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Project on equity analysis

  1. 1. S U M M E R T R A I N I N G P RO J E C T O N “ E Q U I T Y A N A LY S I S ” B a n k s 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 2
  3. 3. • CHAPTER 4: BANKING SECTOR 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. 4
  5. 5. Company Profile Kotak Life Insurance is a joint venture between Kotak Mahindra Bank Ltd., along with its affiliates and Old Mutual plc. Kotak Mahindra Old Mutual Life Insurance is one of the fastest growing insurance companies in India and has shown remarkable growth since its inception in 2001. Kotak Mahindra believes in offering its customers a lifetime of value. Established in 1984, the Kotak Mahindra group has long been one of the India’s most reputed financial organizations. Kotak Mahindra today is one of India’s leading financial institutions offering complete financial solutions that encompass every sphere of life. The group has a net worth of over Rs. 3,380 crore, employs around 12,300 people in its various businesses and has a distribution network of branches, franchisees, representative offices and 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 million customer accounts. Old Mutual, a company with 160 years experience in life insurance, is the 37th largest company 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 into a company that combines international expertise with the understanding of the local market. 5
  6. 6. 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 6
  7. 7. Investment Rationale Each investment alternative has its own strengths and weaknesses. Some options seek to achieve superior returns (like equity), but with corresponding higher risk. Other provide safety (like PPF) but at the expense of liquidity and growth. Other options such as FDs offer safety and liquidity, but at the cost of return. Mutual funds seek to combine the advantages of investing in arch of these alternatives while dispensing with the shortcomings. Indian stock market is semi-efficient by nature and, is considered as one of the most respected stock markets, where information is quickly and widely disseminated, thereby allowing each security’s price to adjust rapidly in an unbiased manner to new information so that, it reflects the nearest investment value. And mainly after the introduction of electronic trading system, the information flow has become much faster. But sometimes, in developing countries like India, sentiments play major role in price movements, or say, fluctuations, where investors find it difficult to predict the future with certainty. Some of the events affect economy as a whole, while some events are sector specific. Even in one particular sector, some companies or major market player are more sensitive to the event. So, the new investors taking exposure in the market should be well aware about the maximum potential loss, i.e. Value at risk. 7
  8. 8. Investment Portfolio of Kotak Life Insurance 8
  9. 9. Investment Portfolio of Aggressive Growth Fund 9
  10. 10. Investment Portfolio of Dynamic Growth Fund 10
  11. 11. Investment in Banks Name Investment % (avg) STATE BANK OF INDIA 5.15 ICICI BANK 4.60 HDFC BANK 2.48 UNION BANK OF INDIA 0.95 11
  12. 12. CHAPTER- 1 INTRODUCTION 12
  13. 13. 1.1 INTRODUCTION Investing, like marriage, isn't something that should be entered into lightly. Investing in equities gives high returns but they correspondingly have higher risk also. Before we invest in a company, there are more than a few things we need to know about it. Securities Analysis An analysis of securities and the organization and operation of their markets. The determination of the risk reward structure of equity and debt securities and their valuation. Special emphasis on common stocks. Other topics include options, mutual fluids and technical analysis. Technical analysis is a method of predicting price movements and future market trends by 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 a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. Main differences between the two types of analysis: Fundamental analysis Technical analysis Focuses on what ought to happen in a market Focuses on what actually happens in a market Factors involved in price analysis: 1. Supply and demand 2.Seasonal cycles 3.Weather 4. Government policy Charts are based on market action involving: 1.Price 2.Volume 3. Open interest (futures only) 13
