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  • 1. A Research Project On Fundamental Analysis of ICICI Bank On the fulfillment of two year Full time Post Graduate Diploma in Management Guru Nanak Institute of Management, Punjabi Bagh, New DelhiSubmitted By Supervised ByNEETU HANS Mr. N.P SinghRoll No-6003 Asst. Prof.Specialization: Finance FinancePGDM
  • 2. A Research Project On Fundamental Analysis of ICICI Bank On the fulfillment of two year Full time Post Graduate Diploma in Management Guru Nanak Institute of Management, Punjabi Bagh, New DelhiSubmitted By Supervised ByNEETU HANS Mr. N.P SinghRoll No-6003 Asst. Prof.Specialization: Finance FinancePGDM 2
  • 3. CertificateThis is to certify that the project work done on “Fundamentalanalysis of ICICI bank” is a bonafide work carried out by Neetu Hansunder my supervision and guidance. The project report issubmitted towards the fulfillment of two year, full time PostGraduate Diploma in Management.This work has not been submitted anywhere else for any otherdegree/diploma.Prof N.P Singh R.P Singh(Project Guide) (Director General) 3
  • 4. AcknowledgementThe present research work cannot see the light of the day unless it is blessedby the benign assistance of eminent person. The help and co-ordination that Ihave received from various quarters of in bringing this work to completionmakes me feel deeply indebted. This is not a work of individual but a numberof persons who helped me directly or indirectly in this journey. So, I wish toexpress great fullness to all those who have helped & assisted me in bringingthe final shape of this report.First of all, I wish to express my deep sense of gratitude to our Director Dr R.P.Singh for his guidance and moral support all along the period of my study inthe institute.I am deeply indebted to my project guide Prof N.P Singh for his kind advice,encouragement, support & proper guidance during the course of preparationof this project. I got tremendous support in mastering fact & figures from him.Really He had been a great source of information during the period of study.Last but not the least I wish to express my deep sense of gratitude to all thosewho were knowingly or unknowingly with me during the project tenure. NEETU HANS 4
  • 5. TABLE CONTENTSSr.no TITLE Page no. 1. Introduction to fundamental analysis 6 2. Economic analysis 14 3. Industry analysis 17 4. Company analysis 26 5. Research methodology 33 6. Data analysis 36 Economic 38 Industry 45 Company 52 7. Finding & Limitations 72 8. Conclusion & Suggestion 76 9. Bibliography 80 5
  • 6. INTRODUCTION TO FUNDAMENTAL ANALYSIS (Chapter-1) 6
  • 7. What is analysis?The examination and evaluation of the relevant information to select the best course of actionfrom among various alternatives. The methods used to analyze securities and make investmentdecisions fall into two very broad categories: fundamental analysis and technical analysis.Fundamental analysis involves analyzing the characteristics of a company in order to estimate itsvalue. Technical analysis takes a completely different approach; it doesnt care one bit about the"value" of a company or a commodity. Technicians (sometimes called chartists) are onlyinterested in the price movement in the market.What is technical analysis?Technical analysis is a method of evaluating securities by analyzing the statistics generated bymarket activity, such as past prices and volume. Technical analysts do not attempt to measure asecuritys intrinsic value, but instead use charts and other tools to identify patterns that cansuggest future activity.What is fundamental analysis?Fundamental Analysis involves examining the economic, financial and other qualitative andquantitative factors related to a security in order to determine its intrinsic value. It attempts tostudy everything that can affect the securitys value, including macroeconomic factors (like theoverall economy and industry conditions) and individually specific factors (like the financialcondition and management of companies). Fundamental analysis, which is also known asquantitative analysis, involves delving into a company‟s financial statements (such as profit andloss account and balance sheet) in order to study various financial indicators (such as revenues,earnings, liabilities, expenses and assets). Such analysis is usually carried out by analysts,brokers and savvy investors.Many analysts and investors focus on a single number--net income (or earnings)--to evaluateperformance. When investors attempt to forecast the market value of a firm, they frequently relyon earnings. Many institutional investors, analysts and regulators believe earnings are not asrelevant as they once were. Due to nonrecurring events, disparities in measuring risk andmanagements ability to disguise fundamental earnings problems, other measures beyond netincome can assist in predicting future firm earnings.Two Approaches of fundamental analysisWhile carrying out fundamental analysis, investors can use either of the following approaches:1 .Top-down approach: In this approach, an analyst investigates both international and nationaleconomic indicators, such as GDP growth rates, energy prices, inflation and interest rates. The 8
  • 8. search for the best security then trickles down to the analysis of total sales, price levels andforeign competition in a sector in order to identify the best business in the sector.2. Bottom-up approach: In this approach, an analyst starts the search with specific businesses,irrespective of their industry/region.How does fundamental analysis works?Fundamental analysis is carried out with the aim of predicting the future performance of acompany. It is based on the theory that the market price of a security tends to move towards itsreal value or intrinsic value. Thus, the intrinsic value of a security being higher than thesecurity‟s market value represents a time to buy. If the value of the security is lower than itsmarket price, investors should sell it. The steps involved in fundamental analysis are:1. Macroeconomic analysis, which involves considering currencies, commodities and indices.2. Industry sector analysis, which involves the analysis of companies that are a part of the sector.3. Situational analysis of a company.4. Financial analysis of the company.5. ValuationThe valuation of any security is done through the discounted cash flow (DCF) model, whichtakes into consideration:1. Dividends received by investors2. Earnings or cash flows of a company3. Debt, which is calculated by using the debt to equity ratio and the current ratio (currentassets/current liabilities)Fundamental Analysis ToolsThese are the most popular tools of fundamental analysis.Earnings per Share – EPSPrice to Earnings Ratio – P/E 9
  • 9. Projected Earnings Growth – PEGPrice to Sales – P/SPrice to Book – P/BDividend Payout RatioDividend YieldBook ValueReturn on EquityRatio analysisFinancial ratios are tools for interpreting financial statements to provide a basis for valuingsecurities and appraising financial and management performance.A good financial analyst will build in financial ratio calculations extensively in a financialmodeling exercise to enable robust analysis. Financial ratios allow a financial analyst to:Standardize information from financial statements across multiple financial years to allowcomparison of a firm‟s performance over time in a financial model.Standardize information from financial statements from different companies to allow apples toapples comparison between firms of differing size in a financial model.Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitatescomparison of these relationships over time and across firms in a financial model.In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently,these are:Performance ratiosWorking capital ratiosLiquidity ratiosSolvency ratiosThese 4 financial ratios allow a good financial analyst to quickly and efficiently address thefollowing questions or concerns: 10
  • 10. Performance ratiosWhat return is the company making on its capital investment?What are its profit margins?Working capital ratiosHow quickly are debts paid?How many times is inventory turned?Liquidity ratiosCan the company continue to pay its liabilities and debts?Solvency ratios (Longer term)What is the level of debt in relation to other assets and to equity?Is the level of interest payable out of profits?WHY ONLY FUNDAMENTAL ANALYSISLong-term TrendsFundamental analysis is good for long-term investments based on long-term trends, very long-term. Theability to identify and predict long-term economic, demographic, technological or consumer trends canbenefit patient investors who pick the right industry groups or companies.Value SpottingSound fundamental analysis will help identify companies that represent a good value. Some of the mostlegendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seenas the champions of value investing. Fundamental analysis can help uncover companies with valuableassets, a strong balance sheet, stable earnings, and staying power.Business insightsOne of the most obvious, but less tangible, rewards of fundamental analysis is the development of athorough understanding of the business. After such pains taking research and analysis, an investor will befamiliar with the key revenue and profit drivers behind a company. Earnings and earnings expectationscan be potent drivers of equity prices. Even some technicians will agree to that. 11
