Project equity research

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Project equity research

  1. 1. SUMMER TRAINING PROJECT ON “EQUITY ANALY SIS” Banks SUBMITTED TO: 1
  2. 2. CONTENTS• ACKNOWLEDGEMENT 3• BREIF COMPANY PROFILE 4• INVESTMENT PORTFOLIO 7• CHAPTER1: INTRODUCTION 11  INTRODUCTION 12  RATIONALE 13  OBJECTIVES 14  RESEARCH METHODOLOGY AND DESIGN 15• CHAPTER 2: TECHNICAL ANALYSIS OVERVIEW 16• CHAPTER 3: FUNDAMENTAL ANALYSIS OVERVIEW 23• CHAPTER 4: BANKING SECTOR 2
  3. 3. 31  BANKING IN INDIA 32  CURRENT SCENARIO 33  FUTURE OUTLOOK 34  BANKING STRUCTURE 35• CHAPTER 4: ANALYSIS 38  ICICI BANK ANALYSIS 39  HDFC BANK ANALYSIS 43  UNION BANK OF INDIA ANALYSIS 48• FINDINGS & CONCLUSION 54• BIBLIOGRAPHY 55 3
  4. 4. Company ProfileKotak Life Insurance is a joint venture between Kotak Mahindra Bank Ltd., alongwith its affiliates and Old Mutual plc. Kotak Mahindra Old Mutual Life Insurance isone of the fastest growing insurance companies in India and has shown remarkablegrowth since its inception in 2001.Kotak Mahindra believes in offering its customers a lifetime of value. Established in1984, the Kotak Mahindra group has long been one of the India’s most reputed financialorganizations. Kotak Mahindra today is one of India’s leading financial institutionsoffering complete financial solutions that encompass every sphere of life. The group hasa net worth of over Rs. 3,380 crore, employs around 12,300 people in its variousbusinesses and has a distribution network of branches, franchisees, representative officesand satellite offices across 320 cities and towns in India and offices in New York,London, Dubai, Mauritius and Singapore. The Group services around 2.9 millioncustomer accounts.Old Mutual, a company with 160 years experience in life insurance, is the 37th largestcompany in the FTSE100 with a market cap of approx. £10 billion and listed on London,Stockholm and Johannesburg stock exchanges. Its fund under management exceeded$468 billion as on 31st December, 2006. For customers, this joint venture translates intoa company that combines international expertise with the understanding of the localmarket. 4
  5. 5. Products• Kotak Eternal Life Plans• Kotak Platinum Advantage Plan• Kotak Headstart Child Plans• Kotak Sukhi Jeevan Plan• Kotak Privileged Assurance Plan• Kotak Term Plan• Kotak Preferred Term Plan• Kotak Money Back Plan• Kotak Child Advantage Plan• Kotak Endowment Plan• Kotak Capital Multiplier Plan• Kotak Retirement Income Plan• Kotak Retirement Income Plan(Unit-linked)• Kotak Safe Investment Plan II• Kotak Flexi Plan• Kotak Easy Growth Plan• Kotak Premium Return Plan 5
  6. 6. Investment RationaleEach investment alternative has its own strengths and weaknesses. Some options seek toachieve superior returns (like equity), but with corresponding higher risk. Other providesafety (like PPF) but at the expense of liquidity and growth. Other options such as FDsoffer safety and liquidity, but at the cost of return. Mutual funds seek to combine theadvantages of investing in arch of these alternatives while dispensing with theshortcomings.Indian stock market is semi-efficient by nature and, is considered as one of the mostrespected stock markets, where information is quickly and widely disseminated, therebyallowing each security’s price to adjust rapidly in an unbiased manner to newinformation so that, it reflects the nearest investment value. And mainly after theintroduction of electronic trading system, the information flow has become much faster.But sometimes, in developing countries like India, sentiments play major role in pricemovements, or say, fluctuations, where investors find it difficult to predict the futurewith certainty. Some of the events affect economy as a whole, while some events aresector specific. Even in one particular sector, some companies or major market player aremore sensitive to the event. So, the new investors taking exposure in the market shouldbe well aware about the maximum potential loss, i.e. Value at risk. 6
  7. 7. Investment Portfolio of Kotak Life Insurance 7
  8. 8. Investment Portfolio of Aggressive Growth Fund 8
  9. 9. Investment Portfolio of Dynamic Growth Fund 9
  10. 10. Investment in Banks Name Investment % (avg)STATE BANK OF INDIA 5.15 ICICI BANK 4.60 HDFC BANK 2.48UNION BANK OF INDIA 0.95 10
  11. 11. CHAPTER- 1INTRODUCTION 11
  12. 12. 1.1 INTRODUCTIONInvesting, like marriage, isnt something that should be entered into lightly. Investing inequities gives high returns but they correspondingly have higher risk also. Before weinvest in a company, there are more than a few things we need to know about it.Securities AnalysisAn analysis of securities and the organization and operation of their markets. Thedetermination of the risk reward structure of equity and debt securities and theirvaluation. Special emphasis on common stocks. Other topics include options, mutualfluids and technical analysis.Technical analysis is a method of predicting price movements and future market trendsby studying charts of past market action which take into account price of instruments,volume of trading and, where applicable, open interest in the instruments.Fundamental analysis is a method of forecasting the future price movements of afinancial instrument based on economic, political, environmental and other relevantfactors and statistics that will affect the basic supply and demand of whatever underliesthe financial instrument.Main differences between the two types of analysis: Fundamental analysis Technical analysis Focuses on what ought to Focuses on what actually happen in a market happens in a market Factors involved in price Charts are based on market analysis: action involving: 1. Supply and demand 1.Price 2.Seasonal cycles 2.Volume 3.Weather 3. Open interest (futures 4. Government policy only) 12