  14. 14. 1.2 RATIONALE FOR THE STUDY In an industry plagued with skepticism and a stock market increasingly difficult to predict and contend with, if one looks hard enough there may still be a genuine aid for the Day Trader and Short Term Investor. The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans expectations are neither easily quantifiable 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 investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the stock market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis. 14
  15. 15. 1.3 OBJECTIVES OF THE STUDY Primary 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. 15
  16. 16. 1.4 RESEARCH METHODOLOGY & DESIGN TYPE OF STUDY The research has been based on secondary data analysis. The study has been exploratory as it aims at examining the secondary data for analyzing the previous researches that have been done in the area of technical and fundamental analysis of stocks. The knowledge thus gained from this preliminary study forms the basis for the further detailed Descriptive research. In the exploratory study, the various technical indicators that are important for analyzing stock were actually identified and important ones short listed. SAMPLE DESIGN The sample of the stocks for the purpose of collecting secondary data has been selected on the basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen. The stocks are chosen from the Banking Sector. SAMPLE SIZE The sample size for the number of stocks is taken as 3 for technical analysis and fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed study. 16
  17. 17. CHAPTER- 2 TECHNICAL ANALYSIS A CONCEPTUAL OVERVIEW 17
  18. 18. TECHNICAL ANALYSIS Technical analysis can be conditionally divided into some main parts such as: • Types of charts • Graphical methods • Analytical methods Technical analysis is concerned with predicting future price trends from historical price and 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 RESISTANCE Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower. Resistance, on the other hand, is the point at which sellers (bears) take control of prices and prevent them from rising higher. The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations. 18
  19. 19. Support levels indicate the price where the most of investors believe that prices will move higher. Resistance levels indicate the price at which the most of investors feel prices will move lower. Role Reversal When a resistance level is successfully broken through, that level becomes a support level. Similarly, when a support level is successfully broken through, that level becomes a resistance level. DOW THEORY– TRENDS: The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis. The Dow theory is a method of interpreting and signaling changes in the stock market direction based on the monitoring of the Dow Jones Industrial and Transportation Averages. Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market. The behavior patterns that he observed apply to markets throughout the world. 19
  20. 20. Three Movements Markets 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 fit into 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 Phases The 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 20
  21. 21. • 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. Trends Bull Trends A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline. Successive higher highs and higher lows. The start of an up trend is signaled when price makes a higher low (trough), followed by a 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. 21
  22. 22. A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend. ELLIOT WAVES THEORY BASICS TRENDLINES Breaking 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 thought of as a rising support level: the bulls are in control and are pushing prices higher. A 22
  23. 23. Downtrend is defined by successively lower high-prices. A falling trend can be thought of as a falling resistance level: the bears are in control and are pushing prices lower. MOVING AVERAGES Moving averages are one of the oldest and most popular technical analysis tools. A moving average is the average price of a financial instrument over a given time. The moving average represents the consensus of investor’s expectations over the indicated 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 average and sell when the it falls below its moving average. 23
  24. 24. CHAPTER- 3 FUNDAMENTAL ANALYSIS A CONCEPTUAL OVERVIEW 24