  • 11. A good understanding can help investors avoid companies that are prone to shortfalls and identify thosethat continue to deliver. In addition to understanding the business, fundamental analysis allows investorsto develop an understanding of the key value drivers and companies within an industry. A stocks price isheavily influenced by its industry group. By studying these groups, investors can better positionthemselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented(computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-oriented (high yield).Knowing Whos WhoStocks move as a group. By understanding a companys business, investors can better position themselvesto categorize stocks within their relevant industry group. Business can change rapidly and with it therevenue mix of a company. This has happened with many of the pure internet retailers, which were notreally internet companies, but plain retailers. Knowing a companys business and being able to place it ina group can make a huge difference in relative valuations. The charts of the technical analyst maygive all kinds of profit alerts, signals and alarms, but there‟s little in the charts that tell us why agroup of people make the choices that create the price patternsObjective of the study To analyze economy by using some economic indicators like GDP, and inflation rate etc for the selected period of 5 years. To analyze the industry especially private bank industry for the selected period of 5 years. To carry out financial and non-financial analysis of ICICI bank as a whole for the selected period.DATA SOURCESSecondary data has been collected from various sources to analyze the fundamentals.The secondary data has been collected from Books ACE equity database Internet-websites 12
  • 12. PERIOD OF STUDY: The period of study for the analysis is five years from 2006-2010.CHAPTER PLANIt is proposed to divide the project into following chapters. CHAPTER 1: INTRODUCTION TO STUDYThis chapter will be introductory in nature covering the relevance of study. CHAPTER 2: CONCEPTUAL FRAMEWORK OF FUNDAMENTAL ANALYSIS This chapter will include a comprehensive study of the concept of Fundamental analysis And its tools. CHAPTER 3: DATA SOURCE AND RESEARCH METHODOLOGYThis chapter will give an inside into source of data and method of undertaking research. CHAPTER 4: DATA ANALYSISThis is the chapter of all observations, inferences, analysis and conclusions that will be madeout of the data analysis during the course of study. CHAPTER 5: LIMITATIONS AND SUGGESTIONSAll the limitations and stumbling blocks that will be encountered during the study will bediscussed in this chapter along with the future scope and suggestions. BIBLIOGRAPHY 13
  • 13. ECONOMIC ANALYSIS (Chapter- 2) 14
  • 14. The economic analysis aims at determining if the economic climate is conclusive and is capable ofencouraging the growth of business sector, especially the capital market. When the economy expands,most industry groups and companies are expected to benefit and grow. When the economy declines,most sectors and companies usually face survival problems. Hence, to predict share prices, an investorhas to spend time exploring the forces operating in overall economy. Exploring the global economy isessential in an international investment setting. The selection of country for investment has to focus itselfto examination of a national economic scenario. It is important to predict the direction of the nationaleconomy because economic activity affects corporate profits, not necessarily through tax policies butalso through foreign policies and administrative procedures.Tools for Economy AnalysisThe most used tools for performing economic analysis are:Gross Domestic Product (GDP)Monetary policy and LiquidityInflationInterest ratesInternational influencesFiscal policyInfluences on long term expectationsInfluences on short term expectations 1) Gross Domestic product GDP is one measure of economic activity. This is the total amount of goods and services produced in a country in a year. It is calculated by adding the market values of all the final goods and services produced in a year. It is a gross measurement because it includes the total amount of goods and services produced, of which some merely replace goods that have depreciated or have worn out. It is domestic production because it includes only goods and services produced within the country. 15
  • 15. 2) Inflation Inflation can be defined as a trend of rising prices caused by demand exceeding supply. Over time, even a small annual increase in prices of say 1 % will tend to influence the purchasing power of the nation. In others word, if prices rise steadily, after a number of years, consumers will be able to buy only fewer goods and services assuming income level does not change with inflation. 3) Interest rate Interest rate is the price of credit. It is the percentage fee received or paid by individual or organization when they lend and borrow money. In general, increases in interest rate, whether caused by inflation, government policy, rising risk premium, or other factors, will lead to reduced borrowing and economic slowdown. 4) International influences Rapid growth in overseas market can create surges in demand for exports, leading to growth in export sensitive industries and overall GDP. In contrast, the erection of trade barriers, quotas, currency restrictions can hinder the free flow of currency, goods, and services, and harm the export sector of an economy. 5) Fiscal policy The fiscal policy of the government involves the collection and spending of revenue. In particular, fiscal policy refers to the efforts by the government to stimulate the economic directly, through spending.. 16
  • 16. Industry Analysis (Chapter-3) 17
  • 17. An industry analysis helps inform business managers about the viability of their current strategyand on where to focus a business among its competitors in an industry. The analysis examinesfactors such as competition and the external business environment, substitute products,management preferences, buyers and suppliers. Industry analysis involves reviewing theeconomic, political and market factors that influence the way the industry develops. Majorfactors can include the power wielded by suppliers and buyers, the condition of competitors. Andthe likelihood of new market entrants.Data needs for industry analysisIndustry analysis requires a variety of quantitative and qualitative data. Though one single sourcefor all the data needs might not found, industry associates, business publications and thedepartment of economic analysis perform a comprehensive industry analysis. A suggestive list ofdata categories that are utilized for performing industry analysis is listed below. Product lines Product growth Complementary product Economics of scale Suppliers Labors Substitute products Buyers and their behavior Product pattern (cyclical, seasonal) Cost structureTools for industry analysis Cross-sectional industry Industry performance over time Differences in industry risk Prediction about market behavior Competitors over the industry life cycle 18
  • 18. THE INDIAN BANKING SECTOR REVIEWWithout a sound and effective banking system in India it cannot have a healthy economy. Thebanking system of India should not only be hassle free but it should be able to meet newchallenges posed by the technology and any other external and internal factors.For the past three decades Indias banking system has several outstanding achievements to itscredit. It is no longer confined to only metropolitans or cosmopolitans in India; in fact, Indianbanking system has reached even to the remote corners of the country. This is one of the mainreasons of Indias growth process. The governments regular policy for Indian bank since 1969has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago,an account holder had to wait for hours at the bank counters for getting a draft or forwithdrawing his own money. Today, he has a choice. Gone are days when the most efficientbank transferred money from one branch to other in two days. Now it is simple as instantmessaging or dial a pizza. Money has become the order of the day.Post independenceIn 1948, the Reserve Bank of India, Indias central banking authority, was nationalized, and itbecame an institution owned by the Government of India.In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India(RBI) "to regulate, control, and inspect the banks in India."The Banking Regulation Act also provided that no new bank or branch of an existing bank maybe opened without a license from the RBI, and no two banks could have common directors.LiberalizationThe new policy shook the Banking sector in India completely. Bankers, till this time, were usedto the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. In the early1990s the then Narsimha Rao government embarked on a policy of liberalization and gavelicenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as Global Trust Bank (the first of such new generationbanks to be set up) which later amalgamated with Oriental Bank of Commerce, UTI Bank (nowre-named as Axis Bank), ICICI Bank and HDFC Bank. 19
  • 19. Current situationCurrently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that iswith the Government of India holding a stake), 29 private banks (these do not have governmentstake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. Theyhave a combined network of over 67,000 branches and 17,000 ATMs. According to a report byICRA Limited, a rating agency, the public sector banks hold over 78 percent of total assets of thebanking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.Over the last four years, India‟s economy has been on a high growth trajectory, creatingunprecedented opportunities for its banking sector. Most banks have enjoyed high growth andtheir valuations have appreciated significantly during this period. Looking ahead, the mostpertinent issue is how well the banking sector is positioned to cater to continued growth. Aholistic assessment of the banking sector is possible only by looking at the roles and actions ofbanks, their core capabilities and their ability to meet systemic objectives, which includeincreasing shareholder value, fostering financial inclusion, contributing to GDP growth,efficiently managing intermediation cost, and effectively allocating capital and maintainingsystem stability.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. Today 27 banksconstitute a strong Public Sector in Indian Commercial Banking. Commercial Banks operating inIndia fall under different sub categories on the basis of their ownership and control overmanagement;Public Sector BanksPublic Sector Banks emerged in India in three stages. First the conversion of the then existingImperial Bank of India into State Bank of India in 1955, followed by the taking over of the sevenassociated banks as its subsidiary. Second the nationalization of 14 major commercial banks in1969and last the nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitutethe Public Sector Banks.New Private Sector BanksAfter the nationalization of the major banks in the private sector in 1969 and 1980, no new bankcould be setup in India for about two decades, though there was no legal bar to that effect. The 20
