ACKNOWLEDGEMENT

The most pleasant part of any project is to express gratitude and bestow honour towards all those who directly or indirectly contributed to the smooth flow of the project work and this being the good opportunity; I dont want to miss it. Sincere acknowledgement are due foremost to the institution Hindustan Institute Of Management And Computer Studies, Farah, Mathura which endowed me with the valuable opportunity to explore so interesting and a critical topic as is the subject of the present report. I thank my project guide Ms. Jyoti, for her valuable inputs in the research and spending so much of valuable time and effort in helping with my topic. I also wish to express sincere gratitude to all the respondents of the project without the kind of co-operation of whom this work would not have been possible.

OBJECTIVES OF THE RESEARCH REPORT

OBJECTIVE OF THE RESEARCH REPORT

The objective of the study include following points

To understand the macro-economic environment and

developments. To analyze the prospects of the industry to which the firm belongs. To assess the projected performance of the company and the intrinsic value of its shares.

_______________________ _ RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

Redman and Mory has defined research as A systematized effort to gain new knowledge. Research Methodology is a way to systematically solve the research problem. In it we study the various steps that are generally adopted in studying the research problem -identification & evaluation along with the logic behind it. It is necessary for the researcher to know not only the research methods/ techniques but also the methodology. Research not only need to know how to apply particular research techniques, but also need to know which of these methods or techniques are relevant and which are not and which are necessary for the researcher to design to objective. When we talk of research methodology we not only talk of the research methods but also considers the logic behind the methods we use in the context of our research study and explain why we are using a particular method or technique so that research results are capable of being evaluated. The steps involved in the making of the research report are: Reviewing literature (reviewing concepts and theories & reviewing previous research findings) Design research (including sample design) Collect data (Execution) Analyze data (Test hypothesis if any) Interpret and report

TYPES OF RESEARCH
DESCRIPTIVE REASEARCH ANALYTICAL RESEARCH APPLIED RESEARCH FUNDAMENTAL RESEARCH QUANTITATIVE RESEARCH QUALITATIVE RESEARCH CONCEPTUAL RESEARCH EMPIRICAL RESEARCH

The kind of research used in this research report is DESCRIPTIVE RESEARCH. Descriptive research, also known as statistical research, describes data and characteristics about the population or phenomenon being studied. Descriptive research answers the questions who, what, where, when and how. Although the data description is factual, accurate and systematic, the research cannot describe what caused a situation. Thus, descriptive research cannot be used to create a causal relationship, where one variable affects another. In other words, descriptive research can be said to have a low requirement for internal validity. Descriptive research is also called Statistical Research. The main goal of this type of research is to describe the data and characteristics about what is being studied. The idea behind this type of research is to study frequencies, averages, and other statistical calculations. Although this research is highly accurate, it does not gather the causes behind a situation.

METHODS OF DATA COLLECTION

The research can call for primary data, secondary data or both. The data have mainly been collected via primary sources. However a good amount of secondary data was also used to have a general understanding of the subject. Primary Source: The primary data are gathered for specific purpose and are collected by the researcher himself. It includes direct communication with the customer. For the purpose of collecting information from customers a structured questionnaire was formulated and is contacted directly. Secondary Sources: The secondary sources are data which are collected for another purpose and already exists somewhere. The secondary source of information here includes books, articles in various newspapers and magazine, product catalogs and online articles. The method used in this report fro data collection is SECONDARY METHOD. Probably the quickest and most economical way for researcher to find possible hypothesis is to make advantage of the work of others and utilize their research programs over a number of years. Data or desired information has been collected through books, newspapers, trade journals and white papers, industry portals, & monitoring of industrial news and developments.

INTRODUCTION TO THE FINANCIAL SYSTEM

FINANCIAL SYSTEM
8

Overview:
Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. A financial system may be defined as a set of institutions, instruments and markets which foster savings and channels them to their most efficient use. The system consists of individuals (savers), intermediaries, markets and users of savings. Economic activity and growth are greatly facilitated by the existence of a financial system developed in terms of the efficiency of the market in mobilizing savings and allocating them among competing users.

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation.

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. For realization of full potential, economies need institutions that impartially enforce property rights, low transaction costs and transparency, according to Professor Marcus Olson (IRIS). Markets require institutions that impartially enforce contract and property rights. The state must create the right kind of institutional environment and must be strong enough to enforce institutional rights. Rules rather than discretion should form the basis for decision-making. Prof. Olsons thesis is that markets, institutions and instruments are the prime movers of economic growth. Economic growth depends on the existence of a well-functioning financial market. The development of the financial structure is actually a necessary condition to economic growth. Further, the development of the financial infrastructure helps in financial deepening. It is essential that financial institutions are developed sufficiently and the market operations be free, fair, competitive and transparent. Market efficiency would be reflected in wide dissemination of information, reduction of transaction costs and allocation of capital to the most productive uses. Freeing the financial sector form government interference has been an important element of market reforms.

10

CONSTITUENTS OF A FINANCIAL SYSTEM

11

CAPITAL MARKETS
Indian capital markets have been one of the best performing markets in the world in the last few years. Fuelled by strong economic growth and a large inflow of Foreign Institutional Investors (FIIs) as well as the development of the domestic mutual funds industry, the Indian stock market indices have delivered truly explosive growth during the last 5 years rising over 3 times during the period. However, it would be a mistake to think that growth has happened only in valuation. During this period Indian capital markets have exhibited explosive growth in almost every respect. While the two major Indian exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) ranked 16th and 17th respectively among exchanges around the world in terms of market capitalization. The former has close to 5,000 stocks listed, of which about half actually trade. In terms of concentration (i.e. the share of top 5% of stocks in total trading) they are not out of line with other major exchanges, though in terms of turnover velocity, BSE is the lowest among the top 20 exchanges. The relatively newly formed NSE has overtaken the more traditional BSE (which is older than the Tokyo Stock Exchange) and now has over 30% higher turnover in terms of value and almost 2.5 times BSEs turnover in terms of number of trades (see table 3.1). Table 3.2 depicts the evolution of liquidity in Indian capital markets in recent years. The regional stock exchanges in India, numbering 20, have recently been relatively speaking devoid of action. In March 2006, the BSE market capitalization accounted for about 86% of Indian GDP while that of the NSE accounted for about 80%. In terms of risk and return, while the Indian markets have been more volatile than those in industrialized nations, the returns have been largely commensurate (see table 3.3). Table 3.4 shows the growth in the number of players in the different segments of the Indian capital markets since 1993. In the new century, a huge derivative market has been created from scratch, foreign institutional investors have almost doubled in number, venture capital funds have made their appearance and exhibited sound growth, and the number of portfolio managers has risen over three-fold. The entire industry has therefore gone through a major transformation during the period. During 2005-06, Indian corporations mobilized over Rs. 1237 trillion ($ 30.93 trillion) from the markets (which accounted for close to 4% of the GDP at factor cost in current 12

prices) of which close to 78% was debt, all of which was privately placed. Of equity issues amounting to over Rs. 273 trillion ($ 6.825 trillion), about 40% were IPOs and the remainder seasoned offerings. Close to 25% of these latter were rights offerings. Qualitatively, these proportions have remained more or less stable over the years. The liberalization and subsequent growth of the Mutual Funds industry, for decades monopolized by the state-owned Unit Trust of India (UTI), since the turn of the century has been one of major stories of Indian capital markets. From the turn of the century, assets under management have more than tripled, in pace with and fuelling the rise of the markets. The biggest development in the Indian capital markets in recent years is undoubtedly the introduction of derivatives futures and options both on indexes as well as individual stocks with turnovers growing 50 to 70 times in the past 5 years and the derivatives segments quickly becoming a crucial part of the Indian capital markets. The rapid growth in Indian capital markets, and the spread of equity culture has doubtlessly strained its infrastructure and regulatory resources. Nevertheless the securities market watchdog, the Securities and Exchanges Board of India (SEBI) has maintained a rate of around 95% in redressing investor grievances reported to it, though investigations undertaken and convictions obtained have, on a proportional basis, trailed those of the Securities Exchange Commission (SEC) of the USA. Capital markets play a vital role in providing liquidity and investment instruments. A liquid corporate bond market can play a critical role in supporting economic development as it supplements the banking system to meet the requirements of the corporate sector for long-term capital investment and asset creation. The domestic capital market can help financial stability by reducing currency mismatches and lengthening the duration of debt11. The private corporate debt market, which is an important segment of the capital market, plays a crucial role in promoting financial stability by providing an alternative means of long-term resources. Such markets also improve economic efficiency by generating market-determined interest rates that reflect the opportunity costs of funds at different maturities. In economies lacking welldeveloped capital debt markets, long-term interest rates may not be competitively determined and thus may not reflect the true cost of funds. This, in turn, will make it difficult for banks to price long-term lending, and borrowers will lack a market reference 13

with which to judge borrowing costs. In cases where the market for long-term debt contracts in the local currency is not developed, borrowers are likely to take risky financing decisions that create balance sheet vulnerabilities, increasing the risk of default A private corporate bond market is important for nurturing a credit culture and market discipline. The existence of a well-functioning bond market can lead to the efficient pricing of credit risk as expectations of all bond market participants are incorporated into bond prices. The absence of a developed domestic capital market may necessitate issuance of foreign currency debt to fund investments that yield local currency earnings which result into currency mismatches. The balance sheet and the debt payments of the borrower become vulnerable to exchange rate changes. Though the capital markets in India have evolved over a long period, they gathered considerable momentum only after various initiatives undertaken by the Government/SEBI beginning the early 1990s. The activity in the market, which remained subdued between 1997-98 and 2003-04, has picked up significantly reflecting effectiveness of the measures initiated to develop the market and restore investor confidence. The strong macroeconomic fundamentals and higher growth rate trajectory embarked upon by the Indian economy have also contributed to the strong upturn in resource mobilization from the primary capital market (Chart VI.10). Beginning the second half of the 1990s, the pattern of financing of investments by the Indian corporate sector has undergone a significant change. Corporates now rely heavily on internal source of funds, which constituted 60.7 per cent of total funds during 200001 to 2004-05 as against 29.9 per cent during 1990-91 to 1994-95. As a result, the debtequity ratio declined sharply during the same period. Owing to increased investment activity and corporates reliance on external sources, both debt and equity, increased during 2005-06. As a result, the debt-equity ratio increased somewhat. Despite this, however, the deleveraging of the balance sheets since the mid-1990s has enabled the corporate sector to significantly improve their profitability, which in turn, has improved their resilience.

14

Mutual funds have played an important role in the development of the capital market. Growing investor interest in the equity market over the years could also be gauged from the resource mobilization by mutual funds. Net funds mobilized by mutual funds (net of redemptions) increased sharply to Rs.93,985 crore during 2006-07 as compared with Rs.52,780 crore during 2005-06 mainly due to resources mobilized under debt oriented schemes which almost quadrupled during the year. Such schemes are preferred for parking surplus funds for short periods with minimum risks. The net mobilization of resources by mutual funds under equity oriented schemes during 2006-07 declined, reflecting the risk aversion tendency among investors particularly in view of the stock market touching record peaks.

15

FUNDAMENTAL ANALYSIS
Fundamental analysis of a business involves analyzing its income statement, financial statements and health, its management and competitive advantages, and its competitors and markets. The analysis is performed on historical and present data, but with the goal to make financial projections. There are several possible objectives:

to conduct a company stock valuation and predict its probable price evolution, to make projection on its business performance, to evaluate its management and make internal business decisions, to calculate its credit risk.

The intrinsic value of an equity share depends on a multitude of factors. The earnings of the company, the growth rate and therisk exposure of the company have direst bearing on the price of the share. Theses factors in turn rely on the host of other factors like economic environment in which they function, the industry they belong to, and finally companies own performance. The fundamental school of thought appraised the intrinsic value of the shares through: Economic Analysis Industry Analysis Company Analysis

Fundamental analysis serves to answer questions, such as:

Is the companys revenue growing? Is it actually making a profit? Is it in a strong-enough position to beat out its competitors in the future? Is it able to repay its debts? Is management trying to "cook the books"?

Of course, these are very involved questions, and there are literally hundreds of others you might have about a company. It all really boils down to one question: Is the companys stock a good investment? Think of fundamental analysis as a toolbox to help you answer this question. 16

Researchers have found that stock price changes can be attributed to the following factors: Economy-wide factors: 30-35 percent Industry factors: 15-20 percent Company factors: 30-35 percent Others factors: 15-25 percent

Based on the above evidence, a commonly advocated procedure of fundamental analysis involves a three-step examination which calls for: Understanding of the macro-economic environment and developments Analyzing the prospects of the industry to which the firm belongs Assessing the projected performance of the company and the intrinsic value of its shares

17

_______________________ _

18

MACRO-ECONOMIC ANALYSIS

19

MACRO-ECONOMIC ANALYSIS
The level of economic activity has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to grow rapidly and viceversa. When the level of the economic activity is low, stock prices are low, and when the level of economic activity is high, stock prices are high reflecting the prosperous outlook for sales and profits of the firms. The analysis of macroeconomic environment is essential to understand the behaviour of the stock prices.

MACRO-ECONOMIC FACTORS
There are various factors that need to be analysed. Some of the parameters taken under consideration are: Gross Domestic Product Savings and Investments Inflation Interest rates Budget Balance of Payment Monsoon and Agriculture Industrial Growth Rate Foreign Investments Sentiments Infrastructure Facilities

20

Gross Domestic Product:

The Indian BPO sector, skyrocketed the India GDP growth rate to around 6%, during the period from 1988 to 2003. The period after 2004 marks the meteoritic rise of gross domestic product of India and this rise was affected by service and manufacturing industry. The India GDP growth rate registered an impressive growth of 8.5% during this period. The present target of India GDP growth rate is pegged at 9.5% to 10 %. The higher the growth rate of GDP, other things being equal, the more favorable is for the stock market. GDP factor for the first quarter of 2007-08 was at Rs 7, 23,132 crore, registering a growth rate of 9.3% over the corresponding quarter of previous year. The Table below gives the overall rates of GDP growth for the past several Quarters.