  25. 25. Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and societal 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 a tremendous product. However, its sales and its costs are affected by factors, some of which are beyond its control - the world economy, price inflation, taxes and a host of others. It is important, therefore, to have an appreciation of the politico-economic factors that affect an industry and a company. II. INDUSTRY ANALYSIS The importance of industry analysis is now dawning on the Indian investor as never before. 1. BARRIER TO ENTRY New entrants increase the capacity in an industry and the inflow of funds. The question that arises is how easy is it to enter an industry ? There are some barriers to entry: a) Economies of scale b) Product differentiation c) Capital requirement d) Government policy 2. THE THREAT OF SUBSTITUTION New inventions are always taking place and new and better products replace existing ones. An industry that can be replaced by substitutes or is threatened by substitutes is normally an industry one must be careful of investing in. An industry where this occurs 25
  26. 26. constantly is the packaging industry -bottles replaced by cans, cans replaced by plastic bottles, and the like. To ward off the threat of substitution, companies often have to spend large sums of money in advertising and promotion. 3. BARGAINING POWER OF THE BUYERS In an industry where buyers have control, i.e. in a buyer's market, buyers are constantly forcing prices down, demanding better services or higher quality and this often erodes profitability. 4. BARGAINING POWER FOR THE SUPPLIERS An industry unduly controlled by its suppliers is also under threat. 5. RIVALRY AMONG COMPETITORS Rivalry among competitors can cause an industry great harm. This occurs mainly by price 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. This analysis has two thrusts: How has the company performed vis-à-vis other similar companies and How has the company performed in comparison to earlier years It is imperative that one completes the politico economic analysis and the industry analysis before a company is analyzed because the company's performance at a period of time 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 Management The Company The Annual Report Ratios 26
  27. 27. THE MANAGEMENT: The single most important factor one should consider when investing in a company and one often never considered is its management. In India management can be broadly divided in two types: Family Management Professional Management THE 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 not wish to touch its shares - yet it may be a good company and worth purchasing into. There are 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 is held in high regard. Its management may be known for its maturity, vision, competence and aggressiveness. The investor must ascertain the reason and then determine whether the reason will continue into the foreseeable future. 2. Whether the company is the market leader in its products or in its segment Another aspect that should be ascertained is whether the company is the market leader in its products or in its segment. When you invest in market leaders, the risk is less. The shares of market leaders do not fall as quickly as those of other companies. There is a magic to their name that would make individuals prefer to buy their products as opposed to others. 27
  28. 28. 3. Company Policies The policy a company follows is also important. What is its plans for growth? What is its vision? Every company has a life. If it is allowed to live a normal life it will grow upto a point and then begin to level out and eventually die. It is at the point of leveling out that it 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 Annual Report. By law, this is prepared every year and distributed to the shareholders. Annual Reports are usually very well presented. A tremendous amount of data is given about the performance of a company over a period of time. The Annual Report is broken down into the following specific parts: A) The Director's Report, B) The Auditor's Report, C) The Financial Statements, and D) The Schedules and Notes to the Accounts. A. The Director’s Report The Director’s Report is a report submitted by the directors of a company to its shareholders, 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 political situation vis-à-vis the company. 2. Explains the performance and the financial results of the company in the period under review. This is an extremely important part. The results and operations of the various separate divisions are usually detailed and investors can determine the reasons for their good or bad performance. 3. The Director’s Report details the company's plans for modernization, expansion and diversification. Without these, a company will remain static and eventually decline. 28