  • 20. Narasimham Committee on financial sector reforms recommended the establishment of newbanks of India. RBI thereafter issued guidelines for setting up of new private sector banks inIndia in January 1993. These guidelines aim at ensuring that new banks are financially viableand technologically up to date from the start. They have to work in a professional manner, so asto 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 financiallyinstitutions like IDBI, ICICI, and UTI etc.Local Area BanksSuch Banks can be established as public limited companies in the private sector and can bepromoted by individuals, companies, trusts and societies. The minimum paid up capital of suchbanks would be 5 crores with promoters contribution at least Rs. 2 crores. They are to be set upin district towns and the area of their operations would be limited to a maximum of 3 districts. Atpresent, four local area banks are functional, one each in Punjab, Gujarat, Maharashtra andAndhra Pradesh.Foreign BanksForeign commercial banks are the branches in India of the joint stock banks incorporated abroad.There number was 38 as on 31.03.2009.Scheduled Commercial Banks in IndiaThe commercial banking structure in India consists of:Scheduled Commercial Banks in IndiaUnscheduled Banks in IndiaScheduled Banks in India constitute those banks which have been included in the SecondSchedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks inthis schedule which satisfy the criteria laid down vide section42 (6) a) of the Act."Scheduled banks in India" means the State Bank of India constituted under the State Bank ofIndia Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (SubsidiaryBanks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of theBanking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or undersection 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 21
  • 21. of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bankof India Act, 1934 (2 of 1934), but does not include a co-operative bank". "Non-scheduled bankin India" means a banking company as defined in clause (c) of section 5 of the BankingRegulation Act, 1949 (10 of 1949), which is not a scheduled bank".Cooperative BanksBesides the commercial banks, there exists in India another set of banking institutions calledcooperative credit institutions. These have been made in existence in India since long. Theyundertake 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, therefinancial position is not sound and a majority of cooperative banks has yet to achieve financialviability on a sustainable basis.The cooperative banks have been set up under various Cooperative Societies Acts enacted byState Governments. Hence the State Governments regulate these banks. In 1966, need was felt toregulate their activities to ensure their soundness and to protect the interests of depositorsAccording to the RBI in March 2009, number of all Scheduled Commercial Banks (SCBs) was171 of which, 86 were Regional Rural Banks and the number of Non-Scheduled CommercialBanks including Local Area Banks stood at 5. Taking into account all banks in India, there areoverall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banksmade up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staffand 60.3 per cent of all automated teller machines (ATMs).SWOT ANALYSIS OF BANKING SECTORSTRENGTHIndian banks have compared favorably on growth, asset quality and profitability with otherregional banks over the last few years. The banking index has grown at a compounded annualrate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market indexfor the same period.Policy makers have made some notable changes in policy and regulation to help strengthen thesector. These changes include strengthening prudential norms, enhancing the payments systemand integrating regulations between commercial and co-operative banks.Bank lending has been a significant driver of GDP growth and employment. Extensive reach:the vast networking & growing number of branches & ATMs. Indian banking system hasreached even to the remote corners of the country. 22
  • 22. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,strong and transparent balance sheets relative to other banks in comparable economies in itsregion.WEAKNESSPublic Sector Banks need to fundamentally strengthen institutional skill levels especially in salesand marketing, service operations, risk management and the overall organizational performanceethic & strengthen human capital.Old private sector banks also have the need to fundamentally strengthen skill levels.The cost of intermediation remains high and bank penetration is limited to only a few customersegments and geographies.Structural weaknesses such as a fragmented industry structure, restrictions on capital availabilityand deployment, lack of institutional support infrastructure, restrictive labour laws, weakcorporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs),unless industry utilities and service bureaus.Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSUbanks below 51% thus choking the headroom available to these banks for raining equity capital.Impediments in sectoral reforms: Opposition from Left and resultant cautious approach fromthe North Block in terms of approving merger of PSU banks may hamper their growth prospectsin the medium term.OPPORTUNITYThe market is seeing discontinuous growth driven by new products and services that includeopportunities in credit cards, consumer finance and wealth management on the retail side, and infee-based income and investment banking on the wholesale banking side. These require newskills in sales & marketing, credit and operations.With increased interest in India, competition from foreign banks will only intensify.Given the demographic shifts resulting from changes in age profile and household income,consumers will increasingly demand enhanced institutional capabilities and service levels frombanks.New private banks could reach the next level of their growth in the Indian banking sector bycontinuing to innovate and develop differentiated business models to profitably serve segmentslike the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means 23
  • 23. to grow and reaching the next level of performance in their service platforms. Attracting,developing and retaining more leadership capacityForeign banks committed to making a play in India will need to adopt alternative approaches towin the “race for the customer” and build a value-creating customer franchise in advance ofregulations potentially opening up post 2009.Reach in rural India for the private sector and foreign banksLiberalization of ECB norms: The government also liberalised the ECB norms to permitfinancial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks andfinancial institutions, which were earlier not permitted to raise such funds, explore this route forraising cheaper funds in the overseas markets.Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed themto raise perpetual bonds and other hybrid capital securities to shore up their capital. If the newinstruments find takers, it would help PSU banks, left with little headroom for raising equity.THREATSThreat of stability of the system: failure of some weak banks has often threatened the stability ofthe system.Rise in inflation figures which would lead to increase in interest rates.Increase in the number of foreign players would pose a threat to the Public Sector Bank as wellas the private players. 24
  • 24. Key playersAndhra Bank State Bank of IndiaAllahabad Bank Vijaya BankPunjab National Bank HDFC BankUTI Bank ICICI BankKotak Mahindra Bank Centurion Bank of PunjabCitibank Standard Chartered BankHSBC Bank State Bank of MysoreAmerican Express Bank ABN AMRO 25
  • 25. Company analysis (Chapter-4) 26
  • 26. Analysis of the company consists of measuring its performance and ascertaining the cause of thisperformance. When some companies have done well irrespective of economic or industry failure,this implies that there are certain unique characteristics for this particular company that had madeit a success. The identification of these characteristics, whether quantitative or qualitative, isreferred to as company analysis. Quantitative indicators of company analysis are the financialindicators and operational efficiency indicators. Financial indicators are the profitabilityindicators and financial position indicators analyzed through the income and balance sheetstatements, respectively, of the company. Operational indicators are capacity utilization and costversus sales efficiency of the company, which includes the marketing edge of the company.Besides the quantitative factors, qualitative factors of a company also influence investmentdecision process of an institutional investor. The focus of the qualitative data, as revealed in theannual report- as in the director‟s speech. Rather than on quantitative data.Tools for company analysisCompany analysis involves choice of investment opportunities within a specific industry thatcomprises of several individual companies. The choice of an investible company broadlydepends on the expectations about its future performance in general. Here, the business cycle thata company is undergoing is a very useful tool to assess the future performance from thecompany.Company analysis ought to examine the levels of competition, demand, and other forces thataffect the company‟s ability to be profitable. Of these factors, understanding the competitiveenvironment is most important.A business faces five forces of competition (porter‟s model) namely, seller‟s competition,buyer‟s competition, competition from new entrants, exit competition. Competitive forcesinclude the power of those who sell the business, those who buy the business; those who buyfrom the business, how easily new businesses can enter the industry, how costly it is to exit, andfinally, the competition from those who already in the industry. How well a company deals witheach of these forces will determine whether the company earns above or below average profit.Each of these forces is discussed below. 1. Porter modelPorters Five Forces is a framework for industry analysis and business strategy developmentformed by Michael E. Porter of Harvard Business School in 1979. It draws upon IndustrialOrganization (IO) economics to derive five forces that determine the competitive intensity andtherefore attractiveness of a market. Attractiveness in this context refers to the overall industryprofitability. An "unattractive" industry is one in which the combination of these five forces actsto drive down overall profitability. A very unattractive industry would be one approaching "purecompetition", in which available profits for all firms are driven down to zero.Three of Porters five forces refer to competition from external sources. The remainder areinternal threats. 27