  13. 13. 1.2 RATIONALE FOR THE STUDYIn an industry plagued with skepticism and a stock market increasingly difficult topredict and contend with, if one looks hard enough there may still be a genuine aid forthe Day Trader and Short Term Investor.The price of a security represents a consensus. It is the price at which one person agreesto buy and another agrees to sell. The price at which an investor is willing to buy or selldepends primarily on his expectations. If he expects the securitys price to rise, he willbuy it; if the investor expects the price to fall, he will sell it. These simple statements arethe cause of a major challenge in forecasting security prices, because they refer to humanexpectations. As we all know firsthand, humans expectations are neither easilyquantifiable nor predictable.If prices are based on investor expectations, then knowing what a security should sell for(i.e., fundamental analysis) becomes less important than knowing what other investorsexpect it to sell for. Thats not to say that knowing what a security should sell for isntimportant--it is. But there is usually a fairly strong consensus of a stocks future earningsthat the average investor cannot disproveFundamental analysis and technical analysis can co-exist in peace and complement eachother. Since all the investors in the stock market want to make the maximum profitspossible, they just cannot afford to ignore either fundamental or technical analysis. 13
  14. 14. 1.3 OBJECTIVES OF THE STUDYPrimary Objective: To do equity analysis of chosen securities.Sub-Objectives:a) To justify the current investment in the chosen securities.b) To understand the movement and performance of stocks.c) To recommend increase/decrease of investment in a particular security. 14
  15. 15. 1.4 RESEARCH METHODOLOGY & DESIGNTYPE OF STUDYThe research has been based on secondary data analysis. The study has been exploratoryas it aims at examining the secondary data for analyzing the previous researches thathave been done in the area of technical and fundamental analysis of stocks. Theknowledge thus gained from this preliminary study forms the basis for the furtherdetailed Descriptive research. In the exploratory study, the various technical indicatorsthat are important for analyzing stock were actually identified and important ones shortlisted.SAMPLE DESIGNThe sample of the stocks for the purpose of collecting secondary data has been selectedon the basis of Random Sampling. The stocks are chosen in an unbiased manner andeach stock is chosen independent of the other stocks chosen. The stocks are chosen fromthe Banking Sector.SAMPLE SIZEThe sample size for the number of stocks is taken as 3 for technical analysis andfundamental analysis of stocks as fundamental analysis is very exhaustive and requiresdetailed study. 15
  16. 16. CHAPTER- 2 TECHNICAL ANALYSISA CONCEPTUAL OVERVIEW 16
  17. 17. TECHNICAL ANALYSISTechnical analysis can be conditionally divided into some main parts such as: • Types of charts • Graphical methods • Analytical methodsTechnical analysis is concerned with predicting future price trends from historical priceand volume data. The underlying axiom of technical analysis is that all fundamentals(including expectations) are factored into the market and are reflected in exchange rates.A technical analysis is based on three axioms: • Movement of the market considers everything • Movement of prices is purposeful • History repeats itself SUPPORT AND RESISTANCESupport is a level at which bulls (i.e., buyers) take control over the prices and preventthem from falling lower.Resistance, on the other hand, is the point at which sellers (bears) take control of pricesand prevent them from rising higher. The price at which a trade takes place is the price atwhich a bull and bear agree to do business. It represents the consensus of theirexpectations. 17
  18. 18. Support levels indicate the price where the most of investors believe that prices willmove higher. Resistance levels indicate the price at which the most of investors feelprices will move lower.Role ReversalWhen a resistance level is successfully broken through, that level becomes a supportlevel. Similarly, when a support level is successfully broken through, that level becomesa resistance level.DOW THEORY– TRENDS:The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis oftechnical analysis. The Dow theory is a method of interpreting and signaling changes inthe stock market direction based on the monitoring of the Dow Jones Industrial andTransportation Averages. Dow created the Industrial Average, of top blue chip stocks,and a second average of top railroad stocks (now the Transport Average). He believedthat the behavior of the averages reflected the hopes and fears of the entire market. Thebehavior patterns that he observed apply to markets throughout the world. 18
  19. 19. Three MovementsMarkets fluctuate in more than one time frame at the same time:Nothing is more certain than that the market has three well defined movements which fitinto each other. • The first is the daily variation due to local causes and the balance of buying and selling at that particular time. • The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days. • The third move is the great swing covering from four to six years. • Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend. • Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement. • Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.Various cycles have subsequently been identified within these broad categories.Primary Movements have Three PhasesThe general conditions in the market:Bull markets • Bull markets commence with reviving confidence as business conditions improve. • Prices rise as the market responds to improved earnings 19
  20. 20. • Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.Bear markets • Bear markets start with abandonment of the hopes and expectations that sustained inflated prices. • Prices decline in response to disappointing earnings. • Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.TrendsBull TrendsA bull trend is identified by a series of rallies where each rally exceeds the highest pointof the previous rally. The decline, between rallies, ends above the lowest point of theprevious decline.Successive higher highs and higher lows.The start of an up trend is signaled when price makes a higher low (trough), followed bya rally above the previous high (peak): Start = higher Low + break above previous High.The end is signaled by a lower high (peak), followed by a decline below the previous low(trough): End = lower High + break below previous Low. 20