  29. 29. 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 skepticism, as the directors will always argue that the performance was satisfactory. If adverse economic conditions are usually at fault. 5. Elaborates on the directors' views of the company's prospects in the future. 6. Discusses plans for new acquisition and investments. An investor must intelligently evaluate the issues raised in a Director’s Report. Industry conditions and the management's knowledge of the business must be considered. B. The Auditor's Report The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors. Auditors are required to report whether the financial statements presented do, in fact, present a true and fair view of the state of the company. Investors must remember that the auditors are their representatives and that they are required by law to point out if the financial statements are not true and fair.. C.Financial Statements The published financial statements of a company in an Annual Report consist of its Balance Sheet as at the end of the accounting period detailing the financing condition of the company at that date, and the Profit and Loss Account or Income Statement summarizing the activities of the company for the accounting period. BALANCE SHEET The Balance Sheet details the financial position of a company on a particular date; of the company's assets (that which the company owns), and liabilities (that which the company owes), grouped logically under specific heads. It must however, be noted that the Balance Sheet details the financial position on a particular day and that the position can be materially different on the next day or the day after. 29
  30. 30. Sources of funds Shareholders Funds Share Capital (i) Private Placement (ii) Public Issue iii) Rights issues RESERVES i) Capital Reserves ii) Revenue Reserves LOAN FUNDS i) Secured loans: ii) Unsecured loans Fixed Assets INVESTMENTS STOCK OR INVENTORIES i) Raw materials ii) Work in progress iii) Finished goods CASH AND BANK BALANCES LOANS AND ADVANCES PROFIT AND LOSS ACCOUNT The Profit and Loss account summarizes the activities of a company during an accounting period which may be a month, a quarter, six months, a year or longer, and the result achieved by the company. It details the income earned by the company, its cost and the resulting profit or loss. It is, in effect, the performance appraisal not only of the company but also of its management- its competence, foresight and ability to lead. RATIOS: Ratios express mathematically the relationship between performance figures and/or assets/liabilities in a form that can be easily understood and interpreted. 30
  31. 31. No single ratio tells the complete story Ratios can be broken down into four broad categories: (A) Profit and Loss Ratios These show the relationship between two items or groups of items in a profit and loss account or income statement. The more common of these ratios are: (B) Balance Sheet Ratios These 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 such as: 1. Earnings to shareholder's funds. 2. Net income to assets employed. (D) Financial Statements and Market Ratios These are normally known as market ratios and are arrived at by relative financial figures to market prices: 1. Market value to earnings and 2. Book value to market value. (a) Market value (b) Earnings (c) Profitability The major ratios that are considered: (i) Market value (ii) Price- earnings ratio (iii) Market-to-book ratio 31
  32. 32. (iv) Earnings (v) Earning per share (vi) Dividend per share 32
  33. 33. CHAPTER- 4 BANKING SECTOR 33