  • 27. Porter referred to these forces as the micro environment, to contrast it with the more general termmacro environment. They consist of those forces close to a company that affect its ability toserve its customers and make a profit. A change in any of the forces normally, requires abusiness unit to re-assess the marketplace given the overall change in industry information. Theoverall industry attractiveness does not imply that every firm in the industry will return the sameprofitability. Firms are able to apply their core competencies, business model or network toachieve a profit above the industry average. A clear example of this is the airline industry. As anindustry, profitability is low and yet individual companies, by applying unique business models,have been able to make a return in excess of the industry average.Porters five forces include - three forces from horizontal competition: threat of substituteproducts, the threat of established rivals, and the threat of new entrants; and two forces fromvertical competition: the bargaining power of suppliers and the bargaining power of customers.This five forces analysis is just one part of the complete Porter strategic models. The otherelements are the value chain and the generic strategies (a) The threat of the entry of new competitorsProfitable markets that yield high returns will attract new firms. This results in many newentrants, which eventually will decrease profitability for all firms in the industry. Unless theentry of new firms can be blocked by incumbents, the abnormal profit rate will fall towards zero(perfect competition). The existence of barriers to entry (patents, rights, etc.) The most attractive segment is one in which entry barriers are high and exit barriers are low. Few new firms can enter and non-performing firms can exit easily. Economies of product differences Brand equity Switching costs or sunk costs Capital requirements Access to distribution 28
  • 28. Customer loyalty to established brands Absolute cost Industry profitability; the more profitable the industry the more attractive it will be to new competitors (b) The threat of substitute products or servicesThe existence of products outside of the realm of the common product boundaries increases thepropensity of customers to switch to alternatives: Buyer propensity to substitute Relative price performance of substitute Buyer switching costs Perceived level of product differentiation Number of substitute products available in the market Ease of substitution. Information-based products are more prone to substitution, as online product can easily replace material product. Substandard product Quality depreciation (c) The bargaining power of customers (buyers)The bargaining power of customers is also described as the market of outputs: the ability ofcustomers to put the firm under pressure, which also affects the customers sensitivity to pricechanges. Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs Buyer volume Buyer switching costs relative to firm switching costs Buyer information availability Ability to backward integrate Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products RFM Analysis (d) The bargaining power of suppliersThe bargaining power of suppliers is also described as the market of inputs. Suppliers of rawmaterials, components, labor, and services (such as expertise) to the firm can be a source ofpower over the firm, when there are few substitutes. Suppliers may refuse to work with the firm,or, e.g., charge excessively high prices for unique resources. 29
  • 29. Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Impact of inputs on cost or differentiation Presence of substitute inputs Strength of distribution channel Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Supplier competition - ability to forward vertically integrate and cut out the BUYER (e) The intensity of competitive rivalryFor most industries, the intensity of competitive rivalry is the major determinant of thecompetitiveness of the industry. Sustainable competitive advantage through innovation Competition between online and offline companies; click-and-mortar -v- slags on a bridge Level of advertising expense Powerful competitive strategy The visibility of proprietary items on the Web used by a company which can intensify competitive pressures on their rivals.How will competition react to a certain behavior by another firm? Competitive rivalry is likely tobe based on dimensions such as price, quality, and innovation. Technological advances protectcompanies from competition. This applies to products and services. Companies that aresuccessful with introducing new technology are able to charge higher prices and achieve higherprofits, until competitors imitate them. Examples of recent technology advantage in have beenmp3 players and mobile telephones. Vertical integration is a strategy to reduce a business owncost and thereby intensify pressure on its rival. 2. The financial statements of the company: Records that outline the financial activities of a business, an individual or any other entity. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: income statements, balance sheet, statements of retained earnings and cash flows, as well as other possible statements 3. Ratio analysis: A tool used by individuals to conduct a quantitative analysis of information in a companys financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis. There are many ratios that can be calculated 30
  • 30. +from the financial statements pertaining to a companys performance, activity, financing and liquidity. Some common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.4. ROA: Return on assets, which, offering a different take on managements effectiveness reveals how much profit a company earns for every dollar of its assets. Assets include things like cash in the bank, accounts receivable, property, equipment, inventory and furniture. ROA is calculated like this: Annual Net Income Total Assets5. ROI: Return on Investment is one of several commonly used approaches for evaluatingthe financial consequences of business investments, decisions, or actions. ROI analysiscompares the magnitude and timing of investment gains directly with the magnitude andtiming of investment costs. A high ROI means that investment gains compare favorablyto investment costs GAINS- INVESTMENT COSTS INVESTMENT COSTS6. ROE: Of all the fundamental ratios that investors look at, one of the most important isreturn on equity. Its a basic test of how effectively a companys management uses investorsmoney - ROE shows whether management is growing the companys value at an acceptablerate. ROE is calculated as: Annual Net Income Average Shareholders Equity7. EPS: The portion of a companys profit allocated to each outstanding share of commonstock. Earnings per share serve as an indicator of a companys profitability. 31
  • 31. Calculated as:8. DPS: The the sum of declared dividends for every ordinary share issued. Dividend pershare (DPS) is the total dividends paid out over an entire year (including interim dividendsbut not including special dividends) divided by the number of outstanding ordinary sharesissued.DPS can be calculated by using the following formula:D - Sum of dividends over a period (usually 1 year)SD - Special, one time dividendsS - Shares outstanding for the period9. P/O RATIO: The amount of earnings paid out in dividends to shareholders. Investorscan use the payout ratio to determine what companies are doing with their earningsCalculated10. DIVIDEND YEILD: financial ratio that shows how much a company pays out individends each year relative to its share price. In the absence of any capital gains, thedividend yield is the return on investment for a stock. Dividend yield is calculated as follows: 32
  • 32. RESEARCH METHODOLOGY (Chapter-5) 33
  • 33. Research methodologyResearch methodology is a way to systematically solve the research problem. The researchmethodology using for find out the solution of the research problem is analytical researchmethodology and some extend descriptive research methodology Secondary Data The sources of secondary data for solve the problems are:- Company Annual Report ACE equity database Internet-websitesPeriod of studyThe period of the study is 5 years i.e. (2006-2010). Company 5 years data has been taken for theanalysis.ToolsThese are the most popular tools of fundamental analysis. They focus on earnings, growth, andvalue in the market. Earnings per Share – EPS Price to Earnings Ratio – P/E Projected Earning Growth – PEG Price to Sales – P/S Price to Book – P/B Dividend Payout Ratio Dividend Yield Book Value Ratio Analysis Liquid ratio 34