  21. 21. A bear trend starts at the end of a bull trend: when a rally ends with a lower peak andthen retreats below the previous low. The end of a bear trend is identical to the start of abull trend.ELLIOT WAVES THEORY BASICSTRENDLINESBreaking through support or resistance levels results in a change of traders’ expectations(which causes supply/demand lines to shift).An Uptrend is defined by successively higher low-prices. A rising trend can be thoughtof as a rising support level: the bulls are in control and are pushing prices higher. A 21
  22. 22. Downtrend is defined by successively lower high-prices. A falling trend can be thoughtof as a falling resistance level: the bears are in control and are pushing prices lower.MOVING AVERAGESMoving averages are one of the oldest and most popular technical analysis tools. Amoving average is the average price of a financial instrument over a given time.The moving average represents the consensus of investor’s expectations over theindicated period of time.The classic interpretation of a moving average is to use it in observing changes in prices.Investors typically buy when the price of an instrument rises above its moving averageand sell when the it falls below its moving average. 22
  23. 23. CHAPTER- 3FUNDAMENTAL ANALYSISA CONCEPTUAL OVERVIEW 23
  24. 24. Fundamental analysis refers to the study of the core underlying elements that influencethe economy of a particular entity. It is a method of study that attempts to predict priceaction and market trends by analyzing economic indicators, government policy andsocietal factors (to name just a few elements) within a business cycle framework.I. ECONOMIC ANALYSIS:POLITICO-ECONOMIC ANALYSIS:No industry or company can exist in isolation. It may have splendid managers and atremendous product. However, its sales and its costs are affected by factors, some ofwhich are beyond its control - the world economy, price inflation, taxes and a host ofothers. It is important, therefore, to have an appreciation of the politico-economic factorsthat affect an industry and a company.II. INDUSTRY ANALYSISThe importance of industry analysis is now dawning on the Indian investor as neverbefore.1. BARRIER TO ENTRYNew entrants increase the capacity in an industry and the inflow of funds. The questionthat arises is how easy is it to enter an industry ?There are some barriers to entry:a) Economies of scaleb) Product differentiationc) Capital requirementd) Government policy2. THE THREAT OF SUBSTITUTIONNew inventions are always taking place and new and better products replace existingones. An industry that can be replaced by substitutes or is threatened by substitutes isnormally an industry one must be careful of investing in. An industry where this occurs 24
  25. 25. constantly is the packaging industry -bottles replaced by cans, cans replaced by plasticbottles, and the like. To ward off the threat of substitution, companies often have tospend large sums of money in advertising and promotion.3. BARGAINING POWER OF THE BUYERSIn an industry where buyers have control, i.e. in a buyers market, buyers are constantlyforcing prices down, demanding better services or higher quality and this often erodesprofitability.4. BARGAINING POWER FOR THE SUPPLIERSAn industry unduly controlled by its suppliers is also under threat.5. RIVALRY AMONG COMPETITORSRivalry among competitors can cause an industry great harm. This occurs mainly byprice cuts, heavy advertising, additional high cost services or offers, and the like.III. COMPANY ANALYSIS:At the final stage of fundamental analysis, the investor analyzes the company. Thisanalysis has two thrusts:How has the company performed vis-à-vis other similar companies andHow has the company performed in comparison to earlier yearsIt is imperative that one completes the politico economic analysis and the industryanalysis before a company is analyzed because the companys performance at a period oftime is to an extent a reflection of the economy, the political situation and the industry.What does one look at when analyzing a company?The different issues regarding a company that should be examined are:The ManagementThe CompanyThe Annual ReportRatios 25
  26. 26. THE MANAGEMENT:The single most important factor one should consider when investing in a company andone often never considered is its management.In India management can be broadlydivided in two types:Family ManagementProfessional ManagementTHE COMPANY:An aspect not necessarily examined during an analysis of fundamentals is the company.A company may have made losses consecutively for two years or more and one may notwish to touch its shares - yet it may be a good company and worth purchasing into. Thereare several factors one should look at.1. How a company is perceived by its competitors?One of the key factors to ascertain is how a company is perceived by its competitors. It isheld in high regard. Its management may be known for its maturity, vision, competenceand aggressiveness. The investor must ascertain the reason and then determine whetherthe reason will continue into the foreseeable future.2. Whether the company is the market leader in its products or in its segmentAnother aspect that should be ascertained is whether the company is the market leader inits products or in its segment. When you invest in market leaders, the risk is less. Theshares of market leaders do not fall as quickly as those of other companies. There is amagic to their name that would make individuals prefer to buy their products as opposedto others. 26