  34. 34. BANKING IN INDIA The Indian banking scenario witnessed a significant development in the recent years with the entry of private banks and their focus on retail banking and convergence of services. The business models of the leading players are adapting to this impending change as banks widen the spectrum of savings and loan products they offer. Private Banks are the best positioned to acquire market share in the emerging scenario: A change is expected to make mergers between banks and Foreign Institutional Investors possible, which will. Benefit large private bank group(s). Nationalization A significant milestone in Indian Banking happened in the late 1960s when the then Indira Gandhi 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 for the nationalization was more control of credit delivery. After this, until the 1990s, the nationalized banks grew at a leisurely pace of around 4%-also called as the Hindu growth of the Indian economy. After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19 nationalized banks in India. Liberalization In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks like ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of India, kick started the banking sector in India, 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 few hiccups for these new banks with many either being taken over like Global Trust Bank while others like Centurion Bank have found the going tough. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. 34
  35. 35. Current scenario Currently, overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage 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, the demand for banking services-especially retail banking, mortgages and investment services are expected to be strong. Currently, India has 88 scheduled commercial banks (SCBs), 2& public sector banks (that is with the 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. 35
  36. 36. 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 36
  37. 37. BANKING STRUCTURE IN INDIA The 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 large numbers, mostly as corporate bodies with shareholding with private individuals. In the sixties of the 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 banks constitute a strong Public Sector in Indian Commercial Banking. Commercial Banks operating in India fall under the different sub categories on the basis of their ownership 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. 37
  38. 38. Fig 1: Banking Structure in India 38 RESERVE BANK OF INDIA SCHEDULED BANKS COMMERCIAL BANKS CO-OPERATIVE BANKS PUBLIC SECTOR BANKS (27) PRIVATE BANKS (29) URBAN CO-OPERATIVE (52) STATE CO-OPERATIVE (16)SBI AND ASSOCIATES (8) NATIONALIZED BANKS (19) OLD BANKS (21) NEW BANKS (8)
  39. 39. 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 to protect the interests of depositors. Consequently, certain provisions of the Banking Regulation Act1949 were made applicable to the cooperative Banks as well. These Banks have thus fallen under dual control viz., that of the State Government and tat of the RBI which exercises control over them so far as their banking Operations are concerned. 39
  40. 40. CHAPTER- 4 ANALYSIS 40
  41. 41. Brief Company Profile : ICICI BANK ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank in market capitalization and second largest overall in terms of assets. ICICI Bank has total assets of about USD 79 Billion (end-Mar 2007), a network of over 950 branches and offices, about 3500 ATMs, and 24 million customers(as of end July '07). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank's equity shares are listed in India on stock exchanges at Kolkata and Vadodara, the Stock Exchange, Mumbai and the National Stock Exchange of India Limited and its ADRs are listed on the New York Stock Exchange (NYSE). Key Executives Mr. Kundapur Vaman Kamath Chief Exec. Officer Smt. Vishakha Mulye Chief Financial Officer Mrs. Chanda Kochhar Exec. Director of Retail Banking Bus., Deputy Managing Director Ms. Madhabi Puri-Buch Head of Operations 41
  42. 42. Equity Research Aug 2006 Stock performance ( Rel to Nifty ) ICICI BANK Ltd ( Rs 920, P/E: 26.6, BUY ) Price Target: Rs. 1100 India’s largest private sector bank ICICI Bank had hit the market with an offer size of Rs200bn, with half the offering scheduled in the domestic market. This offering is estimated to sustain the company’s growth rate over the next three years after factoring in Basel II impact. Unlocking of subsidiary value is likely to be the biggest driver for the Bank's valuation. 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 42 ISIN Code : INE090A01013 Face Value : 10.00 52 Week Low : 672.30 52 Week Hi : 1069.90
  43. 43. Financials 43
  44. 44. Key risk Asset quality deterioration Rising interest rates and consequently deteriorating asset quality remains the key risk to valuations. Further management's decision to move from mortgage products to other high yield assets could impact asset quality in the medium term. 44