  • 34. Turnover ratioValuation ratioTechniquesThe technique used in the analysis of the company is excel sheets, graphs and tables offinancial statement for example balance sheet, profit loss a/c, cash flow statement, dividendper share, ratio analysis, valuation ratio etc. 35
  • 35. DATA ANALYSIS (Chapter-6) 36
  • 36. The process of evaluating data using analytical and logical reasoning to examine eachcomponent of the data provided. This form of analysis is just one of the many steps that must becompleted when conducting a research experiment. Data from various sources is gathered,reviewed, and then analyzed to form some sort of finding or conclusion. There are a variety ofspecific data analysis method, some of which include data mining, text analytics, businessintelligence, and data visualizationsData can be of several types Quantitative data is a number Qualitative data is a pass/fail or the presence of a characteristicQuantitative data is data measured or identified on a numerical scale. Numerical data can beanalyzed using statistical methods, and results can be displayed using tables, charts, histogramsand graphs.The term qualitative data is used to describe certain types of information. This is almost theconverse of quantitative data, in which items are more precisely described as data in terms ofquantity and in which numerical values are used. However, data originally obtained asqualitative information about individual items may give rise to quantitative data if they aresummarized by means of counts.Qualitative data described items in terms of some quality or categorization that may be informalor may use relatively ill-defined characteristics such as warmth and flavor. However, qualitativedata can include well-defined aspects such as gender, nationality or commodity type. 37
  • 37. ECONOMY ANALYSIS 38
  • 38. Analysis of Indian EconomyIndias economy expanded 8.8% in the second quarter from a year earlier, compared to an 8.6% on-yearexpansion in the first, lifted by robust activity in manufacturing. Agricultural output along with strongdevelopment in the Industrial, Mining and banking sector have helped to boost the Indian economy.Agricultural output raised 2.8 per cent y-o-y thanks to improved harvests. Industrial productionincreased by 12% and in the mining sector by 9%. According to 2010 data the shares ofbanking sector value add in GDP has been increased 7.7% from 2.5%. The forecastershave assigned highest 29.6 per cent chance that it will fall in 6.0-6.9 per cent in 2010- 11. They raisedtheir forecasts slightly for agriculture growth to 4.0 percent from 3.5 percent, for industry to 9.0percent from 8.1 percent and for services it was steady at 9.0 percent . The survey showedthe economists expect GDP growth in the April-June quarter to be 8.1 percent up from 7.9 percent in thelast survey. For the July-September quarter, GDP growth is placed at 8.3 percent. TheReserve Bank of India has stated that it had seen an annual growth of 8.5% steadily. The main priority ofthe Reserve Bank is to curb the ongoing inflation, which peaked at 11% last month. Interest rates havebeen increased by the banks to contain the inflation, but it could slow down the growth of the Indianeconomy in the coming months. But even thought there has been a rise in the interest rates therehasn‟t been much change in the distribution of loans, the Indian customer is hardly affectedwith the hiked interest rates. Almost every sector of the economy is poised to grow faster and a 9 percent growth in 2010-11 is not difficult if domestic policies and external factors do not come in the way.Expert expects that India s economy to grow by 8.1% in 2010 based on a steep gain in industrialoutput and resurgent private consumption investment and exports. Were these scenarios tocontinue growth would lift further to 8.3% in 2011 said Chief Economist. They also expect theReserve Bank of India (RBI) to continue gradually raising interest rates and to keep atight leash on liquidity to tame inflation. Recently RBI changed the repo rate from5.75% to 6% and reverse repo rate 4.5% to 5%. CRR rate they keeping unchanged.This six time I a year they revise key parameter to control inflation. 39
  • 39. INDIA GDP SURGES 8.9% IN THE THIRD QUARTERIndias domestically-powered economy grew more than expected in the September quarter,defying weakness elsewhere and putting pressure on the Reserve Bank of India (RBI) to tightenmonetary policy although a rate increase next month still looks unlikely. Annual gross domesticproduct grew 8.9 percent in the September quarter -- matching the revised figure for the previousquarter.Consumer price inflation eased to an annual 9.7 percent in October from 9.82 percent theprevious month, data showed on Tuesday. Wholesale price inflation, which is more closelywatched as it covers a higher number of products, eased to 8.58 percent in October from 8.62percent a month earlier. Investment growth slowed on an annualized basis to 11.1 percent from19 percent in the previous quarter, while annualized private consumption accelerated to 9.3percent from 7.8 percent in the previous quarter, pointing to inflationary risks. The servicessector, which accounts for over 50 percent of GDP, grew 9.8 percent in the September quarter,higher than 9.3 percent in the previous quarter. Signs of easing inflation, a fragile globaleconomy and weaker industrial output in September were likely to forestall any rise in rates inthe near-term, some analysts said. "Unless the full year growth looks likely to cross 9 percent,the central bank is unlikely to get aggressive again in raising rates," said Anjali Varma,economist at MF Global in Mumbai. Industrial output growth -- a key indicator of growthmomentum -- in Asias third-largest economy slowed unexpectedly in September to 4.4 percentfrom a year earlier, down from the previous months upwardly revised 6.92 percent growth Year Mar Jun Sep Dec 2010 8.60 8.90 8.90 - 2009 5.80 6.00 8.60 6.50 2008 8.50 7.80 7.50 6.10 40
  • 40. Healthy economic growth, especially since 2005, has also facilitated impressive growth in thecommercial banking sector (Chart 5.2). Though the growth rate of the consolidated balance sheetof commercial banks moderated in 2008-09 at 21 per cent as compared to 25 per cent in 2007-08,the sector continued to grow at a rate higher than that of the nominal GDP (at current marketprices). Accordingly, the ratio of commercial banking assets to GDP increased to 98.5 per cent atend- March 2009 from 91.6 per cent as at end-March 2008. 41
  • 41. With the impact of the financial crisis gradually affecting the global economy, credit off-takeslowed down further and the year on year growth in bank credit during the first half year of2009-10 stood at 12.3 per cent. During the same period, investments grew by 34.5 per cent (ascompared to 6.3 per cent as on September 2008). However, there are early signs of credit growthrecovering in line with the economy, on the back of fiscal and monetary measures. This trend isclearly shown by the movements in incremental credit-deposit (CD) and investment-deposit (ID)ratio in recent periods (Chart 5.5). 42
  • 42. INDIA INFLATION RATEThe inflation rate in India was last reported at 9.47 percent in December of 2010. From 1969until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976. Inflationrate refers to a general rise in prices measured against a standard level of purchasing power. Themost well known measures of Inflation are the CPI which measures consumer prices, and theGDP deflator, which measures inflation in the whole of the domestic economy. This pageincludes: India Inflation Rate chart, historical data and news.year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 9.82 9.70 8.33 9.472009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.972008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70 43
  • 43. India Interest RateThe benchmark interest rate (reverse repo) in India was last reported at 5.5 percent. In India,interest rate decisions are taken by the Reserve Bank of Indias Central Board of Directors. Theofficial interest rate is the benchmark repurchase rate. From 2000 until 2010, Indias averageinterest rate was 5.82 percent reaching an historical high of 14.50 percent in August of 2000and a record low of 3.25 percent in April of 2009.Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2011 5.502010 3.25 3.25 3.38 3.63 3.75 3.75 4.08 4.50 5.00 5.25 5.252009 4.50 4.00 3.75 3.38 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.252008 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.50 44
  • 44. INDUSTRY ANALYSIS 45