  27. 27. 3. Company PoliciesThe policy a company follows is also important. What is its plans for growth? What is itsvision? Every company has a life. If it is allowed to live a normal life it will grow upto apoint and then begin to level out and eventually die. It is at the point of leveling out thatit must be given new life. This can give it renewed vigour and a new lease of life.THE ANNUAL REPORT:The primary and most important source of information about a company is its AnnualReport. By law, this is prepared every year and distributed to the shareholders. AnnualReports are usually very well presented. A tremendous amount of data is given about theperformance of a company over a period of time.The Annual Report is broken down into the following specific parts:A) The Directors Report,B) The Auditors Report,C) The Financial Statements, andD) The Schedules and Notes to the Accounts.A. The Director’s ReportThe Director’s Report is a report submitted by the directors of a company to itsshareholders, advising them of the performance of the company under their stewardship.1. It enunciates the opinion of the directors on the state of the economy and the politicalsituation vis-à-vis the company.2. Explains the performance and the financial results of the company in the period underreview. This is an extremely important part. The results and operations of the variousseparate divisions are usually detailed and investors can determine the reasons for theirgood or bad performance.3. The Director’s Report details the companys plans for modernization, expansion anddiversification. Without these, a company will remain static and eventually decline.4. Discusses the profit earned in the period under review and the dividend.Recommended by the directors. This paragraph should normally be read with some 27
  28. 28. skepticism, as the directors will always argue that the performance was satisfactory. Ifadverse economic conditions are usually at fault.5. Elaborates on the directors views of the companys prospects in the future.6. Discusses plans for new acquisition and investments. An investor must intelligentlyevaluate the issues raised in a Director’s Report. Industry conditions and themanagements knowledge of the business must be considered.B. The Auditors ReportThe auditor represents the shareholders and it is his duty to report to the shareholders andthe general public on the stewardship of the company by its directors. Auditors arerequired to report whether the financial statements presented do, in fact, present a trueand fair view of the state of the company. Investors must remember that the auditors aretheir representatives and that they are required by law to point out if the financialstatements are not true and fair..C.Financial StatementsThe published financial statements of a company in an Annual Report consist of itsBalance Sheet as at the end of the accounting period detailing the financing condition ofthe company at that date, and the Profit and Loss Account or Income Statementsummarizing the activities of the company for the accounting period.BALANCE SHEETThe Balance Sheet details the financial position of a company on a particular date; of thecompanys assets (that which the company owns), and liabilities (that which the companyowes), grouped logically under specific heads. It must however, be noted that theBalance Sheet details the financial position on a particular day and that the position canbe materially different on the next day or the day after.Sources of fundsShareholders FundsShare Capital 28
  29. 29. (i) Private Placement(ii) Public Issueiii) Rights issuesRESERVESi) Capital Reservesii) Revenue ReservesLOAN FUNDSi) Secured loans:ii) Unsecured loansFixed AssetsINVESTMENTSSTOCK OR INVENTORIESi) Raw materialsii) Work in progressiii) Finished goodsCASH AND BANK BALANCESLOANS AND ADVANCESPROFIT AND LOSS ACCOUNTThe Profit and Loss account summarizes the activities of a company during anaccounting period which may be a month, a quarter, six months, a year or longer, and theresult achieved by the company. It details the income earned by the company, its cost andthe resulting profit or loss. It is, in effect, the performance appraisal not only of thecompany but also of its management- its competence, foresight and ability to lead.RATIOS:Ratios express mathematically the relationship between performance figures and/orassets/liabilities in a form that can be easily understood and interpreted.No single ratio tells the complete storyRatios can be broken down into four broad categories: 29
  30. 30. (A) Profit and Loss RatiosThese show the relationship between two items or groups of items in a profit and lossaccount or income statement. The more common of these ratios are:(B) Balance Sheet RatiosThese deal with the relationship in the balance sheet such as :1. Current assets to current liabilities.2. Liabilities to net worth.(C) Balance Sheet and Profit and Loss Account Ratios.These relate an item on the balance sheet to another in the profit and loss account suchas:1. Earnings to shareholders funds.2. Net income to assets employed.(D) Financial Statements and Market RatiosThese are normally known as market ratios and are arrived at by relative financial figuresto market prices:1. Market value to earnings and2. Book value to market value.(a) Market value(b) Earnings(c) ProfitabilityThe major ratios that are considered:(i) Market value(ii) Price- earnings ratio(iii) Market-to-book ratio(iv) Earnings(v) Earning per share(vi) Dividend per share 30
  31. 31. CHAPTER- 4BANKING SECTOR 31