  45. 45. Brief Company Profile : HDFC BANK HDFC Bank, one of the commercial banks of India, was incorporated in August 1994, after the Reserve Bank of India allowed setting up of Banks in the private sector. The Bank was promoted by 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 of the 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 Executives Jagdish Capoor Chairman / Chair Person Aditya Puri Managing Director Keki Mistry Director Vineet Jain Director 45
  46. 46. Equity Research Aug 2006 Stock performance ( Rel to Nifty ) HDFC BANK Ltd ( Rs 1188, P/E: 33.2, BUY ) Price Target: Rs. 1435 Investment summary 1QFY07 earnings 3-4% higher than estimated HDFC Bank’s 1QFY07 earnings were about 3-4% higher than estimated, driven principally by stronger non-interest income. While top line (net interest 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 gross 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% 46 ISIN Code : INE040A01018 Face Value : 10.00 52 Week Low : 801.30 52 Week Hi : 1248.50
  47. 47. assumed earlier. Holding Pattern of HDFC Bank Description % of Holding Total Foreign 51.46 Total Institutions 5.59 Total Govt. Holding 0.79 Total Non-Promoter Corporate Holdings 7.92 Total Promoters 21.56 Total Public & Others 12.68 Total 100.00 Income Statement As On (Months) 31-Mar-07 31-Mar-06 31-Mar-05 Profit / Loss A/c Rs. mn % BT Rs. mn % BT Rs. mn % BT Interest Income 68890.20 81.29 44753.40 78.67 30934.90 82.92 Other Income 15856.90 18.71 12136.40 21.33 6373.60 17.08 Operating Income (OI) 84747.10 100.00 56889.80 100.00 37308.50 100.00 Interest Expenses 31794.50 37.52 19295.00 33.92 13155.60 35.26 Employee Expenses 7768.60 9.17 4868.20 8.56 2766.70 7.42 OPBDT 18587.50 21.93 14324.00 25.18 11236.60 30.12 OPBT 16391.50 19.34 12538.10 22.04 9795.90 26.26 Extraordinary / Prior period 0.00 0.00 0.00 0.00 0.00 0.00 Tax 4977.00 5.87 3830.30 6.73 3140.30 8.42 PAT 11414.50 13.47 8707.80 15.31 6655.60 17.84 Dividend 2235.70 2.64 1722.30 3.03 1400.70 3.75 Share Statistics As on 31-Mar-07 31-Mar-06 31-Mar-05 EPS (Rs.) 35.74 27.81 21.48 CFPS (Rs.) 42.61 33.51 26.13 Book Value (Rs.) 201.42 169.24 145.86 DPS (Rs.) 7.00 5.50 4.52 47
  48. 48. Balance Sheet (Rs in Cr.) 2007 2006 2005 2004 2003 CAPITAL & LIABILITIES Owners' Fund Equity Share Capital 319.39 313.14 309.88 284.79 282.05 Share Application Money 0.00 0.07 0.43 1.45 6.91 Peference Share Capital 0.00 0.00 0.00 0.00 0.00 Reserves & Surplus 6,113.76 4,986.39 4,209.97 2,407.09 1,962.78 Loan Funds Deposits 68,297.94 55,796.82 36,354.25 30,408.86 22,376.07 Borrowings made by the bank 2,815.39 4,560.48 5,290.01 2,907.82 2,284.65 Other Liabilities & Provisions 13,689.13 7,849.49 5,264.46 6,296.98 3,511.62 Total 91,235.61 73,506.39 51,429.00 42,306.99 30,424.08 ASSETS Cash & Balances with RBI 5,182.48 3,306.61 2,650.13 2,541.98 2,081.96 Money at call and Short Notice 3,971.40 3,612.39 1,823.87 1,115.57 1,087.26 Investments 30,564.80 28,393.96 19,349.81 19,256.79 13,388.08 Advances 46,944.78 35,061.26 25,566.30 17,744.51 11,754.86 Fixed Assets Gross Block 1,917.56 1,589.47 1,290.51 1,061.33 854.11 Less: Revaluation Reserve 0.00 0.00 0.00 0.00 0.00 Less: Accumulated Depreciation 950.89 734.39 582.19 444.42 325.53 Net Block 966.67 855.08 708.32 616.91 528.58 Capital Work-in-progress 0.00 0.00 0.00 0.00 0.00 Other Assets 3,605.48 2,277.09 1,330.57 1,031.23 1,583.34 Miscellaneous Expenses not written off 0.00 0.00 0.00 0.00 0.00 Total 91,235.61 73,506.39 51,429.00 42,306.99 30,424.08 48
  49. 49. 49
  50. 50. Brief Company Profile : UNION BANK OF INDIA Union Bank of India (UBI), is the 5th largest state owned bank in India, with a balance sheet size of >US$25bn as on Mar-07. It has a vast distribution network with over 2,206 branches and 770 ATMS. While the bank has a pan India presence, western region accounts for >40%of its loans and 30% of its deposit base. With >60 of its total lending to the corporate sector, UBI is highly leveraged to the rising demand for corporate credit. It serves approximately 15 million customers. All its branches are computerized, and as its 1,000 branches 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 CBS branches. Key Executives M.V.NAIR Chairman & Managing Director R.S. REDDY Executive Director T.Y. PRABHU Executive Director SHRI B.S.BHALLA I.A.S. Government of India Nominee 50