Fiscal year
2002 / 03

Quarter
Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q1 Q2

Overall GDP
5.2% 5.8% 1.6% 3.8% 5.5% 8.8% 11.0% 8.5% 8.1% 6.9% 5.5% 8.9% 8.4% 8.0% 9.3% 10.0% 9.6% 10.2% 8.7% 9.1% 9.3% 8.9%

2003 / 04

2004 / 05

2005 / 06

2006 / 07

2007/08

21

Industrial Growth Rate

The GDP growth rate represents the average of the growth rates of the three principal sectors of the economy, viz. the services sector, the industrial sector, and the agricultural sector. The higher the growth rate of the industrial sector, other things being equal, the more favorable it is for the stock market During the period AprilOct. 2007/08, the cumulative expansion of Industrial output was 9.7%, lower than the 10.2% registered in the comparable period of the previous year. Manufacturing output expanded by 10.4% during AprilOct. 2007/08, which was also lower than the 11.2% recorded in the Comparable period last year. The lower rate of manufacturing output growth in 2007/08 has become pronounced since June 2007. The main contributory factor is the drop in the rate of expansion in consumer durable output, unsupported by a matching offset from expansion in other product categories.

Infrastructure

Infrastructural facilities and arrangements significantly influence industrial performance. More specifically, the following are important: o Adequate and regular supply of electric power at reasonable tariff. o A well developed transportation and communication system (railway transportation, road network, inland waterways, port facilities, air links, and telecommunications system). o An assured supply of basic industrial raw materials like steel, coal, petroleum products, and cement. o Responsive financial support for fixed assets and working capital.

The infrastructural bottlenecks have traditionally been the bane of the Indian industry. While the situation has improved in some ways over the years, the industrial sector often has to contend with inadequate and irregular availability of infrastructural inputs. During April-November 2007, the infrastructure sector recorded a lower growth of 6.0 per cent than a year ago (8.9 per cent) reflecting slow down in all the sectors. High base, 22

decline in refinery output in some public sector refineries and lower capacity utilization led to the moderation in growth of petroleum refinery products. A sharp deceleration in crude oil production was attributable to decline in production in some of the Oil and Natural Gas Corporation (ONGC) and Oil India Limited wells. Lower growth in the coal sector was mainly on account of decline in production in some of the subsidiaries of Coal India Limited. Capacity constraints faced by major steel producers combined with high base slowed down the growth of the steel sector. High base coupled with capacity constraints have led to moderation in cement sector.

GRAPH SHOWING THE GROWTH IN INFRASTRUCTURE INDUSTRIES

Investment requirements by 2012 estimated by the Committee on Infrastructure, headed by the Prime Minister, in some of the key sectors are: Rs.2, 20,000 crore for modernization and upgradation of highways; Rs.40, 000 crore for civil aviation; Rs.50, 000 crore for ports; and Rs.3, 00,000 crore (of which 40 per cent is expected to come from the private sector through PPP) for the railways.
23

Aggregate Demand

Growth of the Indian economy continued to be driven by domestic demand, particularly gross fixed capital formation (GFCF). While private final consumption demand contributed 36.3 per cent to the incremental growth in real GDP during July-September 2007 (34.9 per cent during July-September 2006), the contribution of real GFCF was 49.4 per cent (34.6 per cent a year ago). The growth rate of private final consumption expenditure (PFCE) was estimated at 5.6 per cent in the second quarter of 2007-08 as compared with 6.3 per cent in the corresponding quarter of 2006-07. The growth rate of real GFCF accelerated to 15.2 per cent from 13.3 per cent in the corresponding period of 2006-07. The expenditure composition of real GDP indicates a decline in the share of real PFCE to 55.2 per cent in the second quarter of 2007-08 from 56.9 per cent in the corresponding period of 2006-07. On the other hand, share of real GFCF, as per cent to GDP, increased to 30.3 per cent from 28.6 per cent.

Money Supply

There are several definitions of money. The two more commonly used ones are: M1 = Currency with public + demand deposits with bank + other deposits with RBI M3 = M1 + time deposits with banks M1 is narrow measures of money supply and M3 is a broad measure. When we talk of money supply, we usually refer to M3. The growth rate of M3 in India has been around 15 percent per year. This growth can be explained by three factors in the main: growth in the real economy, monetisation of a portion of deficit financing (this means that the Reserve Bank of India buys the securities issued by the government), and financial deepening of the economy. At the end of March 2004, M3 was Rs. 2,000,349 crore. Annual average growth of Money (M3) reached a trough of 13 per cent in 2003-04 and has been on an accelerating trend since then, reaching 19.5 per cent in 2006-07. The cumulative (FY to date) increase in the stock of M3 in 2007-08 has also remained above the cumulative growth in 2006-07 and was 13.3 per cent on January 4, 2008, compared to 12.2 per cent on January 5, 2006. The ratio of average M3 to GDP has increased from 44 per cent in 1990-91 to 71 percent in 2006-07. This could be attributed to the spread of banking services and the saving habit, resulting in a rise of time deposits. The 24

monetization of the economy as measured by the ratio of average M1 to GDP has increased from 15 per cent in 1990-91 to 21 per cent in 2006-07.

Table: Monetary sector indicators upto October

Variation in M3 (Rs crore) 2006-07 2007-08 42834 24852 49734 55411 106964 166054 223812 216784 2832 78638 140792 165806 264149 297906 222433 222433 380403 458241 566096 Variation in M3 (%) 2006-07 2007-2008 1.6 1.8 8 1.0 2.0 4.0 6.1 8.2 7.9 8 0.9 2.4 4.3 5.0 8.0 9.0 8.1 10.6 13.9 16.8 20.7

April May June July August September October November December January February March
.

25

Agriculture and Monsoons

Agriculture accounts for about a quarter of the Indian economy and has important linkages, direct and indirect, with industry. Hence, the increase or decrease of agricultural production has a significant bearing on industrial production and corporate performance. Companies using agricultural raw materials as inputs or supplying inputs to agriculture are directly affected by the changes in agricultural production. Other companies also tend to be affected due to indirect linkages. A spell of good monsoons imparts dynamism to the industrial sector and buoyancy to the stock market. Likewise, a streak of bad monsoons casts its shadow over the industrial sector and the stock market. There has been a loss of dynamism in the agriculture and allied sectors in recent years. A gradual degradation of natural resources through overuse and inappropriate use of chemical fertilizers has affected the soil quality resulting in stagnation in the yield levels. Public investment in agriculture has declined and this sector has not been able to attract private investment because of lower/unattractive returns. New initiatives for extending irrigation potential have had a limited success during the Tenth Five Year Plan and only a little over 8 million ha could be brought under irrigation and only three-fourths of that could be utilized.

26

Savings and Investment

The demand for corporate securities has an important bearing on stock price movements. So investment analysts should know what is the level of investment in the economy and what proportion of that investment is directed toward the capital market. The level of investment in the economy is equal to: Domestic savings + Inflow of foreign capital Investment made abroad. A notable feature of the recent GDP growth has been a sharply rising trend in gross domestic investment and saving, with the former rising by 13.1 per cent of GDP and the latter by 11.3 per cent of GDP over five years till 2006-07. The average investment ratio for the Tenth Five Year Plan at 31.4 per cent was higher than that for the Ninth Five Year Plan, while the average saving rate was also 31.4 per cent of GDP higher than the average ratio of 23.6 per cent during the Ninth Five Year Plan. Both private and public savings have contributed to higher overall savings. Private savings have risen by 6.1 per cent points of GDP over the Tenth Five Year Plan period while public sector savings increased by 5.2 per cent of GDP. Both have increased steadily over this period, though private savings appear to have reached a plateau in 2005-06. In contrast to the increase in savings the increase in investment has been driven by private investment, which went up by 10.3 per cent of GDP over the five years of the Tenth Five Year Plan. This improvement was in turn driven by private corporate investment, which increased by 9.1 per cent of GDP over these five years. Private corporate sector investment improved from 5.4 percent of GDP in 2001-02 to 14.5 per cent in 2006-07. The upsurge in private corporate investment has been visible even to the public as a Capex boom, and that is still continuing.

27

Government Budget and Deficit

Governments play an important role in most economies, including the Indian economy. The central budget (as well as the state budgets) prepared annually provides information on revenues, expenditures, and deficit (or surplus, in rare cases). In India, governmental revenues come more from indirect taxes such as excise duty and customs duty and less from direct taxes such as income tax. The bulk of the governmental expenditures go toward administration, interest payment, defense, and subsidies, leaving very little for public investment. The excess of governmental expenditures over governmental revenues represents the deficit. While there are several measures of deficit, the most popular measure is the fiscal deficit. The fiscal deficit has to be financed with government borrowings which are done in three ways. First, the government can borrow from the Reserve Bank of India. This leads to increase in money supply which has an inflationary impact on the economy. Second, the government can resort to borrowing in domestic capital market. This tends to push up domestic interest rates and crowd out private sector investment. Third, the government may borrow from abroad. Borrowing per se is not bad but if the borrowed money is not put to productive purpose, servicing the debt becomes very onerous leading to fiscal crisis. Investment analysts examine the government budget to assess how it is likely to impact on the stock market. They generally classify favorable and unfavorable influences as follows:

28

Favorable A reasonably budget.

Unfavorable balanced A budget with a high surplus or deficit.

A level of debt (both A level of debt (both internal and external) internal and external) which can be serviced which is difficult to comfortably. service. A tax structure which A tax structure which provides incentives for provides disincentive for stock market investment stock market investment.

Balance of Payments

India's balance of payments position continued to remain comfortable during the first half of 2007-08 (April-September), notwithstanding some deceleration in exports and higher growth in non-oil imports. Merchandise exports maintained the growth momentum during April-November 2007, although there was some moderation as compared with the growth rate during April-November 2006. Imports during AprilNovember 2007 posted a high growth rate; oil imports, however, witnessed a sharp deceleration from the strong growth recorded during the corresponding period of the previous year. Net invisibles surplus remained buoyant during the first half of 2007-08, led by higher growth in private transfers and offset a large part of the trade deficit. The current account deficit during April-September 2007 was marginally higher than that during April-September 2006. Net capital inflows were substantially higher than those in the corresponding period of 2006-07, resulting in a sharp increase in foreign exchange reserves of US $ 85.7 billion during 2007-08 (up to January 18, 2008).

29

TABLE SHOWING INDIAS BALANCE OF PAYMENTS

Table : Indias Balance of Payments

(US $ million) Item 2006-07 PR 2006-07 PR 2007-2008 July- April-

April-March April- July- April- AprilJune 1 Exports Imports Trade Balance 2 3 Sept. 4

Sept. June PR Sept. P Sept. P 5 6 7 8

128,083 29,614 31,836 61,450 35,790 37,875 73,665 191,254 46,631 48,593 95,224 56,480 59,586116,066 -63,171-17,017-16,757-33,774 -20,690-21,711 -42,401 (-6.9)

Invisible Receipts Invisible Payments Invisibles, net

115,074 24,946 24,953 49,899 29,379 32,213 61,592 61,669 11,994 14,471 26,465 13,886 16,018 29,904 53,405 12,952 10,482 23,434 15,493 16,195 31,688 (5.8)

Current Account

-9,766 -4,065 -6,275-10,340 (-1.1)

-5,197 -5,516 -10,713

Capital Account (net)* of which: Foreign Direct Investment Portfolio Investment External Commercial Borrowings +

46,372 10,444 8,545 18,989 16,397 34,752 51,149

8,479 1,579 2,912 4,491 7,062 -506 2,150 1,644

1,738 2,142

3,880

7,458 10,876 18,334 6,963 3,594 10,557

16,155 3,974 1,761 5,735

30

Short-term Trade Credit External Assistance NRI Deposits Change in Reserves # Memo: Current Account net of Private Transfers

6,612 1,182 2,683 3,865 1,767 49 337 386

2,153 3,558 276 453 369

5,711 729 -78

4,321 1,302

908 2,210 -447@

-36,606 -6,379 -2,270 -8649 -11,200-29,236 -40,436

-37,707-10,959-11,646-22,605 -13,537-15,596 29,133 (-4.1)

Foreign Exchange Reserves

India's foreign exchange reserves were US $ 284.9 billion as on January 18, 2008, showing an increase of US $ 85.7 billion over end-March 2007. The increase in reserves was mainly due to an increase in foreign currency assets from US $ 191.9 billion during end-March 2007 to US $ 276.1 billion as on January 18, 2008 India holds the third largest stock of reserves among the emerging market economies after China and Russia. The overall approach to the management of India's foreign exchange reserves in recent years reflects the changing composition of the balance of payments and the 'liquidity risks' associated with different types of flows and other requirements. Taking these factors into account, India's foreign exchange reserves continued to be at a comfortable level and consistent with the rate of growth, the share of external sector in the economy and the size of risk-adjusted capital flows.

TABLE SHOWING FOREIGN EXCHANGE RESERVES

Table : Foreign Exchange Reserves

(US $ million) Month Gold SDR Foreign Reserve Position Total Currency Assets (2+3+4+5) in the IMF 31

1 March 1995 March 2000 March 2005 March 2006 March 2007 April 2007 May 2007 June 2007 July 2007 August 2007

2 4,370 2,974 4,500 5,755 6,784 7,036 6,911 6,787 6,887 6,881

3 7 4 5 3 2 11 1 1 12 2 2 13 3 3 3

4 20,809 35,058 135,571 145,108 191,924 196,899 200,697 206,114 219,753 221,509 239,955 256,427 264,725 266,553 276,134

5 331 658 1,438 756 469 463 459 460 455 455 438 441 435 432 433

6 25,517 38,694 141,514 151,622 199,179 204,409 208,068 213,362 227,107 228,847 247,762 264,692 273,520 275,316 284,898

September 2007 7,367 October 2007 7,811

November 2007 8,357 December 2007 8,328 January 2008* 8,328

* : As on January 18, 2008.

Exchange rates movements

As has been the case in recent years, there has been considerable movement in the exchange rates between the major currencies of the world. In 2007, one prominent characteristic has been the appreciation of some emerging market currencies. In the calendar year 2007 the Indian rupee was amongst the three emerging market currencies that appreciated the most, after the Brazilian real and Thai baht, recording appreciation in double digits. India was one of the very few emerging and NIC (newly industrialized 32

country) economies in this list whose currency appreciated strongly despite having a current account deficit. The reason is the widespread practice of managing exchange rate movements through central bank intervention even where the current account surplus as a proportion of GDP is 10% or more.