  32. 32. BANKING IN INDIA The Indian banking scenario witnessed a significant development in the recent years withthe entry of private banks and their focus on retail banking and convergence of services. Thebusiness models of the leading players are adapting to this impending change as banks widenthe spectrum of savings and loan products they offer. Private Banks are the best positioned toacquire market share in the emerging scenario: A change is expected to make mergers betweenbanks and Foreign Institutional Investors possible, which will. Benefit large private bankgroup(s).NationalizationA significant milestone in Indian Banking happened in the late 1960s when the then IndiraGandhi government nationalized, on 19th July, 1969, 14 major commercial Indian banks,followed by nationalization of 6 more commercial Indian banks in 1980. The stated reason forthe nationalization was more control of credit delivery. After this, until the 1990s, thenationalized banks grew at a leisurely pace of around 4%-also called as the Hindu growth of theIndian economy.After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19nationalized banks in India.LiberalizationIn the early 1990s the then Narasimha Rao government embarked on a policy of liberalisationand gave licenses to a small number of private banks, which came to be known as NewGeneration tech-savvy banks, which included banks like ICICI Bank and HDFC Bank. Thismove along with the rapid growth in the economy of India, kick started the banking sector inIndia, which has seen rapid growth with strong contribution from all the three sectors of banks,namely, government banks, private banks and foreign banks. However there had been a fewhiccups for these new banks with many either being taken over like Global Trust Bank whileothers like Centurion Bank have found the going tough.The next stage for the Indian banking has been setup with the proposed relaxation in the normsfor Foreign Direct Investment, where all Foreign Investors in banks may be given voting rightswhich could exceed the present cap of 10%. 32
  33. 33. Current scenarioCurrently, overall, banking in India is considered as fairly mature in terms of supply, productrange and reach-even though reach in rural India still remains a challenge for the private sectorand foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks areconsidered to have clean, strong and transparent balance sheets as compared to other banks incomparable economies in its region. The Reserve Bank of India is an autonomous body, withminimal pressure from the government. The stated policy of the Bank on the Indian Rupee is tomanage volatility without any stated exchange rate and this has mostly been true.Indian economy is expected to be strong for quite some time especially in its services sector, thedemand for banking services-especially retail banking, mortgages and investment services areexpected to be strong.Currently, India has 88 scheduled commercial banks (SCBs), 2& public sector banks (that is withthe Government of India holding a stake), 29 private banks (these do not have government stake;they may be publicly listed and traded on stock exchanges) and 31 foreign banks. 33
  34. 34. FUTURE OUTLOOK• Total banking assets are expected to double and grow to $915 billion by 2010 - a CAGR of 15%• $70 billion additional equity needed for growth plus Basel II compliance• Mutual Funds: Assets Under Management (AUM) are expected to grow by 15% till 2010• Retail Finance is expected to grow at an annual rate of 18%, from $27.6 billion in 2003-04 to $64.2 billion by 2008-09 POTENTIAL• Demographic profile favours higher retail offtake - 54% of the population is in the 15-35 years age group• Capital expenditure by the Government and private industry is expected to grow at a high rate• Economic growth of about 12% p.a. in nominal terms• SME lending, a largely untapped market, presents a significant opportunity - SMEs account for 40% of the industrial output and 35% of direct exports• Regulatory and technological enablers leading to high growth:• The Banking system is technologically enabled with RTGS and cheque truncation in place• Improved asset management practices - Gross NPAs to Advances ratio reduced from 24-25% in 1993 to 7-8% in 2006 34
  35. 35. BANKING STRUCTURE IN INDIAThe banking institutions in the organized sector, commercial banks are the oldest institutions,some them having their genesis in the nineteenth century. Initially they were set up in largenumbers, mostly as corporate bodies with shareholding with private individuals. In the sixties ofthe 20th century a large number of smaller and weaker banks emerged in the country.Subsequently there has been a drift towards state ownership and control. Today 27 banksconstitute a strong Public Sector in Indian Commercial Banking.Commercial Banks operating in India fall under the different sub categories on the basis of theirownership and control over management. 1. Public Sector Banks: Public Sector Banks emerged in India in three stages. First the conversion of the then existing Imperial Bank of India into State Bank of India in 1955, followed by the taking over of the seven associated banks as its subsidiary. Second the nationalization of 14 major commercial banks in 1969and last the nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitute the Public Sector Banks. 2. New Private Sector Banks: after the nationalization of the major banks in the private sector in 1969 and 1980, no new bank could be setup in India for about two decades, though there was no legal bar to that effect. The Narasimham Committee on financial sector reforms recommended the establishment of new banks of India. RBI thereafter issued guidelines for setting up of new private sector banks in India in January 1993. These guidelines aim at ensuring that new banks are financially viable and technologically up to date from the start. They have to work in a professional manner, so as to improve the image of commercial banking system and to win the confidence of the public. Eight private sector banks have been established including banks sector by financially institutions like IDBI, ICICI, and UTI etc. 35
  36. 36. RESERVE BANK OF INDIA SCHEDULED BANKSCOMMERCIAL BANKS CO-OPERATIVE BANKS PUBLIC SECTOR BANKS (27) URBAN CO-OPERATIVE (52) SBI AND ASSOCIATES (8) STATE CO-OPERATIVE (16) NATIONALIZED BANKS (19) PRIVATE BANKS (29) OLD BANKS (21) NEW BANKS (8) Fig 1: Banking Structure in India 36