  51. 51. Equity Research Jul 2006 Stock performance Union Bank of India ( Rs 131.6, P/E: 7.8, BUY ) Price Target: Rs. 180 Offering the best risk reward ratio among government banks, Union Bank of India ranks in the top tier on all operating parameters and trades at the lowest end of the valuation range at <0.9x FY09CL adj book Investment summary 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 51 ISIN Code : INE692A01016 Face Value : 10.00 52 Week Low : 142.00 52 Week Hi : 80.50
  52. 52. trade up to 1.2-1.3x one-year forward(FY09CL) adjusted book, underpinning price target of 180. Financials Year to 31 Mar 05A 06A 07A 08CL 09CL Op income (Rsm) 28307 29994 36320 41570 48852 Net profit (Rsm) 7191 6752 8454 11032 13812 EPS (Rs) 15.6 14.0 16.7 21.8 27.3 Pex (@Rs 118.7) 7.6 8.5 7.1 5.4 4.3 Dividend 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 Govt. Of India 56% FII's 20% Domestic Institutions 9% Others 15% 52
  53. 53. Leveraging Technology efficiently Union bank is amongst the leaders in technology implementation with >80% of its business being on a common banking platform (CBS). While many other state owned banks have been implementing CBS, Union bank seems to be amongst the few banks which have effectively leveraged these initiatives to: a) drive fee income growth b) increase the proportion of low cost demand deposits and c) improve operating efficiency Fee income growth UBI’s fee revenues have grown 23% in FY06 and 26% in FY07, one of the highest across state owned 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 areas like foreign exchange business ( + 33%yoy) etc. C/I ratio has declined The bank has re-deployed its surplus staff (outcome of CBS implementation) in new business initiatives 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/I ratio(from 49% in FY05 to 42% in FY07) making itone of the best amongst all state owned banks. Asset quality to remain stable Union bank has seen a sharp improvement in asset quality over the past two years with its gross NPLs declining to <3% of advances in FY07 (v/s 7.6% in FY04) and net NPLs to <0.5%. The improvement has been led by lower incremental delinquencies, higher recoveries and aggressive provisioning. In FY07 Union Bank’s total NPL provisioning, at around 0.8% of advances, was at the higher end of all state-owned banks. 53
  54. 54. Income Statement Income (Rs Mn) FY05A FY06A FY07A FY08CL FY09CL Interest income 49698 58637 73822 89621 108189 Interest Expense 29052 34894 45920 56595 68961 Net Interest income 20646 23743 27902 33026 39228 Other income 7661 6251 8418 8545 9624 - Treasury Gains 2603 954 1085 750 600 Total income 28307 29994 36320 41570 48852 Operating expenses 12575 14024 14759 16812 18744 Pre-provision profit 15732 15970 21561 24758 30107 Total provision 9616 7023 7757 8293 9493 -Provision for NPL 2391 2567 5044 6250 7500 - for investments 5712 4338 2714 2043 1993 - Other 1513 118 000 000 000 PBT 6116 8947 13804 16466 20614 PAT 7191 6752 8454 11032 13812 Key Ratios FY05A FY06A FY07A FY08CL FY09CL EPS 15.6 13.4 16.7 21.8 27.3 Earnings 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 5.5 Dividend 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 54
  55. 55. Balance sheet ( Rs bn) FY04 FY05A FY06 FY07E FY08E Cash balances 38.5 65.7 63.9 84.3 87.8 Advances 294.3 401.1 533.8 623.9 761.1 Investments 224.4 227.9 259.2 279.8 318.6 Fixed assets 7.7 8.2 8.1 8.2 7.8 Current Assets 18.3 21.2 26.3 30.6 35.2 Total Assets 583.2 724.1 891.3 1026.8 1210.6 Equity capital 4.6 4.6 5.1 5.1 5.1 Reserves & Surplus 26.3 31.5 40.5 46.8 55.3 Shareholder’s funds 30.9 36.1 45.6 51.9 60.4 Deposits 505.6 618.3 740.9 851.8 1003.8 Borrowings 9.3 20.2 39.7 42.2 48.5 Subordinated debt 15.2 19.7 27.7 34.2 42.8 Current liabilities 22.2 29.8 37.3 46.7 55.1 Total Liabilities 583.2 724.1 891.3 1026.8 1210.6 55
  56. 56. Findings & Conclusion Stock Target Price (Rs) Recommendation ICICI Bank 1100 BUY HDFC Bank 1435 BUY Union Bank Of India 180 BUY Current 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 to perform 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 7.8 Investment in Union Bank of India should be increased from current 0.95% to at least 2% of the total investments in the equity market. 56
  57. 57. BIBLIOGRAPHY Websites Referred: www.moneycontrol.com www.myiris.com www.indiaearnings.moneycontrol.com http://finance.yahoo.com www.wikipedia.org www.reuters.com www.kotaklifeinsurance.com www.hdfcbank.com www.investopedia.com Reports Referred: CLSA – Asia Pacific Markets analysis of Union Bank of India Merril Lynch analysis of HDFC Bank India Infoline report on ICICI Bank’s FPO 57

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