Inflation

The effect of inflation on the corporate sector tends to be uneven. While certain industries may benefit, others tend to suffer. Industries that enjoy a strong market for their products and which do not come under the purview of price control may benefit. On the other hand, industries that have a weak market and which come under the purview pf price control tend to lose. On the whole, it appears that a mild level of inflation s good for the stock market. Indian economy is bearing the high inflation. To some extent it is good for economy but it should be controlled because if it will convert into hyper inflation then it will be of great harm for the economy. The prices of goods have been increased and the government and the RBI have taken several measures to suck the liquidity from the market. inflation firmed up in major economies during the third quarter of 2007-08 reflecting the combined impact of higher food and fuel prices as well as strong demand conditions, especially in emerging markets. The monetary policy response during the quarter, however, was mixed in view of heightened concerns about the implications of credit crunch arising out of the US sub-prime crisis on financial stability. Since endSeptember 2007, several central banks (such as the US Federal Reserve System, Bank of England, Bank of Canada, Bank Indonesia, Central Bank of Philippines and Central Bank of the Republic of Turkey) cut their policy rates aimed at promoting financial stability and supporting growth notwithstanding persistence of inflationary pressures. In India, inflation based on the wholesale price index (WPI) has remained below 4 per cent since mid-August 2007 (3.8 per cent as on January 5, 2008), partly reflecting moderation in the prices of primary food articles and some manufactured products items as well as base effects. Pre-emptive monetary measures since mid-2004 accompanied by fiscal and supply-side measures have also helped in containing inflation. Consumer price inflation also eased during the third quarter of 2007-08 but continued to remain above 33

the WPI inflation, mainly reflecting the impact of food prices and their higher weights in the CPI vis--vis WPI. Various measures of consumer price inflation were placed in the range of 5.1-5.9 per cent during November/December 2007 as compared with 5.7-7.9 per cent in September 2007 and 6.7-9.5 per cent in March 2007. It may, however, be noted that since pass-through of higher international oil prices to domestic prices remains incomplete, inflation has remained suppressed. Elevated international food prices also pose potential inflationary pressures in the period ahead. Inflation galloped to 7 per cent on March 21, 2008. The group fuel and power has, however, witnessed an increase in inflation in recent months. An increase in the prices of coal and domestic pass through of international price increase in crude oil to petroleum products, other than petrol and diesel, contributed to this firming up of inflation.

INFLATION IN INDIA: HOW TO TACKLE IT

Inflation climbed high from 6.68 to 7 percent

The inflation rate climbed to a three year high of 7% for the week ended March 22, well above the Reserve Bank of India's (RBI's) "comfort zone" ceiling of 5%. This development created a tremendous fear psychosis in the corridors of power because it is a well acknowledged fact that inflation hits the lower strata much more than the betteroff section of the society. Just when the government was contemplating on lowering the benchmark interest rates in order to spur consumption in the country, this hike in the Wholesale Price Index (WPI) perhaps put a spanner in their works.

34

In the recent past, there has been a global spurt in the prices of food grains and crude oil.
Crude oil prices have crossed the 110 dollars a barrel mark and is likely to head northwards in the days to come. There has also been a global shortage of output of food grains specially wheat on account of natural calamities in Australia and China, one of the largest producers of the commodity. India's output of wheat has also come down mainly because of low productivity.

In the light of this, food grains as well as crude oil prices have contributed in so small measure
to the spiraling prices of other commodities in the market.

The real worrisome factor in the investors' minds is what the government is likely to do in order to tackle rising prices. While fiscal measures have already been taken, there is fear that monetary steps, in the form of hiking the CRR hike could be taken as soon as possible. Government officials have said that it will take some time before its policies to tackle inflation begin to take effect. They revealed that more fiscal measures could be taken in this regard. Planning Commission Deputy Chairman Montek Singh Ahluwalia echoed a similar view and said that the measures taken by the government, like duty cuts essential commodities and ban on export of rice, would impact the rising inflation. The Commerce Minister, Mr. Kamal Nath also pointed out that the government would take all measures available at its disposal to crack down on people indulging in hoarding adding that India was currently facing supply-side challenges. However, leading Indian industrialists and businessmen cautioned the government against any further hike in interest rates that would harm the economy. Cutting across political affiliations, parties are demanding a check on speculative trading, hoarding and black marketing of essential commodities. The government took steps such as banning export of non-basmati rice and pulses, scrapping import duties on non-refined edible oil and cutting import duties on refined oil, butter, ghee and maize to check rising prices. These measures are likely to ease supply side constraints to a major extent. Analysts now expect the central bank to take some immediate steps to suck up the excess supply of money in the financial system thereby easing inflationary pressures to a considerable extent.

35

Financial Markets

The domestic stock markets recorded further gains during the third quarter of 2007-08 amidst intermittent corrections. Liquidity support from both foreign institutional investors (FIIs) and domestic mutual funds on the back of strong GDP growth, healthy corporate profitability and decline in the domestic inflation rate aided the market sentiment. The upward trend in EMEs equity markets, increase in ADR prices in the US markets and rise in global metal prices were the other factors that enthused the domestic stock markets. The uptrend in the domestic stock markets, however, was interspersed by corrections in mid-August and mid-December 2007 mainly on account of downward trend in advanced economies equity markets on account of worries over sub-prime losses and credit crunch in the US and Europe, concerns over the slowdown in the US economy, depreciation of the US dollar against major currencies and increase in global crude oil prices to record high levels. Between end-March 2007 and January 23, 2008, the BSE Sensex moved in a range of 12455.37-20873.33. The BSE Sensex closed at a record high of 20873.33 on January 8, 2008, an increase of 59.7 per cent over end-March 2007. The S&P CNX Nifty also reached a record high of 6287.85 on January 8, 2008. Since mid-January 2008 the domestic stock markets, however, witnessed sharp corrections mainly on account of downward trend in the major international equity markets amidst fears of recession in the US economy and depreciation of the US dollar against major currencies. Liquidity squeeze from the secondary market in the wake of the biggest IPO by Reliance Power, heavy net sales by FIIs in the Indian equity market, decline in ADR prices and fall in metal prices on the London Metal Exchange also dampened the market sentiment. The BSE Sensex closed at 17594.07 on January 23, 2008, witnessing a gain of 34.6 per cent over end-March 2007.

36

Graph showing the trends in Indian stock market

The major gainers in the domestic stock markets during the current financial year so far (up to January 18, 2008) were metal, capital goods, oil and gas, banking, consumer durables, public sector undertakings, fast moving consumer goods and auto sector stocks.

Graph showing Institutional investments and Indian stock market

37

TABLE SHOWING BSE SECTORAL STOCK INDEX

Table: BSE Sectoral Stock Indices (Base: 1978-79=100) Sector Variation (per cent) End-March End-March January 18, 2006@ 1 Fast Moving Consumer Goods Public Sector Undertakings Information Technology Auto Oil and Gas Metal Health Care Bankex Capital Goods Consumer Durables BSE 500 BSE Sensex 2 109.9 44.0 49.2 101.2 61.1 40.3 51.2 36.8 156.0 115.4 65.2 73.7 2007@ 3 -21.4 -3.2 21.6 -8.5 30.5 -4.3 -5.4 24.2 11.1 11.1 9.7 15.9 2008 # 4 32.4 63.1 -22.6 5.7 96.2 103.3 10.3 73.8 102.0 63.7 60.9 45.5

@: Year-on-year variation. #: Variation over end-March 2007. Source: Bombay Stock Exchange Limited.

38

39

Foreign Investments

Foreign investment in India comes in two forms, foreign direct investment and foreign portfolio investment. The former represents investment for setting up new projects and hence is long-term in nature; the latter is in the form of purchase of outstanding securities in the capital market and hence can be reserved easily. Although foreign direct investment is more desirable that foreign portfolio investment, India has received more of the latter to date. In recent years foreign institutional investors who make portfolio investment have emerged as a powerful force on the India Capital Market. In the calendar year 2004 alone, the net foreign portfolio investment has exceeded $8.3 billion.

Foreign Direct Investment

During April-November 2007, Foreign Direct Investment (FDI) equity inflows stood at Rs. 45,098 crore (US$ 11.14 billion) against Rs.33,030 crore (US$ 7.23 billion) during April-September 2006, signifying a growth of 36 percent in terms of rupee and 54 per cent in terms of US dollar 8.73.

FDI: Cumulative equity flow

Period August 1991 to March 2007 April 2007 to November 2007 August 1991 to November 2007 April 2000 to November 2007
In the sectoral distribution of FDI inflows, financial and non-financial services During August 1991 to November 2007, India received 7,898 approvals for foreign technology transfer, of which 81 were obtained during 2006-07 and 52 during April-November 2007.

Rs. crore 23041 45098 277139 216534

US$million 54628 11141 65769 49070

40

Sentiments

The sentiments of consumers and businessman can have an important bearing on economic performance. Higher consumer confidence leads to higher expenditure on big ticket items. Higher business confidence gets translated into greater business investment that has a stimulating effect on the economy. Thus, sentiments influence consumption and investment decisions and have a bearing on the aggregate demand for goods and services.

41

MACROECONOMIC FRAMEWORK STATEMENT (ECONOMIC PERFORMANCE AT A GLANCE)

Sl No. Item Absolute value April - December 2006-07 2007-08 Real Sector 1 GDP at factor cost(Rs.thousand crore)* a) at current prices b) at 1999-2000 prices 2 Index of industrial production (1) 3 Wholesale price index (Base 199394=100)(2) 4 Consumer price index (2001=100)(3) 5 Money Supply (M3)(Rs. thousand crore) 6 Imports at current prices** a) In Rs. crore b) In US $ million 7 Exports at current prices** a) In Rs. crore b) In US $ million 8 Trade Deficit(in US$ million)** Percentage change April - December 2006-07 2007-08

3790.1 Q 2864.3 Q 239.8

4283.0 A 3114.4 A 261.4

15.7 Q 9.6 Q 11.2

13.0 A 8.7 A 9.0

208.7

216.0

5.9

3.5

127.0 $ 3016.3

134.0 3702.8

6.9 19.3

5.5 22.8

611522 134080

682088 168803

31.2 27.3

11.5 25.9

416176 91249 42831

448377 110965 -57838

28.7 24.8 32.9

7.7 21.6 35.0

42

_______________________ _ ANALYSIS
43

ANALYSIS
India's economy is on the fulcrum of an ever increasing growth curve. With positive indicators such as a stable 8-9 per cent annual growth, rising foreign exchange reserves of close to US$ 180 billion, a booming capital market with the popular "Sensex" index, the Government estimating FDI flow of US$ 12 billion in this fiscal, and a more than 35 per cent surge in exports, it is easy to understand why India is a leading destination for foreign investment. It is clear from the above figures that Indian economy is progressing with a good speed. Now, due to the governments liberalized policy the Indian market is open for foreign players which is contributing to the growth of the country. Now, India has good foreign reserve and moving ahead for achieving the targeted growth rates. Overall Economy :

Indias GDP at constant prices for the first half of 2007-08 shows GDP growth maintained the 9 percent plus level. During April-September 2007-08, growth in agriculture, forestry and fisheries picked up by 3.7 percent compared to that of 2.8 percent during the same period of previous year. However the share of agriculture and allied services in Growth in manufacturing sector slowed in the first half of the current fiscal while the percentage share to GDP was maintained. Share of mining, electricity, manufacturing and construction in GDP inched up against the share in the corresponding period of previous year. Services sector maintained a double-digit growth rate with widening share in GDP compared to that of last year. Industrial Production:

During the first seventh-month period of the current fiscal Indias industrial production went up by 9.7 percent compared to 10.1 percent increase registered during the same period of the previous year. Strong overall industrial growth numbers arrived in October 2007 after months of slowdown. This strong growth was mainly led by the manufacturing sector.

44

The capital and intermediate goods recorded an increase in the growth compared to that of the growth posted in the last fiscal. The slowdown was however witnessed in the basic goods. Inflation :

The average inflation numbers up to November 2007 remains within the targeted inflation for the current fiscal. Overall inflation stood at 4.33 percent averaged during April- November period of 200708. Some of the primary articles and the fuel prices have mainly contributed in checking inflation. But now the rate of inflation crossed the mark of 7%, which was recorded as a the highest in 3 years. Monetary Indicators:

In October 2007 money supply has increased (April-October) by 9 percent compared to the 8 percent increase in the same period of the previous year. Borrowings have dropped both in the government and in commercial sector. Aggregate deposits increased mainly due to the increase in the benefit linked time deposits. Credit off take was witnessed only in the non-food category, decline was witnessed only in the food. CRR has been increased by 50-point basis to 7.5 percent and this step will check the excess liquidity due to foreign capital inflows. Stock Market Trends:

Negative signals in some of the major markets have forced the foreign institutional investors to divert their funds in safe havens. Recently the Indian stock market has been primarily pulled by the FI investments, partially fueled by domestic investments. Capital Flows :

Data on total foreign direct investments shows India received USD 26.6 billion up to September 2007. Of the total FDI USD 18.4 billion came from the portfolio sources and the rest USD 8.2 billion arrived as foreign direct investments.

45

Foreign Exchange Reserves :

By the end of October 2007 our foreign exchange reserves touched USD 262.4 billion, surging from USD 200 billion in March 2007. The current level of forex reserves is adequate to meet 15 months of Indias imports. Trends in Exchange Rate:

Indian Rupee against the USD further sunk to an average Rs 39.4 in November 2007 from Rs 40.3 in September 2007. November 2007 saw Indian Rupee weaken gradually from a strong Rs 39.32 to Rs 39.67 traded in the concluding sessions of the month. The RBI intervention was observed, maintaining the exchange rate at Rs 39-40 level despite huge foreign exchange inflows.

FUTURE PROSPECTS
The rapid growth of the Indian economy in recent years has brought into sharp focus the urgent need to develop the physical and social infrastructure. There are clear signals that a rapid increase in the scale and quality of investment in physical infrastructure such as power, railways, roads, airports, ports, and communications is underway. The framework for encouraging public-private partnerships for developing physical infrastructure is also in place and is expected to yield positive results. The Eleventh Plan has also outlined a comprehensive programme for the development of the infrastructure sector. The well-known demographic dividend will manifest itself as a rise in the working age population aged 15 to 64 years, from 62.9 per cent in 2006 to 68.4 per cent in 2026. To tap this dividend, the Eleventh Plan focuses on ensuring better delivery of health care, generation of more employment opportunities and skill development improving employability of persons. The circumstances today are favorable for sustained, rapid and a more inclusive growth of the economy. The responsiveness of the Indian private sector to economic liberalization and increased international integration has been generally satisfactory and has imparted tremendous resilience to the economy. The changing composition of 46

demand in recent times is indicative of addition to productive capacity, which is likely to support the further growth of the economy.