  37. 37. 3. Local Area Banks: Such Banks can be established as public limited companies in the private sector and can be promoted by individuals, companies, trusts and societies. The minimum paid up capital of such banks would be 5 crores with promoters contribution at least Rs. 2 crores. They are to be set up in district towns and the area of their operations would be limited to a maximum of 3 districts. At present, four local area banks are functional, one each in Punjab, Gujarat, Maharashtra and Andhra Pradesh.4. Foreign Banks: foreign commercial banks are the branches in India of the joint stock banks incorporated abroad. There number was 31 as on 31.03.2005.5. Cooperative Banks: Besides the commercial banks, there exists in India another set of banking institutions called cooperative credit institutions. These have been made in existence in India since long. They undertake the business of banking both in urban and rural areas on the principle of cooperation. They have served a useful role in spreading the banking habit throughout the country. Yet, there financial position is not sound and a majority of cooperative banks has yet to achieve financial viability on a sustainable basis. The cooperative banks have been set up under various Cooperative Societies Acts enacted by State Governments. Hence the State Governments regulate these banks.In 1966, need was felt to regulate their activities to ensure their soundness and toprotect the interests of depositors. Consequently, certain provisions of the BankingRegulation Act1949 were made applicable to the cooperative Banks as well. TheseBanks have thus fallen under dual control viz., that of the State Government and tat ofthe RBI which exercises control over them so far as their banking Operations are concerned. 37
  38. 38. CHAPTER- 4ANALYSIS 38
  39. 39. Brief Company Profile : ICICI BANKICICI Bank (formerly Industrial Credit and Investment Corporation of India) is Indias largestprivate sector bank in market capitalization and second largest overall in terms of assets. ICICIBank has total assets of about USD 79 Billion (end-Mar 2007), a network of over 950 branchesand offices, about 3500 ATMs, and 24 million customers(as of end July 07). ICICI Bank offers awide range of banking products and financial services to corporate and retail customers through avariety of delivery channels and through its specialised subsidiaries and affiliates in the areas ofinvestment banking, life and non-life insurance, venture capital and asset management. ICICIBanks equity shares are listed in India on stock exchanges at Kolkata and Vadodara, the StockExchange, Mumbai and the National Stock Exchange of India Limited and its ADRs are listed onthe New York Stock Exchange (NYSE).Key ExecutivesMr. Kundapur Vaman KamathChief Exec. OfficerSmt. Vishakha MulyeChief Financial OfficerMrs. Chanda KochharExec. Director of Retail Banking Bus., Deputy Managing DirectorMs. Madhabi Puri-BuchHead of Operations 39
  40. 40. Equity Research ICICI BANK LtdAug 2006 ( Rs 920, P/E: 26.6, BUY ) Price Target: Rs. 1100 ISIN Code : INE090A01013 India’s largest private sector bank ICICI Bank had hit the market with an offer size of Rs200bn, with Face Value : 10.00 half the offering scheduled in the domestic market. This offering is estimated to sustain the 52 Week Low : 672.30 company’s growth rate over the next three years after factoring in Basel II impact. Unlocking of 52 Week Hi : 1069.90 subsidiary value is likely to be the biggest driver for the Banks valuation.Stock performance ( Rel to Nifty ) Investment summary Positive outlook, despite the huge dilution Positive outlook for the Bank stems from the company’s good market positioning and high pricing power, demonstrated over the past 6 months. While ROE would remain compressed at ~11%, normalized for investments in subsidiaries it stands at a respectable ~15%. Capital sufficient for the next two-three years The current capital raising would be sufficient for the Bank for the next 2-3 years supporting an asset growth of 22%. Given RBI’s recent guidelines, many banks are likely to tap the capital markets, giving ICICI Bank the early mover advantage. FIPB gives approval Financial Services Co ICICI Bank obtained the FIPB (foreign investment promotion board) approval for selling upto 24% stake in its financial services company to foreign investors. The proposed finco (still subject to RBI approval) would be the holding company for its life insurance, general insurance and asset management businesses. Finco approval positive for valuations ICICI bank had earlier proposed sale of 5.9% stake in finco to few investors (subject to approvals) for Rs26.5bn. This values the finco at US$11bn and the 3 businesses at US$15bn. The approval is very positive for valuations and could provide benchmarks for the subsidiaries 40
  41. 41. Financials 41
  42. 42. Key riskAsset quality deteriorationRising interest rates and consequently deteriorating asset quality remains the key risk tovaluations. Further managements decision to move from mortgage products to other high yieldassets could impact asset quality in the medium term. 42
  43. 43. Brief Company Profile : HDFC BANKHDFC Bank, one of the commercial banks of India, was incorporated in August 1994, after theReserve Bank of India allowed setting up of Banks in the private sector. The Bank was promotedby the Housing Development Finance Corporation Limited, a premier housing finance company(set up in 1977) of India. Net Profit for the year ended March 31, 2006 was Rs. 1,141 crores.Currently HDFC Bank has 753 branches, 1,716 ATMs, in 320 cities in India, and all branches ofthe bank are linked on an online real-time basis. The bank offers many innovative products &services to individuals, corporates, trusts, governnments, partnerships, financial institutions,mutual funds, insurance companies.Key ExecutivesJagdish CapoorChairman / Chair PersonAditya Puri ManagingDirectorKeki MistryDirectorVineet JainDirector 43