  • 45. The last decade has seen many positive developments in the Indian banking sector. The policymakers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and relatedgovernment and financial sector regulatory entities, have made several notable efforts to Improveregulation in the sector. The sector now compares favorably with banking sectors in the regionon metrics like growth, profitability and non-performing assets (NPAs). A few banks haveestablished an outstanding track record of innovation, growth and value creation. This isReflected in their market valuation. However, improved regulations, innovation, growth andvalue creation in the sector remain limited to a small part of it. The cost of bankingintermediation in India is higher and bank penetration is far lower than in other markets. India‟sbanking industry must strengthen itself significantly if it has to support the modern and vibranteconomy which India aspires to be. While the onus for this change lies mainly with bankmanagements, an enabling policy and regulatory framework will also be critical to their success.The failure to respond to changing market realities has stunted the development of the financialsector in many developing countries. A weak banking structure has been unable to fuel continuedgrowth, which has harmed the long-term health of their economies. In this “white paper”, weemphasize the need to act both decisively and quickly to build an enabling, rather than a limiting,banking sector in India.OPPORTUNITIES AND CHALLENGESFOR PLAYERSThe bar for what it means to be a successful player in the sector has been raised. Four challengesmust be addressed before success can be achieved. First, the market is seeing discontinuousgrowth driven by new products and services that include opportunities in credit cards, consumerfinance and wealth management on the retail side, and in fee-based income and investmentbanking on the wholesale banking side. These require new skills in sales & marketing, credit andoperations. Second, banks will no longer enjoy windfall treasury gains that the decade-longsecular decline in interest rates provided. This will expose the weaker banks. Third, withincreased interest in India, competition from foreign banks will only intensify. Fourth, given thedemographic shifts resulting from changes in age profile and household income, consumers willincreasingly demand enhanced institutional capabilities and service levels from banks.Growth in the Indian banking industryThe growth in the Indian Banking Industry has been more qualitative than quantitative and it isexpected to remain the same in the coming years. Based on the projections made in the "IndiaVision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecaststhat the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assetsof all scheduled commercial banks by end-March 2010 are estimated at Rs 40, 90,000 croresThat will comprise about 65 per cent of GDP at current market prices as compared to 67 per centin 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent duringthe rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95and 2002-03. It is expected that there will be large additions to the capital base and reserves onthe liability side. 46
  • 46. Peer Group Comparison (Standalone) (Rs. In Crore)Company Year Net Adj. PBIDT PAT PBIDTM% PATM% ROCE% ROE%Name End Sales EPS(Rs)Indusind 201003 2706.99 703.89 350.31 8.53 26 12.94 7.53 19.51BankICICI Bank 201003 25706.93 9732.18 4024.98 36.1 37.86 15.66 6.18 7.96Kotak 201003 3255.62 1297 561.11 8.06 39.84 17.23 6.68 13.52BankHDFC 201003 16172.9 6429.73 2948.7 64.42 39.76 18.23 5.95 16.31BankAxis Bank 201003 11638.02 5240.56 2514.53 62.06 45.03 21.61 6.39 19.15InterpretationHere we can see that ICICI has highest net sales with 25706.93 cr. And PAT is also highestamong the peer group with 4027.93 cr. That means ICICI is most favorable company to invest interms of profit. 47
  • 47. Bank – Private Industry RatiosDescription 2010 2009 2008 2007 2006No Of Companies 74 89 83 71 68Margin RatiosYield on Advances 13.31 14.23 12.87 12.04 11.36Yield on Investments 6.22 7.44 7.21 6.37 6.41Cost of Liabilities 5.02 6.09 5.87 5.1 4.27NIM 5.63 5.38 4.69 4.38 4.92Interest Spread 8.28 8.14 7 6.94 7.1Performance RatiosROA (%) 1.17 1.28 1.34 1.19 1.18ROE (%) 10.65 11.07 12.02 14.45 13.36ROCE (%) 5.96 7.11 7.04 6.4 5.56Efficiency RatiosCost Income Ratio 42.89 42.45 46.35 50.66 51.38Core Cost Income Ratio 44.25 45.19 48.74 51.78 50.8Operating Costs to Assets 7.46 7.55 7.49 7.82 8.2Growth RatioCore Operating IncomeGrowth 9.09 30.55 44.08 32.44 107.35Operating Profit Growth 2.45 20.79 60.6 37.8 127.56Net Profit Growth 3.73 16.84 55.86 37.48 102.66Advances Growth 8.99 14.77 46.44 38.42 86.72Liquidity RatiosLoans/Deposits(x) 0.2 0.26 0.22 0.18 0.19Cash/Deposits(x) 0.09 0.07 0.1 0.07 0.06Investment/Deposits(x) 0.47 0.44 0.43 0.41 0.43Inc Loan/Deposit (%) 19.63 25.72 22.28 17.58 18.73 48
  • 48. Interpretation ROE: ROE examines profitably from the perspective of equity investors by relating profits available for the equity share holders with the book value of equity investments. The return from the point of view of equity shareholders may be calculated by comparing the net profit less preference dividend with there total contribution to the firm. Over the years ROE of the industry have declined ROA: ROA measures a profitability of the firm in terms of assets employed in the firm. ROE is calculated by establishing the relationship between the profits and the assets employed to earn that profit. ROA shows as to how much is the profit earn by the firm per rupee of assets used. Here industry ROA is almost stable. NET PROFIT: the NP ratio establishes the relationship between the net profit (after tax) of the firm and the net sales. Its measures the efficiency of the management in generating additional revenue over and above the total cost of operations. Net profit ratio has decreased over the years which mean that the overall profitability of the industry has fallen down. 49
  • 49. Bank – Private Industry profit & Loss A/CDESCRIPTION Latest 2010 2009 2008 2007 2006No of Companies 98 74 89 83 71 68Interest Earned 135486.15 113327.71 136806.93 107590.8 71311.52 50355.01Other Income 35136.24 29599.54 35299.77 28016.66 20011.95 14051.36Total Income 170622.38 142927.25 172106.71 135607.47 91323.48 64406.36Interest Expended 78145.22 65332.36 84711.83 68370.19 42996.95 28555.1Operating Expenses 38681.01 33282.45 36938.65 31161.41 24155.71 18421.37Provisions andContingencies 19010.41 16440.68 16710.7 8910.47 6848.84 4792.74Profit Before Tax 34785.74 27871.76 33745.53 27165.39 17321.97 12637.15Taxes 12304.43 9657.77 12149.69 8925.72 5498.1 3904.43Total 148141.07 124713.26 150510.87 117367.79 79499.61 55673.64Profit After Tax 22481.31 18213.99 21595.84 18239.68 11823.87 8732.73Extra items -22.08 -19.49 -30.5 -1.46 133.84 62.51Profit brought forward 15392.55 14902.92 11246.87 5710.75 3893.12 1766.31Adjustments to PAT 24.84 -23.31 15.64 140.12 182.71 85.56Total Profit & Loss 37898.7 33093.6 32858.35 24090.55 15899.7 10584.6IV. APPROPRIATIONS 37886.23 33074.11 32827.85 24089.09 16043.16 10647.11InterpretationPrivate bank industry profit & loss account shows that banking industry is having a large profityoy and growing rapidly. This is a good sign for the investor who want to invest in the bankingindustry. 50
  • 50. Competition Last Price Market Cap. Net Interest Net Profit Total Assets (Rs. Cr.) IncomeICICI Bank 1,105.45 127,322.68 25,706.93 4,024.98 363,399.71HDFC Bank 2,350.05 109,330.36 19,928.21 3,926.39 222,458.56Axis Bank 1,333.45 54,744.24 15,154.81 3,388.49 180,647.87Kotak Mahindra 458.00 33,748.71 3,255.62 561.11 37,436.31IndusInd Bank 267.00 12,418.17 3,589.36 577.32 35,369.52YES BANK 316.25 10,978.53 4,041.74 727.13 36,382.50Federal Bank 436.05 7,454.92 3,673.23 464.55 43,675.61Karur Vysya 417.00 4,449.13 1,757.94 336.03 21,993.49ING Vysya 353.15 4,272.65 2,694.06 318.65 33,880.24BankJK Bank 823.50 3,992.15 3,056.88 512.38 42,546.80 51
  • 51. COMPANY ANALYSIS 52
  • 52. ICICI BANK LTDICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution,and was its wholly-owned subsidiary. ICICI‟s shareholding in ICICI Bank was reduced to 46%through a public offering of shares in India in fiscal 1998, an equity offering in the form ofADRs listed on the NYSE in fiscal 2000, ICICI Bank‟s acquisition of Bank of Madura Limitedin an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutionalinvestors in fiscal 2001 and fiscal 2002.ICICI was formed in 1955 at the initiative of the World Bank, the Government of India andrepresentatives of Indian industry. The principal objective was to create a development financialinstitution for providing medium-term and long-term project financing to Indian businesses. Inthe 1990s, ICICI transformed its business from a development financial institution offering onlyproject finance to a diversified financial services group offering a wide variety of products andservices, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE.After consideration of various corporate structuring alternatives in the context of the emergingcompetitive scenario in the Indian banking industry, and the move towards universal banking,the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICIBank would be the optimal strategic alternative for both entities, and would create the optimallegal structure for the ICICI group‟s universal banking strategy. The merger would enhancevalue for ICICI shareholders through the merged entity‟s access to low-cost deposits, greateropportunities for earning fee-based income and the ability to participate in the payments systemand provide transaction-banking services. The merger would enhance value for ICICI Bankshareholders through a large capital base and scale of operations, seamless access to ICICI‟sstrong corporate relationships built up over five decades, entry into new business segments,higher market share in various business segments, particularly fee-based services, and access tothe vast talent pool of ICICI and its subsidiaries.In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICIand two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial ServicesLimited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved byshareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat atAhmedabad in March 2002, and by the High Court of Judicature at Mumbai and the ReserveBank of India in April 2002. Consequent to the merger, the ICICI group‟s financing and bankingoperations, both wholesale and retail, have been integrated in a single entity. 53
  • 53. ICICI Bank is India‟s second-largest bank with total assets of Rs.3,793.01 billion (US$ 75billion) at March 31, 2009 and profit after tax Rs.37.58 billion for the year ended March 31,2009. The Bank has a network of 1,454 branches and about 4,721 ATMs in India and presence in18 countries. ICICI Bank offers a wide range of banking products and financial services tocorporate and retail customers through a variety of delivery channels and through its specializedsubsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venturecapital and asset management.The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches inUnited States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai InternationalFinance Centre and representative offices in United Arab Emirates, China, South Africa,Bangladesh, Thailand, Malaysia and Indonesia. Their UK subsidiary has established branches inBelgium and Germany. 54