_______________________ _
47

INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
Each industry has differences in terms of its customer base, market share
will give an investor a deeper understanding of a company's financial health. among firms, industry-wide growth, competition, regulation and business cycles. Learning about how the industry works

Since each industry is unique, a systematic study of its specific features and characteristics must be an integral part of the investment decision process.

INDIAN BANKING SECTOR

One of the major areas of the economy that has received renewed focus in recent times has been the financial sector. And within the broad ambit of the financial sector, it is the banking sector that has been the cynosure of academia and policymakers alike. With concerns about financial stability emerging to the forefront of policy challenges facing central banks worldwide, it is being increasingly realized that promoting healthy financial institutions, especially banks, is a crucial prerequisite towards this end. Not surprisingly therefore, the banking sector in most emerging economies is passing through challenging yet exciting times and India is no exception to this rule. With deposits of over half a trillion US dollars, the Indian banking sector accounts for close to three-quarters of the countrys financial assets. Over the decades, this sector has grown steadily in size, measured in terms of total deposits, at a fairly uniform average annual growth rate of about 18%. In the years since liberalization, several significant changes have occurred in the structure and character of the banking sector the most visible being perhaps the emergence of new private sector banks as well as the entry of several new foreign banks. The spirit of competition and the emphasis on profitability are also driving the public sector banks towards greater profit-orientation in a departure from

48

the socialistic approach followed for decades. In general it seems that the emergence of the new private banks and the increased participation of foreign banks have increased professionalism in the banking sector. Competition has clearly increased with the Herfindahl index (a measure of concentration) for advances and assets dropping by over 28% and about 20% respectively between 1991-1992 and 2000-20019. Over the period, SBI, the largest Indian bank, witnessed a decline in asset market share from 28% to 24% while its loan market share dropped from 27% to 22%. The deposit share, on the other hand, stayed pretty much the same at 23%. The asset, loan and deposit shares of the top 10 banks all fell from close to 70% to below 60%. Nevertheless, the public sector banks still enjoy a pre-eminent position in Indian banking today, accounting for over 80% of deposits and credit there is, however, a noticeable trend of private banks gradually eroding the market share of the public sector. Performance and efficiency of commercial banks are key elements of the efficiency and efficacy of a countrys financial sector. It is not surprising then, that considerable attention has been focused on the performance of commercial banks in India in recent years. According to the general perception as well as on several metrics, the new private sector banks and the foreign banks have led the way in terms of efficiency. Public sector banks, still not entirely free from the old bureaucratic mode of functioning and constrained by certain developmental lending objectives, are often thought to be lagging behind in the race to efficiency. Bank privatization and further liberalization of 9 Koeva (2003). The Herfindahl index is a measure of industry concentration and is computed as the sum of the squared market shares of the firms in an industry. Ranging between 0 and 10,000, a lower Herfindahl index represents less concentration and greater competition. With the Indian economy moving on to a high growth trajectory, consumption levels soaring and investment riding high, the Indian banking sector is at a watershed. Further, as Indian companies globalize and people of Indian origin increase their investment in India, several Indian banks are pursuing global strategies, The industry has been growing faster than the real economy, resulting in the ratio of assets of commercial banks to GDP increasing to 92.5 per cent at end-March 2007. The 49

Indian banks have also been doing exceptionally well in the financial sector with the price-to-book value being second only to china, according to a report by Boston Consultancy Group. Consequently, the degree of leverage enjoyed by the banking system, as reflected in the equity multiplier (measured as total assets divided by total equity), has increased from 15.2 per cent at end March 2006 to 15.8 per cent at the end of March 2007. GROWTH OF THE INDIAN BANKING SECTOR A burgeoning economy, financial sector reforms, rising foreign investment, favorable regulatory climate and demographic profile has led to India becoming one of the fastest growing banking markets in the world. The overall banking industry's business grew at a CAGR of about 20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007. Aggregate bank deposits of banks increased by US$ 129.26 billion (22.1 per cent) at the end of March 2007 over the corresponding in 2006. In the current fiscal, aggregate bank deposits increased by 23.8 per cent, year-on-year, as of January 4, 2008 as against 21.5 per cent a year ago. While aggregate demand deposits increased by 15.6 per cent, aggregate time deposits increased by 25.3 per cent in the same period, indicating migration from small savings schemes of the Government. Similarly, aggregate deposits of the scheduled commercial banks (SCB), after growing by 17.8 per cent and 24.6 per cent in 2005-06 and 2006-07, rose by 25.2 per cent, yearon-year, as on January 4, 2008. In fact, the absolute increase of US$ 96.34 billion (14.6 per cent) in the current fiscal year up to January 4 2008 was higher than the US$ 70.59 billion (13.2 per cent) increase in the same period last year. Simultaneously, loans and advances of SCBs rose by over 30 per cent (i.e. 33.2 per cent in 2004-05, 31.8 per cent in 2005-06 and 30.6 per cent in 2006-07) in the last three financial years, underpinned by the robust macroeconomic performance. The growth has continued in the current fiscal with non-food credit by SCBs increasing by 22.2 per cent, year-on-year, as on January 4, 2008. Significantly, the asset quality of the banks has also improved over this period. The gross non-performing assets (NPA) as a per cent of total assets have declined from 4 per 50

cent as of March 2002 to 1.46 per cent as of March 2006. Simultaneously, the capital adequacy ratio of all SCBs has improved from 11.1 per cent as of March 2002 to 12.3 per cent by March 2007. Ever since the banking operations had been opened to the private sector in 1990s, the new private banks have been increasing its role in the Indian banking industry. Against the industry average growth of about 20 per cent in the past five years, the new private sector banks registered a growth of about 35 per cent per annum, growing from US$ 41.63 billion as of March 2002 to US$ 186.71 billion by March 2007. Consequently, new private banks market share has increased from about 9 per cent in 2001-02 to 16 per cent as of March 2006-07. Foreign banks, which totaled 29 in June 2007, have also been expanding at a rapid pace. For example, India was the fastest growing market for Global banking major HSBC in 2006-07, with a growth rate of 64 per cent. The balance sheet of private banks and foreign banks in India expanded by 38.7 per cent and 39.5 per cent during 2006-07, taking their combined share (along with private banks) in total assets of the banking sector to grow from 22.3 per cent at the end of March 2006 to 24.9 per cent by March 2007. The flurry of mergers and acquisition deals by Indian corporates has boosted the investment banking revenues to a record high. According to Dealogic, an international firm that tracks global M &A transactions, investment baking revenues from India crossed the US$ 1 billion mark for the first time in 2007 to US$ US$ 1.069 billion. This is significantly higher than the US$ 400 million investment banking revenues recorded in 2006. Also, this surge in revenues has propelled India to become the third largest market for investment banking in Asia-Pacific in 2007. While this growth has been very impressive, the potential banking market waiting to be tapped in India is still fairly huge. Out of the 203 million Indian households, threefourths, or 147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4 per cent have no access to formal or informal sources of credit, while 73 per cent have no access to formal sources of credit. In fact, according to a report by Boston Consultancy Group, India has the second largest financially excluded households of about 135 million, which is next only to china. Also, 51

about 60 million new households are expected to be added to India's bankable pool between 2005 and 2009. With such a large untapped market, the Indian banking industry is estimated to grow rapidly, faster than even china in the long run. Indian banks are one of the most technologically advanced with vast networks of branches empowered by strong banking systems, and their product and channel distribution capabilities are on par with those of the leading banks in the world, says a survey by McKinsey. It also reveals that IT effectiveness at the top Indian banks is world class. With the economy in overdrive and buoyancy in consumption and investment demand, nine Indian banks, led by HDFC Bank and ICICI bank, have made it to the top 50 Asian Banks list in Asian Bankers 300 report. Simultaneously, State Bank of India has become the top loan arranger in the Asia-Pacific region in 2007, according to UK based Project Finance International (PFI). Also, India emerged as the top provider of educational loans worth US$ 3.67 billion till September in 2007. Banks aspiring to become global must have a presence in India and other merging markets, says a report of consultancy major Ernst & Young, as they are set to become a major source of financial sector revenue and profit growth. As the Indian banking industry continues its rapid growth along with rise in financial services penetration in the Indian economy, the industry's profit is likely to simultaneously surge ahead. According to a report by Boston Consultancy Group, the profit pool of the Indian banking industry is estimated to increase from US$ 4.8 billion in 2005 to US$ 20 billion in 2010 and further to US$ 40 billion by 2015. Simultaneously, driven by the expansion of the middle class population, increase in private banks and the burgeoning national economy, the domestic credit market of India is estimated to grow from US$ 0.4 trillion in 2004 to US$ 23 trillion by 2050. With such a favorable scenario, India is likely to emerge as the third largest banking hub in the world by 2040, says a price water house Coopers report.

52

SCHEDULED COMMERCIAL BANKS

The banking sector witnessed accelerated growth during 2006-07. The faster growth of the banking sector in relation to the real economy pushed up the ratio of assets of scheduled commercial banks to GDP to 92.5 per cent at end-March 2007.

Table: Select Financial Sector Indicators: 2006-07 Category 1 2 Indicator 2005-06 200607 3 4

1.Scheduled Commercial Banks

a) Growth in Major Aggregates (per cent) Aggregate Deposits Loans and Advances 17.8 31.8 24.6 30.6 9.3

Investment in Government Securities -1.2 b)Financial Indicators (as percentage of total assets) Operating Profits Net Profits Spread c) Non-Performing Assets (as percentage of advances) Gross NPAs Net NPAs 3.1 1.2 2.0 0.9 2.8

1.9 0.9 2.7

2.4 1.0

2.Urban Co-operative Banks

a) Growth in Major Aggregates (per cent) 53

Deposits Credit b)Financial Indicators (as percentage of total assets)@ Operating Profits Net Profits Spread c) Non-Performing Assets (as percentage of advances) Gross NPAs Net NPAs

6.3 4.0

6.1 9.8

1.3 0.8 2.2

1.2 0.6 2.3

18.9 8.8

17.0 7.7

3.Rural Co-operative Banks

a) Number b)Growth in Major Aggregates (per cent) Deposits Credit c) Financial Indicators Societies in Profit (Number) Societies in Loss (Number) Overall Profit/Loss (Rs. crore) d)Non-Performing Assets (as percentage of advances)*

1,07,497

4.9 6.2

44,968 53,344 -271 23.8

4.All-India Financial Institutions

a) Growth in Major Aggregates (per cent)1 Sanctions 54 41.0 12.9

Disbursements b)Financial Indicators (as percentage of total assets)2 Operating Profits Net Profits Spread

47.1

82.8

1.4 1.0 1.8

2.1 1.5 1.6

5.Non-banking Financial Companies

a) Growth in Major Aggregates (per cent) Public Deposits b)Financial Indicators (as percentage of total assets) Net Profits 1.5 1.2 -32.1 -16.5

c) Non-Performing Assets (as percentage of advances)3 Net NPAs 0.5 0.4

6.Residuary Nonbanking

Companies a) Growth in Major Aggregates (per cent) Deposits b)Financial Indicators (as percentage of total assets) Net Profits 0.7 0.9 21.5 12.1

Financial performance of SCBs during 2006-07 was underpinned by hardening of interest rates, both on the liability and the asset sides. Both net interest income and 55

non-interest income of banks increased sharply in absolute terms, but declined in relation to total assets. Banks, however, were able to maintain their profitability by containing operating expenses. 29 Banks capital raising efforts kept pace with the asset growth and risk profile of new assets. Hence, the capital to risk-weighted asset ratio of SCBs, a measure of the capacity of the banking system to absorb losses, was at 12.3 per cent at end-March 2007-same as at end-March 2006.

CO-OPERATIVE BANKS
Operations of urban co-operative banks (UCBs) witnessed a moderate growth during 2006-07. The growth in loans and advances was higher than the deposits growth. Balance sheets of all segments of the rural co-operative banking sector, except PACS, expanded during 2005-06. However, their financial performance worsened during the year. Wide variations were also observed in the financial performance of different segments of the rural cooperative banking sector.

FINANCIAL INSTITUTIONS
Financial assistance disbursed by All-India Financial Institutions (AIFIs) witnessed a sharp rise during 2006-07 despite slowdown in financial assistance sanctioned by them. Financial assistance sanctioned and disbursed by FIs increased by 12.9 per cent and 82.8 per cent, respectively, during 2006-07 as compared with a rise of 41.0 per cent and 38.0 per cent, respectively, witnessed during the previous year. The sharp rise in disbursements was accounted for mainly by a rise in disbursements by investment institutions and specialised financial institutions, while the slowdown in sanctions was mainly due to lower sanctions by all-India term-lending institutions. Deposit rates of SCBs declined from July 2007 to August 2007, particularly at the upper end of the range for various maturities. Interest rates of PSBs on deposits of maturity of one year to three years were placed in the range of 7.25-9.00 per cent in August 2007 as compared with 7.25-9.75 per cent in June 2007 (7.25-9.50 per cent in March 2007), while those on deposits of maturity of above three years were placed in the range of 7.75-9.50 per cent in August 2007 as compared with 7.75-9.75 per cent 56

in June 2007 (7.50-9.50 per cent in March 2007). While BPLRs of PSBs and foreign banks remained unchanged during the second quarter of 2007-08, those of private sector banks softened to the range of 13.00-16.50 per cent in August 2007 as compared with 13.00-17.25 per cent in June 2007.

CHALLENGES FACING BANKING INDUSTRY IN INDIA

The banking industry in India is undergoing a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank trying to graduate from completely regulated sellers market to completed deregulated customers market.

DEREGULATION:
This continuous deregulation has made the Banking market extremely competitive with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized 57

norms for foreign exchange. The deregulation of the industry coupled with decontrol in interest rates has led to entry of a number of players in the banking industry. At the same time reduced corporate credit off take thanks to sluggish economy has resulted in large number of competitors battling for the same pie.

NEW RULES:
As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. Natural fall out of this has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.

EFFICIENCY:
This in turn has made it necessary to look for efficiencies in the business. Banks need to access low cost funds and simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread and have to give thrust on retail assets

DIFFUSED CUSTOMER LOYALTY:

This will definitely impact Customer preferences, as they are bound to react to the value added offerings. Customers have become demanding and the loyalties are diffused. There are multiple choices, the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.

MISALIGNED MINDSET:

These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly creeping in but the utilization is not maximised.