  44. 44. Equity Research HDFC BANK LtdAug 2006 ( Rs 1188, P/E: 33.2, BUY ) Price Target: Rs. 1435 ISIN Code : INE040A01018 Investment summary Face Value : 10.00 1QFY07 earnings 3-4% higher than estimated HDFC Bank’s 1QFY07 earnings were about 3-4% 52 Week Low : 801.30 higher than estimated, driven principally by stronger non-interest income. While top line (net interest 52 Week Hi : 1248.50 income) was a tad lower, it was owing to a mismatch of balance sheet and revenue growth and the higher funding costs of the previous quarter, which was expected. Asset quality remains steady with grossStock performance ( Rel to Nifty ) NPLs at 1.3% of customer assets and net NPLs at 0.4%. Loan growth at 33% was few notches higher as the results reinforce that the bank continues to be on a strong growth trajectory. Earnings raised by 2-3%; to grow at 30% CAGR through FY09 Building in the equity infusion by HDFC Ltd (USD 330 million), margins are likely to be steady, resulting in stronger earnings growth. This assumes high NPL coverage after factoring in an uptick in the NPL cycle. Net NPLs forecast at <0.5% through FY10. Looking ahead – FY08; earnings growth at 30% A 30% CAGR growth in earnings through FY08-09 on the back of greater visibility on the bank’s ability to generate loan growth of +34-35%. Key earnings drivers are likely to be: Loan growth of around 35% v/s earlier estimates of 30-31% yoy Fee revenues are likely to be higher at +35% yoy (and would show the expected rebound) supported by enhanced customer acquisition especially as the bank has expanded its distribution network very aggressively in the past 6 months. Strong volume growth with easing margin pressures Loan growth could be a few notches higher at +34% owing to the enhanced penetration of its products and ongoing buoyancy in its retail (non-auto) business and sustained uptick in the corporate loan growth cycle. Moreover, margins may be steady owing to the equity infusion by HDFC and the share of low cost deposits sustaining at +50% levels v/s 47-48% 44
  45. 45. assumed earlier.Holding Pattern of HDFC BankDescription % of HoldingTotal Foreign 51.46Total Institutions 5.59Total Govt. Holding 0.79Total Non-Promoter Corporate Holdings 7.92Total Promoters 21.56Total Public & Others 12.68Total 100.00 Income StatementAs On (Months) 31-Mar-07 31-Mar-06 31-Mar-05Profit / Loss A/c Rs. mn % BT Rs. mn % BT Rs. mn % BTInterest Income 68890.20 81.29 44753.40 78.67 30934.90 82.92Other Income 15856.90 18.71 12136.40 21.33 6373.60 17.08Operating Income (OI) 84747.10 100.00 56889.80 100.00 37308.50 100.00Interest Expenses 31794.50 37.52 19295.00 33.92 13155.60 35.26Employee Expenses 7768.60 9.17 4868.20 8.56 2766.70 7.42OPBDT 18587.50 21.93 14324.00 25.18 11236.60 30.12OPBT 16391.50 19.34 12538.10 22.04 9795.90 26.26Extraordinary / Prior period 0.00 0.00 0.00 0.00 0.00 0.00Tax 4977.00 5.87 3830.30 6.73 3140.30 8.42PAT 11414.50 13.47 8707.80 15.31 6655.60 17.84Dividend 2235.70 2.64 1722.30 3.03 1400.70 3.75Share StatisticsAs on 31-Mar-07 31-Mar-06 31-Mar-05EPS (Rs.) 35.74 27.81 21.48CFPS (Rs.) 42.61 33.51 26.13Book Value (Rs.) 201.42 169.24 145.86DPS (Rs.) 7.00 5.50 4.52 45
  46. 46. Balance Sheet (Rs in Cr.) 2007 2006 2005 2004 2003CAPITAL & LIABILITIESOwners FundEquity Share Capital 319.39 313.14 309.88 284.79 282.05Share Application Money 0.00 0.07 0.43 1.45 6.91Peference Share Capital 0.00 0.00 0.00 0.00 0.00Reserves & Surplus 6,113.76 4,986.39 4,209.97 2,407.09 1,962.78Loan FundsDeposits 68,297.94 55,796.82 36,354.25 30,408.86 22,376.07Borrowings made by the bank 2,815.39 4,560.48 5,290.01 2,907.82 2,284.65Other Liabilities & Provisions 13,689.13 7,849.49 5,264.46 6,296.98 3,511.62Total 91,235.61 73,506.39 51,429.00 42,306.99 30,424.08ASSETSCash & Balances with RBI 5,182.48 3,306.61 2,650.13 2,541.98 2,081.96Money at call and Short Notice 3,971.40 3,612.39 1,823.87 1,115.57 1,087.26Investments 30,564.80 28,393.96 19,349.81 19,256.79 13,388.08Advances 46,944.78 35,061.26 25,566.30 17,744.51 11,754.86Fixed AssetsGross Block 1,917.56 1,589.47 1,290.51 1,061.33 854.11Less: Revaluation Reserve 0.00 0.00 0.00 0.00 0.00Less: Accumulated Depreciation 950.89 734.39 582.19 444.42 325.53Net Block 966.67 855.08 708.32 616.91 528.58Capital Work-in-progress 0.00 0.00 0.00 0.00 0.00Other Assets 3,605.48 2,277.09 1,330.57 1,031.23 1,583.34Miscellaneous Expenses not written off 0.00 0.00 0.00 0.00 0.00Total 91,235.61 73,506.39 51,429.00 42,306.99 30,424.08 46
  47. 47. 47
  48. 48. Brief Company Profile : UNION BANK OF INDIAUnion Bank of India (UBI), is the 5th largest state owned bank in India, with a balance sheet sizeof >US$25bn as on Mar-07. It has a vast distribution network with over 2,206 branches and 770ATMS. While the bank has a pan India presence, western region accounts for >40%of its loansand 30% of its deposit base. With >60 of its total lending to the corporate sector, UBI is highlyleveraged to the rising demand for corporate credit.It serves approximately 15 million customers. All its branches are computerized, and as its 1,000branches are under the network of core banking solution, which covers 85% business of the bank.The bank is providing e-banking services and other online services through all these CBSbranches.Key ExecutivesM.V.NAIRChairman & Managing DirectorR.S. REDDYExecutive DirectorT.Y. PRABHUExecutive DirectorSHRI B.S.BHALLA I.A.S.Government of India Nominee 48