  • 54. SNAPSHORT OF ICICI BANK LTDCompany DetailsIndustry Bank – PrivateChairman K V KamathManaging Director Chanda D KochharCompany Secretary Sandeep BatraISIN INE090A01013Bloomberg Code ICICIBC INReuters Code ICBK.BOCompany AddressRegistered Office Landmark,Race Course Circle,Vadodara,390007,GujaratPhone 91-0265-6617200/3983200Fax 91-0265-2339926Website www.icicibank.comEmail investor@icicibank.comPrice InformationLatest Date 09-Mar-11Latest Price (Rs) 1033.55Previous Close (Rs) 1020.851 Day Price Var% 1.241 Year Price Var% 11.7652 Week High (Rs) 127752 Week Low (Rs) 803.3Beta 1.4927Face Value (Rs) 10Industry PE 20.04 55
  • 55. PRICE V/S SENSEX CHART Period: From 10/03/2010 To 09/03/2011Company Size (Standalone)Market Cap(Rs Crore) 118741.77EV (Rs Crore) 185491.05Latest no. of shares 1148873022Share holding pattern as on 201012Promoter No of shares 0Promoter % 0FII No of Shares 451680100FII % 39.23Total No of Shares 1151422189Free Float % 100Financial Highlights (Standalone) (Rs. In Crore)Description 201003 200903 200803 200703 200603Equity Paid Up 1114.81 1113.21 1112.6 899.27 889.8Reserve 50503.48 48419.73 45357.53 23413.92 21316.16Deposits 202016.6 218347.83 244431.05 230510.19 165083.17Gross Block 7114.12 7443.71 7036 6298.56 5968.57Interest Earned 25706.93 31092.55 30788.34 21995.59 14306.13Operating Profit 9732.18 8925.23 7960.68 5874.41 3888.42PAT 4024.98 3758.13 4157.73 3110.22 2540.08Dividend % 120 110 110 100 85Adj. EPS(Rs) 36.1 33.76 37.37 34.59 28.55Adj. Book 463.02 444.95 417.67 270.37 249.56Value(Rs) 56
  • 56. Key Market Ratio (Standalone)Latest EPS (Rs) 40.95Latest CEPS (Rs) 45.11Price/TTM CEPS(x) 22.91TTM PE (x) 25.24Price/BV(x) 2.14EV/TTM EBIDTA(x) 20.29EV/TTM Sales(x) 7.53Dividend Yield% 1.16Mcap/TTM Sales(x) 4.82Latest Book Value (Rs) 482.44Quarter on Quarter (Standalone) (Rs. In Crore) Y on YParticulars 201012 201009 Q on Q Var% 200912 Var%Interest Earned 6695.96 6309.1 6.13 6089.57 9.96Total 1717.92 1570.37 9.4 1362.39 26.1ExpenditureOperating 2342.61 2211.94 5.91 2368.84 -1.11ProfitPAT 1437.02 1236.27 16.24 1101.06 30.51PBIDTM% 34.99 35.06 -0.2 38.9 -10.05PATM% 21.46 19.6 9.49 18.08 18.69Adj. EPS(Rs) 12.48 10.74 16.2 9.88 26.32 57
  • 57. InterpretationBETA: A measure of the volatility, or systematic risk, of a security or a portfolio incomparison to the market as a whole. Beta is used in the capital asset pricing model(CAPM), a model that calculates the expected return of an asset based on its beta andexpected market returns.Here beta is more than 1 (1.4927) beta of greater than 1 indicates that the security‟s pricewill be more volatile than the market. Stock‟s beta is 1.4927; it‟s theoretically 49.27%more volatile than the market.EPS: EPS indicates the profitability of a company. Earning per Share is the single mostpopular variable in dictating a share‟s price. Earning per Share is the Net Income (profit)of a company divided by the number of outstanding shares. And here EPS of thecompany increasing. This shows that company is earning profit.P/E: price-to-earnings ratio (P/E) is probably the most widely used – and thus misusedinvesting metric. It‟s easy to calculate, which explains its popularity. The most commonway to calculate :P/E = share price divided by earnings per shareDPS: The the sum of declared dividends for every ordinary share issued. Dividend pershare (DPS) is the total dividends paid out over an entire year (including interimdividends but not including special dividends) divided by the number of outstandingordinary shares issued. Dividends are a form of profit distribution to the shareholder.Having a growing dividend per share can be a sign that the company‟s managementbelieves that the growth can be sustained. Here dividend is highest in last 5 years; itindicates that company is growing YOY.ICICI is having highest market capital, net profit and assets value as compared tocompetitors this indicates that ICICI is most favorable company for investors. 58
  • 58. ICICI BANK LTD BALANCE SHEETDESCRIPTION Mar-10 Mar-09 Mar-08 Mar-07 Mar-06SOURCES OF FUNDS:Share Capital 1114.89 1113.29 1462.68 1249.34 1239.83Share Warrants & Outstanding 0.00 0.00 0.00 0.00 0.00Total Reserves 50503.48 48419.73 45357.53 23413.92 21316.16Deposits 202016.60 218347.82 244431.05 230510.19 165083.17Borrowings 94263.57 93155.45 65648.43 51256.03 38521.91Other Liabilities & Provisions 15501.18 18264.66 42895.38 38228.64 25227.88Total Liabilities 363399.72 379300.96 399795.08 344658.11 251388.95APPLICATION OF FUNDS :Cash and balance with Reserve Bank ofIndia 27514.29 17536.33 29377.53 18706.88 8934.37Balances with banks and money at call 11359.40 12430.23 8663.60 18414.45 8105.85Investments 120892.80 103058.31 111454.34 91257.84 71547.39Advances 181205.60 218310.85 225616.08 195865.60 146163.11Gross block 7114.12 7443.71 7036.00 6298.56 5968.57Less: Accumulated Depreciation 3901.43 3642.09 2927.11 2375.14 1987.85Less: Impairment of AssetsNet Block 3212.69 3801.62 4108.90 3923.42 3980.71Lease AdjustmentCapital Work in ProgressOther Assets 19214.93 24163.62 20574.63 16489.92 12657.51Total Assets 363399.72 379300.96 399795.08 344658.11 251388.95Contingent Liabilities 727084.06 834683.00 1211082.33 562959.91 395033.67Bills for collection 6474.95 6000.44 4278.28 4046.56 4338.46Book Value 463.02 444.95 417.67 270.37 249.56Adjusted Book Value 463.02 444.95 417.67 270.37 249.56 59
  • 59. 60
  • 60. ICICI BANK LTD PROFIT AND LOSS A/CDESCRIPTION Mar-10 Mar-09 Mar-08 Mar-07 Mar-06No of Months 12.00 12.00 12.00 12.00 12.00I. INCOMEInterest Earned 25706.93 31092.55 30788.34 21995.59 14306.13Other Income 7477.65 7603.73 8810.76 6927.87 4180.89Total Income 33184.58 38696.28 39599.11 28923.46 18487.02II. EXPENDITUREInterest Expended 17592.57 22725.93 23484.24 16358.50 9597.45Operating Expenses 5859.83 7045.11 8154.18 6690.56 5001.15Provisions andContingencies 4386.86 3808.26 2904.58 2226.37 791.81Profit Before Tax 5345.32 5116.97 5056.10 3648.04 3096.61Taxes 1320.34 1358.84 898.37 537.82 556.53Total 29159.60 34938.14 35441.38 25813.24 15946.94III. PROFIT AND LOSSProfit After Tax 4024.98 3758.13 4157.73 3110.22 2540.07Extra itemsProfit brought forward 2809.65 2436.32 998.27 293.44 188.22Adjustments to PATTotal Profit & Loss 6834.63 6194.45 5156.00 3403.66 2728.30IV. APPROPRIATIONS 6834.63 6194.45 5156.00 3403.66 2728.30Equity Dividend % 120.00 110.00 110.00 100.00 85.00Earnings Per Share 36.10 33.76 37.37 34.59 28.55Adjusted EPS 36.10 33.76 37.37 34.59 28.55 61
  • 61. 62
  • 62. ICICI BANK LTD FINANCIAL RATIOS RATIOS 2010 2009 2008 2007 2006Per Share Ratios EPS 36.10 33.76 37.37 34.59 28.55 DPS 12 11 11 10 8.50 Profitability ratios GP Ratio 15.06 12.36 12.99 11.41 15.10 NP Ratio 12.17 9.74 10.51 10.81 14.12 ROE 7.96 7.83 11.75 13.37 14.62 ROA 1.08 .96 1.12 1.04 1.21Liquidity Ratios Current Ratio 1.94 0.78 0.72 0.61 0.62 Quick Ratio 14.70 5.94 6.42 6.04 6.64 63
  • 63. Interpretation Earning per share (EPS): EPS is the profitability of the firm measures in terms of number of equity shares, which is derived by dividing the profit after tax by the number of equity shares. EPS calculation in a time series analysis indicates whether the firm EPS is increasing or decreasing. Over the years EPS of the firm is increasing which indicates that per share earning of the firm has increased, but this increase in EPS is erroneous in the sense that the real earnings (ROE) have not increased. 64
  • 64. Dividend per share (DPS): sometimes the equity shareholders may not be interested in the EPS but in the return which they are actually receiving from the firm in the form of dividends. The amount of profits distributed to shareholders per share is known as DPS and it is calculated by dividing total profits distributed by number of equity share.Dividend per share over the years has increased which indicates that the amount ofdividend distributed towards the shareholder has increased. Gross profit ratio: the GP ratio is also called the average mark up ratio. It is calculated by comparing the gross profit of the firm with the net sales.In 2007 GP ratio had drastically fallen, which means operating efficiency of the firm hasdecreased but it has recovered over the next three years and become almost stable. 65
  • 65. Net profit ratio: the NP ratio establishes the relationship between the net profit (after tax) of the firm and the net sales. Its measures the efficiency of the management in generating additional revenue over and above the total cost of operations.Net profit ratio has decreased over the years which mean that the overall profitability ofthe firm has fallen down. ROE: ROE examines profitably from the perspective of equity investors by relating profits available for the equity share holders with the book value of equity investments. The return from the point of view of equity shareholders may be 66
  • 66. calculated by comparing the net profit less preference dividend with there total contribution to the firm.Over the years ROE of the firm have declined which indicates that the funds of the ownerhave not been used properly by the firm, and the firm has not been able to earnsatisfactory return for the owner. ROA: ROA measures a profitability of the firm in terms of assets employed in the firm. ROE is calculated by establishing the relationship between the profits and the assists employed to earn that profit. ROA shows as to how much is the profit earn by the firm per rupee of assets used. ROA of the firm over the year is almost stable. 67