COMPETENCY GAP:

58

Placing the right skill at the right place will determine success. The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. The focus of people will be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

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STRATEGIC OPTIONS WITH BANKS TO COPE WITH THE CHALLENGES

Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives include: Investing in state of the art technology as the back bone of to ensure reliable service delivery Leveraging the branch network and sales structure to mobilize low cost current and savings deposits Making aggressive forays in the retail advances segment of home and personal loans Implementing organization wide initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction Focusing on fee based income to compensate for squeezed spread, (e.g.CMS, trade services) Innovating Products to capture customer mind share to begin with and later the wallet share Improving the asset quality as per Basel II norms

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TRANSFORMATION INITIATIVES NEEDED FOR BANKS

In order to meet these challenges, the Reserve Bank initiated several measures during 2006-07.

MACRO LEVEL MEASURES

The stipulation of reserve requirement has traditionally been the key instrument of monetary policy. A greater flexibility in use of these instruments provides greater manoeuvrability to the central bank in ensuring monetary stability. With the amendment to the Reserve Bank of India Act, 1934, effective April 1, 2007, the floor and ceiling on the cash reserve ratio (CRR) have been removed and the Reserve Bank has been empowered to prescribe the CRR depending upon the prevailing monetary conditions.

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PRUDENTIAL MEASURES
Following the revised capital adequacy framework of the Basel Committee on Banking and Supervision (BCBS), the final guidelines for implementing the revised framework in India were issued to banks in April 2007. With a view to providing a wider choice of instruments to Indian banks for raising Tier I and Upper Tier II capital, guidelines for issuing preference shares as part of regulatory capital were issued on October 29, 2007. It has been decided to allow the banks to issue the following types of preference shares in Indian rupees: i) perpetual non-cumulative preference shares (PNCPS) under Tier I capital; and ii) perpetual cumulative preference shares (PCPS), redeemable non-cumulative preference shares (RNCPS) and redeemable cumulative preference shares (RCPS) under Upper Tier II capital Recognising the implications of investment pattern of banks on financial stability and with a view to discouraging banks to undertake risky exposures, it was advised to banks in September, 2006 that the exposure of banks to entities for setting up special economic zones (SEZs) or for acquisition of units in SEZs, which included real estate, would be treated as exposure to the commercial real estate sector and banks would have to make provisions as also assign appropriate risk weights for such exposures as per the guidelines laid down for this purpose. Considering the high risks inherent in Banks exposure to venture capital funds, the prudential framework governing banks exposure to VCFs was revised on August 23, 2006. Accordingly, all exposures to VCFs (both registered and unregistered) are deemed on par with equity and hence are reckoned for compliance with the capital market exposure ceilings and the limits prescribed for such exposure also apply to investments in VCFs. The quoted equity shares/ bonds/units of VCFs in the banks portfolio should be held under available for sale (AFS) category and marked-tomarket preferably on a daily basis, but at least on a weekly basis in line with valuation norms for other equity shares as per the laid down instructions.

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STRENGTHENING OF RISK MANAGEMENT PRACTICES

Banks are now facing increased risk on account of greater fluctuation in prices, exchange rates and interest rates, which underscore the need for developing regular systems for stress testing. Internationally, stress testing has become an integral part of banks risk management systems and is used to evaluate the potential vulnerability to some unforeseen events or movements in financial variables. There are broadly two categories of stress tests used in banks, viz., sensitivity tests and scenario tests. Sensitivity tests are normally used to assess the impact of change in one variable (for example, a high magnitude parallel shift in the yield curve, a significant movement in the foreign exchange rates and a large movement in the equity index) on the banks financial position. Scenario tests include simultaneous moves in a number of variables, for instance, equity prices, oil prices, foreign exchange rates, interest rates, and liquidity based on a single event experienced in the past. The need for banks in India to adopt stress tests as a risk management tool was emphasised in the Annual Policy Statement for 2006-07. Accordingly, guidelines on stress testing were issued by the Reserve Bank on June 26, 2007. Banks are required to put in place appropriate stress test policies and the relevant stress test framework for various risk factors by September 30, 2007 and make formal stress testing operational from March 31, 2008.

SUPERVISORY MEASURES:
From the financial stability point of view, crisis prevention is the major objective of financial regulators and supervisors. This involves continuous monitoring of potential risks and vulnerabilities that may threaten the health of the financial system. The success in preventing the occurrence of crisis depends on the process of information gathering, technical analysis, monitoring and assessment. The analytical process involves gathering information about macroeconomic performance and various aspects of the financial system through supervisory, regulatory and surveillance mechanism. 63

 The supervisory process based on information on individual institutions could be gainfully aided by the information on economys position in the business and credit cycles because macroeconomic and market performance provide the background against which the operational performance of individual institutions should be assessed. Thus, the supervisory framework plays a critical role in maintaining suitable conditions for financial stability and putting in place adequate safeguards so that the impact of shocks on the financial system is minimised. The Reserve Bank has also put in place a robust supervisory framework comprising on-site and off-site supervision. The focus of supervisory measures during 2006-07 was on strengthening the monitoring mechanism of financial conglomerates (FCs).

BENCHMARKING OF THE INDIAN BANKING SECTOR

The financial soundness of the banking and financial institutions is a pre-requisite for financial stability. The increasing degree of financial globalisation puts domestic banking and financial institutions on international platform of competition, thereby compelling them to meet international standards in respect of financial soundness. The competition in the Indian banking system has intensified with the entry of private banks and increased presence of foreign banks and the margins have come under pressure. Banks are also required to raise capital both from the domestic and international capital market. India is also gradually moving towards fuller capital account convertibility regime. The Committee on Fuller Capital Account Convertibility in its report submitted on July 31, 2006, observed that under a FCAC regime, the banking system will be exposed to greater market volatility. Hence, it is imperative that the Indian banking system imbibes enhanced risk management capabilities with more effective supervisory and regulatory system. In view of these developments, it is imperative that the Indian banking system meets the international benchmarks of efficiency, profitability and financial soundness.

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Several initiatives undertaken to strengthen the banking system in India over the years have resulted in a significant improvement in the financial performance of the banking sector.

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RETURN ON ASSETS:
The return on total assets (RoA) of banks, defined as the ratio of net profits to total assets, is one of the most widely used indicators of profitability. Higher RoA indicates the commercial soundness of the banking system. From the financial stability point of view, high RoA provides a level of comfort against potential shocks to the system, i.e., banks would be able to operate without jeopardising the process of financial intermediation even in the wake of adverse shocks. RoA of Indian scheduled commercial banks recorded a significant improvement in recent years to reach 0.9 per cent at end-March 2007; globally, the range varied from 0.2 per cent to 4.3 per cent in 2006. Banks earnings are affected by several factors, which could be broadly classified as structural and secondary. The earnings are easily sustainable if they are affected more by structural factors than secondary factors.

NON-PERFORMING LOANS:
Quality of assets of banks is a crucial indicator of financial health of the banking system and hence, financial stability. The ratio of non-performing loans (NPLs) to total advances is a common measure to assess the quality of assets of banks. A lower NPL ratio indicates prudent business strategy followed by a bank. The legal framework for recovery of loans also plays an important role in the burden of NPLs on the banking system in a country. The assessment of bank earnings forms an integral part of most models of supervision and supervisory rating systems. Detection of earnings weakness enables the supervisor to take action before the solvency of the bank is seriously threatened, and before it begins to assume increased risks in attempting to achieve profitability. In recent years, amalgamation of a few weak SCBs such as Bharat Overseas Bank, Sangli Bank Ltd., Ganesh Bank of Kurundwad and United Western Bank points to greater relevance of such an analysis in the Indian context. It is often found that banks may try to conceal their losses for various reasons, such as to maintain depositor confidence, to avoid devaluation of their stock in the market or to avoid supervisory action. Some banks are able to conceal their losses for quite 66

some time. However, they eventually end up being liquidated because of financial weakness without ever reporting a net loss. In the light of above factors, it is important to understand how banks generate their income. If a bank is able to raise sufficient income from sustainable core business sources so as to meet most of its operating expenses, provisions and taxes, as well as to provide for an adequate return on capital, it reflects on the earning strengths of the bank. Alternatively, if a bank relies more on non-recurring income, it is a sign of earning weaknesses. Furthermore, the relative contribution of the various activities of the bank to its earnings, rather than typical assessment based on volumes alone, may be a better indicator of how risk is distributed across its various activities. In the analytical framework proposed by Rosa Couto (2002), the income and expense items are classified into two basic categories: structural determinants of profitability and secondary determinants of profitability. The structural determinants of profitability are those items of income and expense that satisfy three conditions: (i) they arise from the operational activities of a bank; (ii) can properly be considered sustainable in the case of income, or recurring in the case of expenses; and (iii) are not particularly subject to misrepresentation. Net interest income, fee income and operating expenses, are the structural determinants of profitability. They are the core income and expense items of a bank, and are determined by essential banking factors such as asset/client base size, profit margins, capitalisation and cost efficiency. The evaluation of the sensitivity of bank earnings to changes in relevant business conditions have become an important plank of risk assessment. The variables which are identified as structural determinants of earnings are used to anticipate the impact of expected or possible changes in business conditions on banks profitability. This process is found to be relevant to assess the viability of banks, in order to identify and monitor particularly those in vulnerable positions.

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IMPACT OF HIKE IN CRR BY RBI ON THE BANKING SECTOR

The Reserve Bank on 16th of april 2008, hiked Cash Reserve Ratio, the amount of depositors' money that banks need to park with it, by half a per cent to tighten money supply, as part of concerted efforts with the government to ease inflation. The hike, which would take CRR to 8 per cent, will come into effect in two tranches of 0.25 per cent on April 26 and May 10, the central bank said. The unscheduled hike comes ahead of RBI's annual credit policy for 2008-09 to be unveiled on April 29. The measure would suck out liquidity to the tune of Rs 18,500 crore from the banking system and would leave banks with less money to lend and in turn would help cool inflation that is at a three-year high of 7.14 per cent. "In the light of the current macro-economic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it was essential to take appropriate action on an urgent basis," Giving the rationale for the increase in CRR, RBI said year-on-year Wholesale Price Index-based inflation, which was 3.83 per cent on January 12, 2008 (at the time of announcement of third quarterly review of credit policy), increased to 7.41 per cent on March 29 and remained at 7.14 per cent as on April 5 and its overall impact on inflation expectations requires to be monitored and moderated India's wholesale price index rose 7.14 percent in the 12 months to April 5, a government official said on Thursday.

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IMPACT OF CRR HIKE ON INFLATION

"Inflation has come in in line with market expectations and on account of higher base effect from last week. Inflation is likely to remain around 7 percent for a few weeks. Inflation management is on top of the agenda for both the Ministry of Finance and the RBI. While the impact of fiscal measures is yet to play out, it is expected RBI to take monetary measures to manage demand conditions. Early indicators from policy pronouncements suggest that a hike in rates cannot be ruled out." The finance minister said on Wednesday the government would not hesitate to take tough measures against anyone caught hoarding commodities, and the central bank would take more monetary steps soon to tame inflation. Government agencies have been asked to import one million tonnes of edible oil to meet rising domestic demand. RBI governor Y V Reddy has said inflation was unacceptably high and the central bank was ready to act if necessary. The RBI next reviews monetary policy on April 29. Government raised prices of auto fuels in February by about 4 per cent; an increase analysts said would nudge inflation slightly higher and undermined chances of an early cut in interest rates. The central bank aimed to contain inflation close to 5.0 percent in 2007/08 (AprilMarch). It wants to condition expectations in the range of 4.0-4.5 percent with an inflation rate of around 3.0 percent as a medium-term goal. The wholesale price index is more closely watched than the consumer price index (CPI) because it has a higher number of products in its basket and is published weekly.

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_______________________ _
INDIA BANKING 2010 TOWARDS A HIGH PERFORMING SECTOR A VISION REPORT
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INDIA BANKING 2010 TOWARDS A HIGH PERFORMING SECTOR

Indian banks have compared favorably on growth, asset quality and profitabillty with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51% since April 2001 as compared to 27% growth in the market index of the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changed include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. However, the cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. While bank le4nding has been a significant driver of GDP growth and employment, periodic instances of the failure of some weak banks have often threatened the stability of the system. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless addressed, could seriously weaken the health of the sector. Further, the inability of bank management (with some notable exceptions) to improve capital allocation, increase the productivity of their service platforms and improve the performance ethic in their organizations could seriously affect future performance.

ONE OF THREE SCENARIOS WILL PLAY OUT BY 2010

The interplay between policy and regulatory interventions and management strategies will determine the performance of Indian banking over the next few years. Legislative actions will shape the regulatory stance through six key elements: industry structure and sector consolidation; freedom to deploy capital; regulatory coverage; corporate governance; labour reforms and human capital development; and support for creating industry utilities and service bureaus. Management success will be determines on three fronts fundamentally upgrading organizational capability to stay in tune with the changing market; adopting value-creating M&A as an avenue for growth; and continually innovating to develop new business models to access untapped opportunities. Three scenarios can be defined to characterize these outcomes: 71

High performance : In this scenario, policy makers intervene only to the extent required to ensure system stability and protection of consumer interests, leaving managements free to drive far-reaching changes. Changes in regulations and bank capabilities reduce intermediation costs leading to increased growth, innovation and productivity. Banking becomes an even greater driver of GDP growth and employment and large sections of the population gain access to quality banking products. Management is able to overhaul bank organizational structures, focus on industry consolidation and transform the banks into industry shapers. In this scenario we witness consolidation within public sector banks (PSBs) and within private sector banks. Foreign banks begin to be active in M&A, buying out some old private and newer private banks. Some M&A activity also begins to take place between private and public sector banks. As a result, foreign and new private banks grow at rates of 50 per cent, while PSBs improve their growth rate to 15 per cent. The share of the private sector banks increases to 35 per cent and that of foreign banks increases to 20 per cent of total sector assets. The share of banking sector value adds in GDP increases to over 7.7 per cent, from current levels of 2.5 per cent. Funding this dramatic growth will require as much as Rs. 600 billion in capital over the next few years.