  49. 49. Equity Research Union Bank of IndiaJul 2006 ( Rs 131.6, P/E: 7.8, BUY ) Price Target: Rs. 180 ISIN Code : INE692A01016 Offering the best risk reward ratio among government banks, Union Bank of Face Value : 10.00 India ranks in the top tier on all operating parameters and trades at the 52 Week Low : 142.00 lowest end of the valuation range at <0.9x FY09CL adj book 52 Week Hi : 80.50 Investment summaryStock performance Top-tier ranking on all parameters It ranks in the top tier on all operational measures with 30% earnings growth in FY08CL and among the highest FY09CL ROEs at 21%. It is effectively leveraging its leadership in technology implementation to achieve the highest growth in fee revenue, improve the percentage of low-cost demand deposits and attain the best operating efficiency. Moving to a higher growth trajectory With the excess of 75% of its lending to the non-retail sector, Union Bank is a key beneficiary of rising corporate credit demand. With management strategically reducing its lending to large corporates and focusing on the SME segment, the margins are expected to expand by 4-7bps over next two years. Strategic initiatives like a life-insurance venture in collaboration with Bank of India and Dai-chi of Japan, can drive next leg of growth. Earnings to grow +25% in FY08-09 UBI’s earnings are expected to grow 30% in FY08, 25% in FY09 led by: • A pick up in loan growth led by rising corporate credit demand • 20% sustained growth in fee revenue • Marginal improvement in operating efficiency • Sharp decline in investment hits Asset quality to remain stable with gross non- performing loans at 2.9%, and a coverage ratio should improve to 100% as the bank maintains its aggressive provisioning policy. Attractive valuations Given >30% earnings growth in FY08 and high ROE of 20% in FY08(21% in FY09), Union Bank could 49
  50. 50. trade up to 1.2-1.3x one-year forward(FY09CL) adjusted book, underpinning price target of 180. FinancialsYear to 31 Mar 05A 06A 07A 08CL 09CLOp income (Rsm) 28307 29994 36320 41570 48852Net profit (Rsm) 7191 6752 8454 11032 13812 EPS (Rs) 15.6 14.0 16.7 21.8 27.3Pex (@Rs 118.7) 7.6 8.5 7.1 5.4 4.3Dividend yield % 3.0 3.0 3.0 3.8 4.6 Price/book 1.5 1.3 1.2 1.0 0.8 ROAA 1.10 0.83 0.88 0.98 1.04 ROAE 21.4 16.5 17.3 19.6 21.0 Shareholding Pattern Others 15% Domestic Institutions 9% Govt. Of India 56% FIIs 20% 50
  51. 51. Leveraging Technology efficientlyUnion bank is amongst the leaders in technology implementation with >80% of its business beingon a common banking platform (CBS). While many other state owned banks have beenimplementing CBS, Union bank seems to be amongst the few banks which have effectivelyleveraged these initiatives to:a) drive fee income growthb) increase the proportion of low cost demand deposits andc) improve operating efficiencyFee income growthUBI’s fee revenues have grown 23% in FY06 and 26% in FY07, one of the highest across stateowned banks, as it leveraged its technology platform to roll out new retail products (depository,credit card/debit card), increase cross selling to its vast client base and gain market share in areaslike foreign exchange business ( + 33%yoy) etc.C/I ratio has declinedThe bank has re-deployed its surplus staff (outcome of CBS implementation) in new businessinitiatives like marketing of retail products, etc. Hence while the bank’s top line has grown+20%, related costs haven’t increased so much resulting in a significant decline in the C/Iratio(from 49% in FY05 to 42% in FY07) making itone of the best amongst all state ownedbanks.Asset quality to remain stableUnion bank has seen a sharp improvement in asset quality over the past two years with its grossNPLs declining to <3% of advances in FY07 (v/s 7.6% in FY04) and net NPLs to <0.5%. Theimprovement has been led by lower incremental delinquencies, higher recoveries and aggressiveprovisioning. In FY07 Union Bank’s total NPL provisioning, at around 0.8% of advances, was atthe higher end of all state-owned banks. 51
  52. 52. Income Statement Income (Rs Mn) FY05A FY06A FY07A FY08CL FY09CLInterest income 49698 58637 73822 89621 108189Interest Expense 29052 34894 45920 56595 68961Net Interest income 20646 23743 27902 33026 39228Other income 7661 6251 8418 8545 9624- Treasury Gains 2603 954 1085 750 600Total income 28307 29994 36320 41570 48852Operating expenses 12575 14024 14759 16812 18744Pre-provision profit 15732 15970 21561 24758 30107Total provision 9616 7023 7757 8293 9493-Provision for NPL 2391 2567 5044 6250 7500- for investments 5712 4338 2714 2043 1993- Other 1513 118 000 000 000PBT 6116 8947 13804 16466 20614PAT 7191 6752 8454 11032 13812 Key Ratios FY05A FY06A FY07A FY08CL FY09CLEPS 15.6 13.4 16.7 21.8 27.3Earnings Growth 1.0% -14.5% 25.2% 30.5% 25.2%Capital Adequacy 12.3% 11.4% 12.8% 11.4% 11.5%Cost-Income ratio 49% 48% 42% 41% 39%Loan Growth 36% 33% 17% 22% 20%Yield on Investments 8.4% 8.0% 7.8% 7.9% 8.0%Dividend per share 3.5 3.5 3.5 4.5 5.5Dividend payout 25% 29% 24% 23% 23%Dividend yield 2.9% 2.9% 2.9% 3.8% 4.6%P/E 7.7 9.0 7.2 5.5 4.4 52
  53. 53. Balance sheet( Rs bn) FY04 FY05A FY06 FY07E FY08ECash balances 38.5 65.7 63.9 84.3 87.8Advances 294.3 401.1 533.8 623.9 761.1Investments 224.4 227.9 259.2 279.8 318.6Fixed assets 7.7 8.2 8.1 8.2 7.8Current Assets 18.3 21.2 26.3 30.6 35.2Total Assets 583.2 724.1 891.3 1026.8 1210.6Equity capital 4.6 4.6 5.1 5.1 5.1Reserves & Surplus 26.3 31.5 40.5 46.8 55.3Shareholder’s funds 30.9 36.1 45.6 51.9 60.4Deposits 505.6 618.3 740.9 851.8 1003.8Borrowings 9.3 20.2 39.7 42.2 48.5Subordinated debt 15.2 19.7 27.7 34.2 42.8Current liabilities 22.2 29.8 37.3 46.7 55.1Total Liabilities 583.2 724.1 891.3 1026.8 1210.6 53
  54. 54. Findings & Conclusion Stock Target Price (Rs) Recommendation ICICI Bank 1100 BUY HDFC Bank 1435 BUY Union Bank Of India 180 BUYCurrent scenario suggests, markets are on a bullish run, especially in case of Banking Industry.Analysis suggests that all the chosen stocks ie ICICI Bank, HDFC Bank and UBI are going toperform well, with huge potential of earnings for equity holders.It is recommended to increase the investment in Banks. Stock P/E ratio ICICI Bank 26.6 HDFC Bank 33.2 Union Bank of India 7.8Investment in Union Bank of India should be increased from current 0.95% to at least 2% of thetotal investments in the equity market. 54
  55. 55. BIBLIOGRAPHYWebsites Referred:www.moneycontrol.comwww.myiris.comwww.indiaearnings.moneycontrol.comhttp://finance.yahoo.comwww.wikipedia.orgwww.reuters.comwww.kotaklifeinsurance.comwww.hdfcbank.comwww.investopedia.comReports Referred:CLSA – Asia Pacific Markets analysis of Union Bank of IndiaMerril Lynch analysis of HDFC BankIndia Infoline report on ICICI Bank’s FPO 55

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