  • 67. Current Ratio: current ratio shows the firms ability to pay its current liability out of its current assets. Generally a current ratio of 2:1 is considered to be satisfactory but sometimes it varies from industry to industry therefore the firms current ratio should be compared with the standard for the specific industry only.Current ratio of the firm has increased over the year which indicates that the firm hasenough current assets to pay off its current liability. Quick ratio: this ratio establishes the relationship between quick current assets and current liabilities. Quick current assets excludes inventory and prepaid expenses from current assets as they are potentially illiquid. This calculated by dividing quick assets by total current liabilities. Generally a quick ratio of 1:1 is considered to be satisfactory. Quick ratio of the firm is much higher than the ideal and its increasing over the years which means that the firm has enough quick assets to payoff its current liability. 68
  • 68. ICICI BANK LTD VALUATION RATIO Mar- Mar- Mar- Mar- Mar-DESCRIPTION 10 09 08 07 06Adjusted PE (x) 26.39 9.85 20.61 24.67 20.64PCE(x) 23.59 8.76 18.81 22.13 18.16Price / BookValue(x) 2.06 0.75 1.84 3.16 2.36Dividend Yield(%) 1.26 3.31 1.43 1.17 1.44EV/Net Sales(x) 7.80 4.19 4.93 5.83 6.38EV/EBITDA(x) 20.60 14.59 19.05 21.84 23.48EV/EBIT(x) 8.74 4.68 5.31 6.41 7.19EV/CE(x) 0.55 0.34 0.38 0.37 0.36M Cap / Sales 4.13 1.19 2.78 3.49 3.66High PE 28.45 25.19 42.13 29.50 22.76Low PE 10.35 7.03 20.61 15.96 13.24ICICI BANK LTD CASH FLOW RATIODESCRIPTION Mar-10 Mar-09 Mar-08 Mar-07 Mar-06Cash Flow Per share 16.77 -127.46 -104.54 256.45 52.29Price to Cash Flow Ratio 56.82 -2.61 -7.37 3.33 11.27Free Cash Flow perShare 102.15 241.13 198.79 -160.91 30.12Price to Free Cash Flow 9.33 1.38 3.87 -5.30 19.56Free Cash Flow Yield 0.11 0.72 0.26 -0.19 0.05Sales to cash flow ratios 13.75 -2.19 -2.65 0.95 3.07 69
  • 69. Intrinsic value of ICICI Bank Year EPS P/E 2006 36.10 26.39 2007 33.76 9.85 2008 37.37 20.61 2009 34.59 24.67 2010 28.55 20.64 1) Based on the past 5 year EPS data, estimated growth % can be determine. And the estimated growth rate is 10.1% 2) Now, by using the current EPS we can compound it with the estimated growth i.e. 10.1% 3) Current EPS is 40.95 compounding of the EPS is 40.95+(40.95*.101)=45.085 4) Now, based on the past 5 year P/E take the average of P/E value which is 20.432 5) Now multiply the step 3 & 4 and we will get the estimated share price. 6) Estimated share price is 921.176 and current share price is 1033 which is higher than the estimated its means that share price is overvalued and investor should sell the shares for short term. 70
  • 70. Expected Growth of ICICI in 2011 by Unicon Investment research report“ICICI Bank registered a good financial performance in Q4FY11 with standalone PAT up by44% to INR 14.52 Bn from INR 10.06 Bn in Q4FY10. The growth, being the highest in last 7years, was aided by increase in interest and non interest income. The QoQ increase in NetInterest Income was better than expected (a rise of 23.3% from INR 20.35 bn in Q4FY10 to INR25.10 Bn to Q4FY11). Net interest margin increased QoQ & YoY by 10 bps to 2.7%respectively, on account of lower cost of funds, lower delinquencies and growing CASAdeposits.”“CASA ratio increased from 41.7% in Q4FY10 to 45.1% in Q4FY11. The total depositsincreased by 11.7% YoY (INR 668.7 Bn on March 31,2011 as compared to INR 532.18 Bn inMarch 31,2010). Non interest income decreased by 13.2% QoQ and 11.1% YoY, this wasprimarily because of MTM loss in treasury income (Q4FY11 value stood at INR 1.96 Bn) andreduction in other income by 73.6% (QoQ). However, fee income increased by 17.8% to INR17.91 Bn on QoQ basis. Advances increased YoY by only 19% which was lower than theindustry level of 21%, advances to domestic 71orporate increased by 42.6% YoY. The retailadvances like vehicle loan and home loan are expected to grow in the near future. The NetNPA‟s improved from 1.87% in Q4FY10 to 0.94% of net advances in Q4FY11. Loan losscoverage ratio also increased to 76% on March 31,2011 from 59.5% in March 31,2010, muchabove the RBI regulation of 70%. Operating expenses rose YoY by 14.1% to INR 17.89 Bn inQ4FY11 from INR 14.58 Bn in Q4FY10. Credit to deposit ratio from domestic business stood at75%, Cost to income ratio was 42% due to healthy operating income growth. This was onaccount of expanding network of the bank with 2529 branches and 6104 ATMs.”“ICICI Bank‟s growth in the past has been mainly retail-driven, the bank is now looking to growits large corporate and SME segment loan book as well. Progress on the „4C‟ strategy (CASA,capital conservation, cost control and credit charges) has been good. At the CMP ICICI is tradingat 2x of its FY12E P/BV (standalone basis). We have Accumulate rating on the stock for a targetprice of INR 1306,” says Unicon Investment research report 71
  • 71. FINDINGS(Chapter-7) 72
  • 72. In this project report there are many facts which say whether an investor should invest in ICICIBank or not. For the conclusion on this part, we have analyzed economic, industry as well ascompany (ICICI Bank). 1) In the Economic Analysis we can see that economic is booming after 2009 and current position shows that this is the good time to invest after the recession because GDP growth rate is increasing. And overall economy is growing. 2) In the industry analysis here overall industry PAT is increasing over the years which means banking industry is having much profit but on the other side banking industry Net Profit growth has decreased very much so investor should invest carefully. 3) In the analysis of ICICI Bank we can see that EPS is increasing yoy. And dividend is also increasing so investor can invest in the company but on other side we company‟s intrinsic value is less than the current price it shows that the share price is overvalued and invester should sell the share. But if investor want to invest in the company for long term than he can have a good profit because company growing rapidly in terms of profit and net sales and its EPS & DPS are increasing over the years. 73
  • 73. LIMITATIONS 74
  • 74. Fundamental analysis has some limitation involved in it. This limitation can be explained asunder:Time Constrain: Fundamental analysis may offer excellent insights, but it can be extraordinarily time-consuming. Time-consuming models often produce valuations that are contradictory to thecurrent price prevailing on the exchange.Company Specific: Valuation techniques vary depending on the industry group and specifics of eachcompany. For this reason, a different technique and model is required for different industries anddifferent companies. This can be quite time-consuming process, which can limit the amount ofresearch that can be performed. The sales and inventory ratio may be very important for the cement sector company butthese ratios are not very useful for the banking sector.Inadequacies of Data: While making analysis one has to often wrestle with inadequate data. While deliberatefalsification of data may be rare, subtle misrepresentation and concealment are common.Future Uncertainties: Future changes are largely unpredictable; more so when the economic and businessenvironment is buffeted by frequent winds of change. In an environment characterized bydiscontinuities, the past record is a poor guide to future performance.Irrational Market Behavior: The market itself presents a major obstacle while making analysis on account of neglector prejudice, undervaluation may persist for extended periods; likewise, overvaluations arisingfrom unsatisfied optimism and misplaced enthusiasm may endure for unreasonable lengths oftime. 75
  • 75. CONCLUSION 76
  • 76. Fundamental analysis holds that no investment decision should be without processing andanalyzing all relevant information. Its strength lies in the fact that the information analyzed isreal as opposed to hunches or assumptions. On the other hand, while fundamental analysis dealswith tangible facts, it does not tend to ignore the fact that human beings do not always actrationally. Market prices do sometimes deviate from fundamentals. Prices rise or fall due toinsider trading, speculation, rumor, and a host of other factors.Fundamental analysis is based on the analysis of the economic, industry as well as the companyand in this research we can see that the economic indicators have an effect on the bank growthand assets.The above report says that our economic is growing after the recession and it is the good time forthe one who want to invest. and according to the industry analysis investor can invest in thebanks but he/she should be careful for the investment. But according to financial analysis ofICICI bank its performance in the private industry is good and expected to grow further in thenear future which is a good sign for investment. EPS and dividend both are increasing yoy andit‟s on the top in terms of profit and net interest income if we compared it with the other banks inthe same industry but we can‟t ignore the intrinsic value of the company which is lower than thecurrent value which shows then investor should sell the share of the company if he/she isinvesting for short term and for long term it is good for investor to invest in the company. 77
  • 77. SUGGESTION 78
  • 78. The analysis carried out at on the ICICI Bank, their profit and loss account, balance sheet andratios. I shall suggest the investors to invest in ICICI Bank than the other banks as a valueinvestment.Reasons:  Largest private sector bank in India, second largest in entire banking Industry  Strong increase in profit year-on-year basis.  Increasing EPS indicate good earnings.  Increase in sharing profit with shareholders in form of dividend.  ICICI Bank is expanding its footholds on international level also; its Insurance and asset management business are also performing well. 79
  • 79. BIBLIOGRAPHY 80
  • 80. Books: Investment Analysis & Portfolio Management- Prasanna Chandra. Financial management – R.P RustagiACE EQUITY data baseWebsites: www.google.com www.icicibank.com www.rbi.org.in www.moneycontrol.com www.equitymaster.com mwww.nseindia.com http://www.business-standard.com/india/index2.php http://economictimes.indiatimes.com/ http://en.wikipedia.org/wiki/Magnetic_ink_character_recognition http://finance.indiabizclub.com/info/indian_banking_industry http://finance.indiamart.com/investment_in_india/banking_in_india.html 81