Evolution : Policy makers adopt a pro-market stance but are cautious in liberalizing the industry. As a result, some constraints still exist. Processes to create highly efficient organizations have been initiated but most banks are still not best-in-class operators. Thus, while the sector emerges as an important driver of the economy and wealth 2010, it has still not come of age in comparison to developed markets. Significant changes are still required in policy and regulation and in capabilitybuilding measures, especially by public sector and old private sector banks. In this scenario, M&A activity is driven primarily by new private banks, which take over some old private banks and also merge among themselves. As a result, growth of these banks increases to 35 per cent. Foreign banks also grow faster at 30 per cent due to a relaxation of some regulations. The share of private sector banks increases to 30 per cent of total sector assets, from current levels of 18 per cent, while that of 72

foreign banks increases to over 12 per cent of total assets. The share of banking sector value adds to GDP increases to over 4.7 per cent. Stagnation : In this scenario, policy makers intervene to set restrictive conditions and management is unable to execute the changes needed to enhance returns to shareholders and provide quality products and services to customers. As a result, growth and productivity levels are low and the banking sector is unable to support a fast-growing economy. This scenario sees limited consolidation in the sector and most banks remain sub-scale. New private sector banks continue on their growth trajectory of 25 per cent. There is a slowdown in PSB and old private sector bank growth. The share of foreign banks remains at 7 per cent of total assets. Banking sector value add, meanwhile, is only 3.3 per cent of GDP.

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_______________________ _ ANALYSIS OF INDIAN BANKING SECTOR THROUGH PORTERS MODEL

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75

ANALYSIS OF INDIAN BANKING SECTOR THROUGH PORTERS MODEL

Michael porter has argued that the profit potential of an industry depends on the combined strength of the following five basic competitive forces: Threat to new entrants Rivalry among the existing firms Pressure from substitute products Bargaining power of buyers Bargaining power of sellers

The figure below shows diagrammatically the forces that drive competition and determine industry profitkspotential.

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THREATS OF NEW ENTRANTS:

The new foreign banks entering the Indian market will strive for creating a strong customer base. These banks, with their large resource availability in the form of capital, are likely to infuse the latest IT based technological solutions for quality financial services. The Indian commercial banks have experienced the shift of preferences of the new generation customers from personalised banking to technological banking. This techno-savvy customer group prefers to complete banking transactions from their home or offices rather than visiting the bank branch. They have very little loyalty to their bankers and given a slightest improved technology based service, they are ready to shift their banking needs from the existing to another bank. In the face of the threat of losing profitable customers to the new entrants in the banking sector, the existing commercial banks will have to evolve suitable market strategies aimed at attracting new customers and retaining the existing ones. In the changed circumstances, the need for need for customer delight will override the need for customer service. Senior bankers and other professional experts will be presenting to you their ideas on Delivering superior customer experience during these two days. ENTRY/EXIT NORMS-While regulatory barriers have been eased, desirable barriers exist in the form of capital and other requirements. After all banking license is difficult to achieve and at the same time establishing a bank requires a huge capital investment. But, entry norms are fairly clear, though exit norms are not clear yet.

COMPETITIVE RIVALRY WITHIN THE INDUSTRY:

The banking industry is highly competitive. The financial services industry has been around for hundreds of years, and just about everyone who needs banking services already has them. Because of this, banks must attempt to lure clients away from competitor banks. They do this by offering lower financing, preferred rates, and investment services. The banking sector is in a race to see who can offer the better and faster services, but this also causes banks to experience a lower ROA. They then have an incentive to take- on high risk projects. In the long run, we're likely to see more consolidation in the banking industry. Larger banks would prefer to takeover or merge with another bank rather than spend the money to market and advertise to people. 77

The forthcoming competition in the banking industry is likely to bring out some of the complex issues requiring effective, efficient and accurate decision making by the bank managements. It will be necessary to have talented leadership and broader organisation in the Indian banks for meeting the challenges. The banking and financial industry is thus grappling in developing suitable leadership and talent in the present environment.

BARGAINING POWER OF BUYERS:

The individual doesn't pose much of a threat to the banking industry, but one major factor affecting the power of buyers is relatively high switching costs. If a person has their mortgage, car loan, credit card, checking account, and mutual funds with one particular bank, it can make it extremely tough for them to switch. In an attempt to lurein customers, banks try to lower the price of switching, but many people would still rather stick with their current bank. On the other hand, large corporate clients have banks wrapped around their little finger. Financial institutions--by offering better exchange rates, more services, and exposure to foreign capital markets--try extremely hard to get high margin corporate clients.

BARGAINING POWER OF SUPPLIERS:

The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. If a talented individual is working in a smaller regional bank, there is the chance that that person will be enticed away by bigger banks, investment firms, etc.

AVAILABILITY OF SUBSTITUTES:

There are plenty of substitutes in the banking industry. Banks offer a suite of services over and above taking deposits and lending money, but whether it is insurance, mutual funds, or fixed income securities, chances are there is a non-banking financial services company who can offer similar services. In the lending side of the business, banks are seeing competition rise from unconventional companies. Sony, General Motors, and Microsoft all offer preferred financing to customers who buy big ticket items. If car companies are offering 0% financing, why would anyone want to get a car loan from the bank and pay 5-10% interest? 78

_______________________ _ COMPANY ANALYSIS

79

COMPANY ANALYSIS
Before diving into a company's financial statements, we're going to take a look at some of the qualitative aspects of a company. Fundamental analysis seeks to determine the intrinsic value of a company's stock. But since qualitative factors, by definition, represent aspects of a company's business that are difficult or impossible to quantify, incorporating that kind of information into a pricing evaluation can be quite difficult. Company analysis can be done in two ways:

Company analysis

Quantitative analysis

Qualitative anlaysis

Some of the company-specific

qualitative factors are:

BUSINESS MODEL

Even before an investor looks at a company's financial statements or does any research, one of the most important questions that should be asked is: What exactly does the company do?
This is referred to as a company's business model it's how a company makes money at the very least, you should understand the business model of any company you invest in. The "Oracle

of Omaha",

Warren Buffett, rarely invests in tech stocks because most of the time he doesn't understand them. This is not to say the technology sector is bad, but it's not Buffett's area of expertise; he doesn't feel comfortable investing in this area. Similarly, unless you understand a company's business model, you don't know what

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the drivers are for future growth, and you leave yourself vulnerable to being blindsided like shareholders of Boston Chicken were.

COMPETITIVE ADVANTAGE

Another business consideration for investors is competitive advantage. A company's long-term success is driven largely by its ability to maintain a competitive advantage and keep it. Powerful competitive advantages, such as Coca Cola's brand name and Microsoft's domination of the personal computer operating system, create a moat around a
business allowing it to keep competitors at bay and enjoy growth and profits. When a company can achieve competitive advantage, its shareholders can be well rewarded for decades

MANAGEMENT

Just as an army needs a general to lead it to victory, a company relies upon management to steer it towards financial success. Some believe that management is
of the company fail to properly execute the the most important plan. aspect for investing in a company. It makes sense - even the best business model is doomed if the leaders

So how does an average investor go about evaluating the management of a company? This is one of the areas in which individuals are truly at a disadvantage compared to professional investors. Every public company has a corporate information section on its website. Usually there will be a quick
biography on each executive with their employment history, educational background and any applicable achievements. Don't expect to find anything useful here..

CORPORATE GOVERNANCE

Corporate governance describes the policies in place within an organization denoting the relationships and responsibilities between management, directors and stakeholders. These
policies are defined and determined in the

company charter and its bylaws, along with corporate laws

and regulations. The purpose of corporate governance policies is to ensure that proper checks and balances are in place, making it more difficult for anyone to conduct unethical and illegal activities.

Good corporate governance is a situation in which a company complies with all of its governance policies and applicable government in order to look out for the interests of the company's investors and other stakeholders.

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Although, there are companies and organizations that attempt to quantitatively

quite expensive for the average investor to purchase.

assess

companies on how well their corporate governance policies serve stakeholders, most of these reports are

Fortunately, corporate governance policies typically cover a few general areas: structure of the board of directors, stakeholder rights and financial and information transparency. With a little research and the right questions in mind, investors can get a good idea about a company's corporate governance.

Financial and Information Transparency

This aspect of governance relates to the quality and timeliness of a company's financial disclosures and operational happenings. Sufficient transparency implies that a company's financial releases are written in a manner that stakeholders can follow what management is doing and therefore have a clear understanding of the company's current financial situation.

Stakeholder Rights

This aspect of corporate governance examines the extent that a company's policies are benefiting stakeholder interests, notably shareholder interests. Ultimately, as owners of the company, shareholders should have some access to the board of directors if they have concerns or want something addressed. Therefore companies with good governance give shareholders a certain amount of ownership voting rights to call meetings to discuss pressing issues with the board.

Structure of the Board of Directors

The board of directors is composed of representatives from the company and representatives from outside of the company. The combination of inside and outside directors attempts to provide an independent assessment of management's performance, making sure that the interests of shareholders are represented.

QUANTITATIVE ANALYSIS

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A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically. Quantitative analysis can be done for a number of reasons such as

measurement, performance evaluation or valuation of a financial instrument. It can also be used to predict real world events such as changes in a share price. In broad terms, quantitative analysis is simply a way of measuring things. Examples of quantitative analysis include everything from simple financial ratios such as earnings per share, to something as complicated as discounted cash flow, or option pricing. Although quantitative analysis is a powerful tool for evaluating investments, it rarely tells a complete story without the help of its opposite - qualitative analysis.

RATIO ANALYSIS
Ratio analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's 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 from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.

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ICICI BANK
ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$ 96 billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine months ended December 31, 2007. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation. The Bank has a network of about 955 branches and 3,687 ATMs in India and presence in 18 countries. 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 nonlife insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Unites States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). ICICI 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 of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and 84

through a number of subsidiaries and affiliates like ICICI Bank. In 1999, 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 emerging competitive 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 ICICI Bank would be the optimal strategic alternative for both entities, and would create the optimal legal structure for the ICICI group's universal banking strategy. The merger would enhance value for ICICI shareholders through the merged entity's access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate in the payments system and provide transactionbanking services. The merger would enhance value for ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICI's strong 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 to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity.

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VARIOUS RATIOS OF THE BANK

Table: Ratios of ICICI Bank
Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03 Per share ratios Adjusted EPS (Rs) Adjusted cash EPS (Rs) Reported EPS (Rs) Reported cash EPS (Rs) Dividend per share Operating profit per share (Rs) Book value (excl rev res) per share (Rs) Book value (incl rev res) per share (Rs.) Net operating income per share (Rs) Free reserves per share (Rs) Profitability ratios Operating margin (%) Gross profit margin (%) Net profit margin (%) Adjusted cash margin (%) Adjusted return on net worth (%) Reported return on net worth (%) Return on long term funds (%) Leverage ratios Long term debt / Equity Total debt/equity Owners fund as % of total source Fixed assets turnover ratio Liquidity ratios Current ratio Current ratio (inc. st loans) Quick ratio Inventory turnover ratio Payout ratios Dividend payout ratio (net profit) Dividend payout ratio (cash profit) Earning retention ratio Cash earnings retention ratio 33.89 28.84 64.80 70.22 34.08 27.36 65.82 72.58 36.05 27.85 63.98 72.17 37.49 28.19 62.59 71.85 43.00 30.29 57.23 69.82 0.61 0.08 6.04 0.62 0.08 6.64 0.51 0.09 4.98 0.50 0.10 4.18 0.47 0.12 3.84 0.01 9.50 9.52 4.52 0.01 7.45 11.83 2.94 0.02 7.98 11.13 2.14 0.04 8.55 10.47 2.26 0.05 7.00 12.50 2.42 13.33 11.41 10.81 12.30 12.31 12.79 82.46 18.66 15.10 14.12 17.55 11.40 11.43 56.24 22.63 17.64 16.32 21.14 15.99 15.97 18.12 13.44 13.67 18.20 20.47 20.43 7.57 3.23 9.86 14.05 17.49 17.39 119.87 33.30 39.36 34.59 40.64 10.00 42.19 28.47 35.48 28.55 35.56 8.50 36.75 27.25 35.26 27.22 35.23 8.50 36.37 26.76 35.56 26.71 35.51 7.50 34.06 19.78 28.03 19.68 27.93 7.50 14.40 113.10 113.10 190.10 70.11

270.37 249.55 170.35 130.67 270.37 249.55 170.35 130.67 316.45 196.87 160.69 187.90 200.08 193.24 110.70 66.38

70.54 106.69

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Interpretation
From the above table, we can found out various information Dividend per share has risen from Rs. 7.00 to Rs. 10 per share from march 2003 to march 2007. This means that it is good for a long term investor to invest in the shares of the company. EPS has also shown an upward trend in the following years, which in turn means that the investors are likely to get better returns in the coming years also. Debt/equity Ratio: This ratio has risen from 7.00 in March 2003 to 9.5 in March 2007. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.

SHARE PRICES OF THE BANK

SHARE PRICES OF ICICI BANK FROM MAY 2007 TO APRIL 2008
1400 1200 1000 800 600 400 200 0
JU LY M N O JA N E P S A R C H T A Y V

PRICES

PRICES

MONTHS

Interpretation:
The share prices of ICICI bank have shown a log term upward trend in its prices. Although the prices of the share dipped to a small amount in the month of Oct.

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2007, but it gained a rise in its prices in the following months. The share of the bank provides a better growth opportunity to the investors in the long term.

GRAPH SHOWING THE P/E RATIO OF THE BANK

1000 Values (in RS.) 0 Aug-02 Apr-02 Dec-02 Apr-03

P/E Band of ICICI Bank

Aug-03 Aug-04 Aug-05 Dec-03 Dec-04 Dec-05 Aug-06 Apr-04 Apr-05 Apr-06 Dec-06 Series1

-1000 -2000 -3000 -4000

Months

88

 VARIOUS RISKS THAT THE BANK FACES

Credit risk

Market risk

Operational risk

RISK MANAGEMENT

Risk is an integral part of the banking business and we aim at delivering superior shareholder value by achieving an appropriate trade-off between risk and returns. The bank is exposed to various risks, including credit risk, market risk and operational risk. Banks risk management strategy is based on a clear understanding of various risks, disciplined risk assessment and measurement procedures and continuous monitoring. 89

The policies and procedures established for this purpose are continuously benchmarked with international best practices.

90

CREDIT RISK

Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. The bank measure,monitor and manage credit risk for each borrower and also at the portfolio level. It has standardized credit approval processes, which include a wellestablished procedure of comprehensive credit appraisal and rating. ICICI have developed internal credit rating methodologies for rating obligors. The rating factors in quantitative, qualitative issues and credit enhancement features specific to the transaction. The rating serves as a key input in the approval as well as post-approval credit processes. Credit rating, as a concept, has been well internalised within the Bank. The rating for every borrower is reviewed at least annually. Industry knowledge is constantly updated through field visits and interactions with clients, regulatory bodies and industry experts. MARKET RISK

Market risk is the risk of loss resulting from changes in interest rates, foreign currency exchange rates, equity prices and commodity prices. The banks exposure to market risk is a function of our trading and assetliability management activities and its role as a financial intermediary in customer-related transactions. The objective of market risk management is to minimise the impact of losses on earnings and equity capital due to market risk. OPERATIONAL RISK

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk includes legal risk but excludes strategic and reputational risks. Operational risk is of wide import and includes all types of risk other than credit risk and market risk. INFORMATION TECHNOLOGY

ICICI Bank continues to deploy technology for use in banking. Innovative approaches have helped shape end-to-end solutions that provide customers with secure access to services at multiple locations. With automation of processes across the supply-chain, we have developed the concept of technology-led delivery. By introducing low-cost

91

customer touch points in unbanked areas, ICICI have initiated the process of financial inclusion through appropriate use of technology.

HDFC BANK
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in electronic form. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched its credit card business in late 2001. By September 30, 2005, the bank had a total card base (debit and credit cards) of 5.2 million cards. The Bank is also one of the leading players in the "merchant acquiring" business with over 50,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments.

BUSINESS STRATEGY
The banks business strategy emphasizes the following: Increase the market share in Indias expanding banking and financial services industry by following a disciplined growth strategy focusing on balancing quality and volume growth while delivering high quality customer service;

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 Leverage its technology platform and open scaleable systems to deliver more products to more customers and to control operating costs; Maintain high standards for asset quality through disciplined credit risk management; Develop innovative products and services that attract the targeted customers and address inefficiencies in the Indian financial sector; Continue to develop products and services that reduce the cost of funds; and Focus on healthy earnings growth with low volatility.

BUSINESS SEGMENT UPDATE:

The bank has been able to achieve healthy growth across various operating and financial parameters. This performance reflects the strength and diversity of the banks three primary business franchises retail banking, wholesale banking and treasury, as well as a disciplined approach to risk-reward management. The retail banking business continued its growth in 2006-07. In this business, the Bank has positioned itself as a onestop-shop financial services provider, catering primarily to the middle class, mass affluent and high networth segments. The Banks range of retail financial products and services is fairly exhaustive including various deposit products, loans, credit cards, debit cards, depository (custody) services, investment advice, bill payments and various transactional services. Apart from its own products, the Bank sells third party financial products like mutual funds and insurance to its retail customers. To provide its customers greater flexibility and convenience as well as to reduce servicing costs, the Bank has invested in multiple channels branches, ATMs, phone banking, internet banking and mobile banking. The success of the Banks multichannel strategy is evidenced in the fact that almost 78% of customer initiated transactions are serviced through non-branch channels. The Banks data warehouse and Customer Relationship Management (CRM) solutions have helped it to target its customers more effectively and offer appropriate products depending on customer profiles, thus reducing costs of acquisition and deepening customer relationships

RISK MANAGEMENT & PORTFOLIO QUALITY

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The Banks risk philosophy involves developing and maintaining a healthy porfolio within its risk appetite and the regulatory framework. While the Bank is exposed to various types of risks, the most important among them are credit risk, market risk (which includes liquidity risk and price risk) and operational risk. The measurement, monitoring and management of risks remains a key focus areas for the Bank. For credit risk, distinct policies and processes are in place, separately for wholesale and retail credit exposures.

SERVICE QUALITY INITIATIVES

In January 2006, the Bank had launched a new Quality Initiative Lean Sigma Project Management. Through this initiative more than 500 projects have been executed to reduce transaction turnaround times and improve business cycle efficiencies. The Service Quality Initiative was upgraded during the year to measure and improve the customer service experience across all touch points. The Bank plans to re-engineer key processes in the coming year using technology, Six Sigma and Five S (a technique used for workplace transformation) to further improve customer experience.

Share prices of HDFC Bank

Interpretation:

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From the above graph it can be clearly seen that there is a lot of fluctuations in the price of the shares of the bank within one year starting from may 2007 to march 2008. And the share prices have declined in recent times. But still according to the analysis, the inverstors are recommended that the share prices of the bank would rise in the long term, and therefore the shares are good for long term investors.

Various ratios of HDFC Bank

Table: Ratios of HDFC Bank
Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03 Per share ratios Adjusted EPS (Rs) Adjusted cash EPS (Rs) Reported EPS (Rs) Reported cash EPS (Rs) Dividend per share Operating profit per share (Rs) Book value (excl rev res) per share (Rs) Book value (incl rev res) per share (Rs.) Net operating income per share (Rs) Free reserves per share (Rs) Profitability ratios Operating margin (%) Gross profit margin (%) Net profit margin (%) Adjusted cash margin (%) Adjusted return on net worth (%) Reported return on net worth (%) Return on long term funds (%) Leverage ratios Long term debt / Equity Total debt/equity Owners fund as % of total source Fixed assets turnover ratio Liquidity ratios Current ratio Current ratio (inc. st loans) Quick ratio Inventory turnover ratio 0.26 0.04 4.07 0.29 0.03 5.18 0.25 0.03 5.61 0.16 0.02 3.39 0.45 0.06 4.39 10.62 8.60 4.33 10.53 8.67 3.50 8.04 11.05 2.89 11.30 8.13 2.80 9.97 9.11 2.86 33.15 30.50 13.57 19.07 17.75 17.74 74.91 29.56 26.35 15.55 23.11 16.42 16.43 60.06 34.66 30.79 17.77 26.63 14.72 14.72 50.77 30.18 25.95 16.81 24.06 18.94 18.92 71.74 29.73 23.23 15.53 23.87 17.21 17.26 78.50 35.77 50.20 35.74 50.16 7.00 86.19 27.80 41.33 27.81 41.34 5.50 52.56 21.47 32.19 21.48 32.20 4.50 41.65 17.91 25.59 17.89 25.58 3.50 31.48 94.52 94.52 53.76 13.70 21.12 13.74 21.16 3.00 25.75 79.59 79.59 86.57 49.04

201.42 169.24 145.86 201.42 169.24 145.86 155.69 132.01 99.78

259.98 177.80 120.17 104.29

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Payout ratios Dividend payout ratio (net profit) Dividend payout ratio (cash profit) Earning retention ratio Cash earnings retention ratio 22.91 16.32 77.11 83.69 22.55 15.17 77.44 84.83 23.99 16.00 76.00 83.99 22.15 15.49 77.87 84.52 24.74 16.07 75.19 83.90

Interpretation:
Dividend per share: This ratio has increased to 7.00 in March 2007 , which indicates that the shareholders are getting better returns for the investments made by them. EPS: this ratio has shown an upward trend and is good for the long term investors. Debt/Equity Ratio: the ratio has remained almost the same from march 2003 to march 2007, which means that the bank is able to manage its debt finances along with its growth.

P/E chart of HDFC Bank

P/E Band of HDFC Bank
Values (in Rs.) 40 30 20 10 0 Aug-06 Aug-02 Aug-03 Aug-04 Aug-05 Dec-06 Apr-02 Dec-02 Apr-03 Dec-03 Apr-04 Dec-04 Apr-05 Dec-05 Apr-06

Months

96

Interpretation:
Higher P/E ratio is not good for the company. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop.

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STATE BANK OF INDIA

SBI State Bank of India is the largest Bank in India and in the entire Indian Subcontinent with far flung Branches. In fact, in regards to its employees and branches, the State Bank of India is the largest bank in the world. Founded in 1806, SBI has evolved to be a major Bank in India to provide financial assistance, with the most extensive Networking all over the world and many leading SBI Associate Banks. Not Just the SBI Branches but also the SBI ATMs are found in the nook and corner of India. The State Bank of India has been instrumental in carrying out innovations in personal banking to make the transactions easy for its customers. The extensive reach of SBI Branches in the rural areas in India has made it touch the lives of the millions. In fact, The State Bank of India is a leading Credit Card Bank that introduced the facility of ATM Cards and Internet Banking to all its Branches in the interiors of India. In the true sense of the term, the State Bank of India has been a visionary Bank with the incorporation of all the modern and contemporary trends At the same time, The State Bank of India has been instrumental in facilitating Finance for Agriculture by dedicating special Rural Branches. Not just Financial Services, but Counseling on the SBI-State Bank of India Interest Rates and various SBI Loans meant for laborers is provided. In fact, SBI Card has been provided to all the rural clients so to enable them to enjoy the fruits of Globalization. The SBI NRI Services form a core area of International Banking with easy and speedy transfer of Funds and various schemes. Shri O.P. Bhatt is the chairman of SBI

STRONG MARKET TRENDS OF THE BANK

SHARE PRICES OF STATE BANK OF INDIA

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SHARE PRICES OF STATE BANK OF INDIA FROM MAY 2007 TO APRIL 2008 3000
PRICES 2500 2000 1500 1000 500 0
JU L Y M A N O JA N E P S A R C H T Y V

PRICES

MONTHS

Interpretation:
From the above graph, it can be clearly seen that the share prices are rising, which is a very good indicator. The investors are likely to get higher returns if they invest their funds in the shares of the bank.

MARKET SHARE ADVANCES

MARKET SHARE DEPOSITS

99

Market Valuation of State Bank Of India

RETURN PROFILES Return On Assets and Equity

100

VISION OF THE BANK

101

P/E chart of State Bank Of India

P/E Band of SBI
Value (in Rs.) 20 15 10 5 0
r-0 2 O ct -0 2 Ap r-0 3 O ct -0 3 Ap r-0 4 O ct -0 4 Ap r-0 5 O ct -0 5 Ap r-0 6 O ct -0 6 Ap

Months

Risk Information
The following principal categories of business risks and other risks affecting the SBI Groups businesses could have a material impact on investment decisions. Although the risks below are those recognized by the SBI Group at present, all risks are not necessarily limited to the following. In recognizing these latent risks, the Group will strive to avoid any such risks and take appropriate measures in the event that any risk arises.

(1)

Impact of Changes in the Business

Environment The SBI Group engages in a diverse range of businesses that include the investment, housing and real estate, securities, home loan and leasing businesses. Accordingly, there is a possibility that trends in such related markets as stock markets, money markets and real estate markets as well as political, economic and industry trends could have a significant impact on the Group. Therefore, such external factors over which the Group has no control could cause changes in business results and have a major impact on the SBI Groups overall business results. Additionally, governments, government ministries and agencies as well as various stock exchanges are proceeding with system reforms and amendments to laws concerning stock markets and other markets related the Groups businesses. Although appropriate measures are taken upon 102

sufficiently ascertaining these developments, additional major changes to system reforms and legal amendments in the future may have an impact on the Companys business results.

(2)

Competition

The SBI Group engages in businesses in fields characterized by innovation and expected high growth. In that these businesses are considered to have extremely strong growth potential in the future, competition is intense, which is evidenced by the entry of new participants. Consequently, there is no assurance the SBI Group can maintain its future competitiveness in the event of excessive competition that exceeds market growth. The Group will continue making further efforts in its businesses to maintain and increase its current competitive advantage. However, the emergence of strong competitors could cause the SBI Group to lose its dominant position and have an impact on its business results.

(3)

System Risk

The SBI Group fully utilizes the Internet in carrying out its businesses. Because a large portion of our business depends on computer systems, the SBI Group has devised various countermeasures that include the building of backup computer systems. Nevertheless, the SBI Groups business results could be significantly affected if its computer systems become inoperable due to reasons unforeseen at present, including hardware and software malfunctions, human error, interruption or cessation of service due to a breakdown in communication lines or problems with the communications provider, computer viruses, cyber terrorism or a system malfunction caused by a natural disaster. Particularly in the Brokerage & Investment Banking Business, which uses the Internet as a principal sales channel, we recognize that ensuring the stability of our system for online transactions is our most crucial management issue. The Group has thus implemented a number of countermeasures such as building redundant mission critical systems and monitoring functions as well as establishing backup sites at multiple locations and undertaking daily initiatives to maintain and enhance the level of service. Nevertheless, in the case of a system malfunction for some reason despite the implementation of these countermeasures, there is a possibility that a delay or failure to 103

appropriately respond could result in claims for damage resulting from this malfunction as well as erode trust in the SBI Groups systems and support structure. This, in turn, could result in the loss of a large number of customers.

(4)

Investment Risk

In the Asset Management Business, the investee companies in the investment partnerships managed by the SBI Group include numerous venture companies and companies undergoing restructuring. These companies face numerous uncertainties regarding their future and there is a possibility that the business results of investee companies could change due to various factors in the future. These factors include but are not limited to changes in the competitive environment owing to sudden technological innovations or changes in industry standards, the inability to secure and maintain excellent managers and employees, a weak financial foundation, and nondisclosure of crucial information from investee companies. In the Real Estate Business, the Company performs sufficient prior due diligence when acquiring real estate. However, the discovery of problems after acquisition in areas beyond the scope of the due diligence, including those related to rights that are unique to the real estate industry, ground geology, structures or the environment, could have a large impact on the value or profitability of the real estate. Also, the occurrence of any unforeseen accidents, incidents, or natural disasters such as fires, civil unrest, terrorism, earthquakes, volcanic eruptions or tidal waves could cause a loss of the value or profitability of the real estate.

(5)

Protection of Personal Information

Utilizing the Internet to the fullest, the SBI Group carries out wide-ranging business activities that include financial, real estate and lifestyle-related businesses, and in doing so, obtains and uses information on numerous customers. As a business enterprise that engages in financial businesseswhich includes entry into the banking and life and nonlife insurance industrieswhere reassurance, stability and safety are demanded, the SBI Group believes that preventing damage from the leakage of customer information and illegal access is extremely crucial. The Company thus recognizes that information security is its most crucial issue for ensuring that customers can use its services with a sense of reassurance. With the full-fledged implementation of the Personal

104

Information Protection Act in April 2005, the Company announced its Personal Information Protection Policies and formulated its Compliance Program (regulations on the management of personal information) to ensure strict adherence to its policies, as well as established security countermeasures based on this program. In ensuring that meticulous consideration is given to protecting customer information, we have also set up an internal management structure that includes establishing the Information Security Committee in addition to implementing related employee training programs. The Company has also implemented such thorough steps as entrance and exit log monitoring through the use of security cards as well as electronic file monitoring. Further, in August 2006 we received the Privacy Mark certification from the Japan Information Processing Development Corporation as a business operator that has established a structure for formulating appropriate measures to protect personal information. As illustrated by these measures, the SBI Group is working to maintain and enhance the level of security for protecting personal information.

(6)

Business Reorganization

As a Strategic Business Innovator, one of the SBI Groups basic policies is to perpetuate Self Evolution. In line with this policy, in September 2005 the Company sold all its shares in ACE Securities Co., Ltd. and entered into a business and capital alliance with ZEPHYR Co., Ltd. In March 2006, the Company merged the operations of SBI Partners Co., Ltd. and FINANCE ALL CORPORATION, with SBI Holdings as the successor company, while converting SBI Securities Co., Ltd. into a wholly owned subsidiary. In the future as well, the SBI Group will actively promote the expansion of its business content, which includes carrying out M&A activities in businesses that will provide synergies with the Groups core businesses. Nevertheless, despite sufficient prior investment analysis and detailed investigations, there is a possibility that this business reorganization and expansion in the scope of business could have unanticipated effects and have an impact on the SBI Groups business results. In undertaking the fund business, prior to the completion of the fund formation, there are instances in which the SBI Group establishes special purpose entities and temporarily invests in its own funds 105

to make advanced acquisitions under favorable conditions. Taking into consideration the degree of influence of such factors as our share of investment and degree of control, we decide on a case-by-case basis whether the aforementioned special purpose entities will be subsidiaries or affiliated companies. However, the establishment of fixed rules based on accounting practices or changes in the SBI Groups accounting procedures could result in a change in the Groups scope of consolidation, which in turn could have an impact on the SBI Groups financial condition and business results.

(7)

Entering New Businesses

Based on the management principle of Aiming to be a New Industry Creator, the SBI Group is proactively creating and cultivating core industries of the 21st century. During the fiscal year ended March 31, 2006, the SBI Group entered into several new businesses, which included forming a capital and business alliance with The Sumitomo Trust & Banking Co., Ltd. for the purpose of engaging in the Internet banking business and establishing SBI Card Co., Ltd. as a wholly owned subsidiary to carry out credit card and related businesses. Nevertheless, the inability of new businesses to attain initially forecast targets or the failure to achieve sufficient future profits commensurate with initial investments could have an adverse impact on the SBI Groups business results. There is also the possibility that these new businesses could become subject to new laws or placed under the guidance of oversight authorities, in which conflict with such laws and guidance and any subsequent punishment could impede the performance of these businesses.

(8)

Reliance on Key Personnel

The SBI Group relies on a management team with strong leadership capabilities, beginning with Representative Director and CEO Yoshitaka Kitao. In the event that the current management team does not remain in place and results in the inability to manage the Groups business activities, this could have an adverse impact on the SBI Groups business results.

106

107

PUNJAB NATIONAL BANK

Punjab National Bank is one of the leading public sector commercial bank in India, offering banking products and services to corporate and commercial, retail and agricultural customers. The bank started its operations in 1895 and since then have grown to become Indias third largest bank in terms of assets and second largest bank in terms of number of branches. Although the bank began its operations in the Agriculturally rich areas of Northern India, it has expanded its operations to provide products and services to over 35 million customers across India through over 4,000 branches. Its banking operations for corporate and commercial customers include a range of products and services for large corporate customers as well as for small and middle market businesses and government entities. The bank caters to the financing needs of the Agricultural sector and have created innovative financing products for farmers. It also provide significant financing to other priority sectors including small scale industries. Bank offers a wide range of retail credit products including home loans, personal Loans and automobile loans. Through our subsidiaries and joint ventures, PNB deals in Indian government securities and provide housing finance and asset management services. Through its treasury operations, it manages balance sheet, including the maintenance of required regulatory reserves, and seek to maximize profits from trading portfolio by taking advantage of market opportunities. Since 1969, when PNB became a public sector bank, the bank has managed to continue to grow its business while maintaining a strong balance sheet. As of September 30, 2006, our total deposits represented 85.9% of our total liabilities. On average, interest free demand deposits and low interest savings deposits represented 43.8% of these deposits in the first six months of fiscal 2005. PNB intends to maintain its position as a cost efficient and customer friendly institution that provides comprehensive financial and related services. We seek to achieve this by continuing to adopt technology which will integrate our extensive branch network. We intend to grow by cross-selling various financial products and services to our customers 108

and by expanding geographically in India and internationally. We are committed to excellence in serving the public and also maintaining high standards of corporate responsibility. In line with our philosophy of aiding Indias development we have opened branches in many rural areas.

BUSINESS STRATEGY
The goal is to further strengthen the position as one of Indias premier commercial banks and to increase the profitability by providing a comprehensive range of products and services and superior customer service. PNBS business strategy emphasizes the following elements:

Expand our business as the Indian economy grows by using our extensive domestic branch network to deliver high quality service that is tailored to the needs of our customers.

The Indian economy is currently experiencing a high rate of growth. The consequent increase in the size and incomes of the middle and upper-income classes has resulted in significant expansion in Indias banking and financial services industry. We believe that we can benefit from the growth of the Indian economy and increase our market share by continuing to emphasize high quality service through our extensive network of over 4,000 branches and our comprehensive product offerings which are tailored to our customers. To this end, we intend to continue to expand and at the same time restructure and rationalize our branch network to make our services more efficient. We also have introduced specialized branches that cater to the specific needs of various categories of customers. We intend to continue to implement these measures so as to ensure that we have one of the largest, as well as one of the most efficient, delivery networks in India.

109

Punjab National Bank (PNB) is the second largest PUBLIC SECTOR UNDERTAKING bank in India with a dominant presence in north India. With its presence virtually in all the important centers of the country, Punjab National Bank offers a wide variety of banking services, which include: Corporate and personal banking, Industrial finance, Agricultural finance, Financing of trade and international banking.

Among the clients of the Bank are Indian conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies. The large presence and vast resource base have helped the Bank to build strong links with trade and industry.

The bank operates through a branch network of 4,022 branches and an ATM network of 404. The bank came out with its IPO in April 2002. The bank recently formed a joint venture with Principal AMC to form the PNB Principal AMC.

At the same time, the bank has been conscious of its social responsibilities by financing agriculture and allied activities and small-scale industries (SSI). Considering the importance of small-scale industries bank has established 31 specialized branches to finance exclusively such industries.

Strong correspondent banking relationship which Punjab National Bank maintains with over 200 leading international banks all over the world enhances its capabilities to handle transactions worldwide. Besides, bank has Rupee Drawing Arrangements with 15 exchange companies in the Gulf and one in Singapore. Bank is a member of the SWIFT and over 150 branches of the bank are connected through its computer-based terminal at Mumbai. With its state-of-art dealing rooms and well-trained dealers, the bank offers efficient forex dealing operations in India. 110

The bank has been focusing on expanding its operations outside India and has identified some of the emerging economies which offer large business potential. Bank has set up representative offices at Almaty: Kazakhistan, Shanghai: China and in London. Besides, Bank has opened a full-fledged Branch in Kabul, Afghanistan.

Keeping in tune with changing times and to provide its customers more efficient and speedy service, the Bank has taken major initiative in the field of computerization. All the Branches of the Bank have been computerized. The Bank has also launched aggressively the concept of "Any Time, Any Where Banking" through the introduction of Centralized Banking Solution (CBS) and over 1100 offices have already been brought under its ambit.

PNB also offers Internet Banking services in the country for Corporate as well as individuals. Internet Banking services are available through all Branches of the Bank networked under CBS. Providing 24 hours, 365 days banking right from the PC of the user, Internet Banking offers world class banking facilities like anytime, anywhere access to account, complete details of transactions, and statement of account, online information of deposits, loans overdraft account etc.

PNB has recently introduced Online Payment Facility for railway reservation through IRCTC Payment Gateway Project and Online Utility Bill Payment Services which allows Internet Banking account holders to pay their telephone, mobile, electricity, insurance and other bills anytime from anywhere from their desktop.

Another step taken by PNB in meeting the changing aspirations of its clientele is the launch of its Debit card, which is also an ATM card. It enables the cardholder to buy goods and services at over 99270 merchant establishments across the country.

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RATIOS OF PUNJAB NATIONAL BANK

VARIOUS RATIOS Per share ratios Adjusted EPS (Rs) Adjusted cash EPS (Rs) Reported EPS (Rs) Reported cash EPS (Rs) Dividend per share Operating profit per share (Rs) Book value (excl rev res) per share (Rs) Book value (incl rev res) per share (Rs.) Net operating income per share (Rs) Free reserves per share (Rs) Profitability ratios Operating margin (%) Gross profit margin (%) Net profit margin (%) Adjusted cash margin (%) Adjusted return on net worth (%) Reported return on net worth (%) Return on long term funds (%) Leverage ratios Long term debt / Equity Total debt/equity 13.79 13.19 13.14 18.74 20.47 19.41 17.80 12.53 14.10 15.17 15.18 80.76 18.35 16.44 14.50 16.35 15.83 15.86 74.57 22.50 20.61 13.84 15.64 17.95 17.96 21.13 19.24 11.45 13.32 23.63 23.63 16.56 15.06 9.79 11.28 22.73 22.74 149.71 48.82 55.00 48.84 55.02 10.00 74.53 45.56 51.48 45.65 51.57 6.00 57.00 44.70 50.52 44.72 50.54 3.00 69.32 41.78 48.62 41.79 48.63 4.00 76.61 31.73 36.59 31.74 36.61 3.50 53.42 139.59 152.01 322.40 4.20 Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03

321.65 287.79 248.93 176.81 330.97 297.38 258.84 188.91 383.89 310.53 308.04 362.50 64.29 69.61 63.79 4.20

81.00 126.29

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Owners fund as % of total source Fixed assets turnover ratio Liquidity ratios Current ratio Current ratio (inc. st loans) Quick ratio Inventory turnover ratio

6.76 5.48

7.04 4.75

7.06 5.28

5.06 5.97

4.65 6.06

0.39 0.02 11.10 -

0.39 0.02 10.69 -

0.25 0.02 5.98 -

0.40 0.03 7.05 -

0.52 0.03 8.72 -

Interpretation:
1. Dividend per share: The ratio has shown a tremendous rise in its dividends from Rs. 3.00 in March 2003 to Rs. 10.00 in March 2007. this shows that the investor is likely to get better returns if they invest their funds in this banks shares. 2. 3. EPS: EPS also show an upward trend, which indicates that the bank share are good for the long term investors, who are likely to get good returns in future. Total Debt/Equity Ratio: A declining trend can be seen in the debt/equity ratio from March 2003 to March 2007, which indicates that the bank is using more of the equity funds for financing purposes.

113

SHARE PRICES OF PUNJAB NATIONAL BANK

Interpretation:
The share prices of the bank shows a long term upward trend, which indicates that it is good for the investors to invest their funds in the shares of this bank.

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KEY INVESTMENT POINTS

Strong Fundamentals Strong technology focus -To leverage on technology and franchise to maximize opportunities for cross-selling. Strong experience in managing take overs - PNB has taken over 7 banks so far Large Pan-India network Ranks among the stronger public sector banks, with one of the highest Net Interest Margin (NIM) and high share of CASA. Bank prepared to conform to Basel II norms FY 2008 also to witness strong economic growth in India; - To benefit PNB because of the wide reach and customer base.

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_______________________ _ CONCLUSION
116

117

CONCLUSION
The level of economic activity has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to grow rapidly and viceversa. When the level of the economic activity is low, stock prices are low, and when the level of economic activity is high, stock prices are high reflecting the prosperous outlook for sales and profits of the firms. Today, corporates have an array of financial instruments at their disposal and also have access to global capital markets. Besides, the changes mindset of Indian corporates in looking to grow inorganically would also bring in improved performances. Since the India growth story is intact for the long term, investors should not resort to panic selling. They should not get swayed by the short-term movements and should use every opportunity on the downside to average their acquisition costs. Thus, every fall in price should be viewed as an opportunity to buy. Clearly, this is not the market for the short-term investor, but a paradise for those investing with a two-year horizon.

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_______________________ _ RECOMMENDATIONS
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Recommendations
Although at the current moment the stock market is facing a volatility situation , yet the economy is expected to gain its momentum soon and markets are expected to revive the earlier growth figures. If the June quarter results continue to be good, the markets might revive the earlier positive sentiments. Thus, the three key parameters that the market will look out for is news on global liquidity, news on domestic interest rates and news on domestic earnings growth outlook for various companies. The corporate performance of the past few years has been good and, in many cases, earnings growth has exceeded analysts expectations. This has made analysts expect an extrapolation of the past growth rates into the future. However, in the changed environment of higher interest rates, the growth rates of earnings may not be able to keep up with the past, given the higher base and high expectations. Thus, our sense is that expectations will have to be moderated and companies will continue to grow, but possibly closer to their respective long-term median growth trajectories. It is a question that to what extent would the interest rates impact corporate earnings growth? Though the financial leverage is on the rise, debt/equity ratio of Indian corporates, at around 0.5:1, is reasonable and well within the accepted norms, Indias growth story is based on volume more than anything else. There are certain companies which can get impacted negatively, due to higher debt and consequently higher finance charges. However, if interest rates continue to rise, going forward, earnings across corprates could get adversely impacted. Thus, if there will not be any hike in CRR, Repo Rate and the interest rate then the market of the banks may go up. Although the reserve bank of India have decided to hike the cash reserve ratio by 50 basis points in order to control the inflation. 120

This step taken by the bank will result in sucking the liquidity from the banks and the markets, which would in turn effect the growth of the banking sector. Today, corporates have an array of financial instruments at their disposal and also have access to global capital markets. Besides, the changes mindset of Indian corporates in looking to grow inorganically would also bring in improved performances. Since the India growth story is intact for the long term, investors should not resort to panic selling. They should not get swayed by the short-term movements and should use every opportunity on the downside to average their acquisition costs. Thus, every fall in price should be viewed as an opportunity to buy. Clearly, this is not the market for the short-term investor, but a paradise for those investing with a two-year horizon.

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ANNEXURES

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REFERENCES
Books and magazines

Investment Analysis and Portfolio Management by Prassana Chandra. India Bankers Journal Business research by ICFAI Publication. C.R. Kothari, Research Methodology Business today magazine

Internet www.google.co.in www.investopedia.com www.rbi.org.in www.indiainfoline.com www.icicidirect.com www.sbi.com www.pnbindia.com www.icici.com www.hdfc.com

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