A project report

on
A study on Equity Analysis
at
India Bulls.
Submitted in partial fulfillment of the
Requirements for the award of the Degree
of
MASTER OF BUSINESS ADMINISTRATION

Submitted By
D.Mounika
14BK1E0012

Under the Guidance of

Mr. K.V.R.Satya kumar
HOD & Assistant Professor
DEPARTMENT OF BUSINESS ADMINISTRATION
ST PETERS ENGINEERING COLLEGE
(Affiliated to Jawaharlal Nehru Technological University Hyderabad)
Hyderabad
2014 2016

CHAPTER I
INTRODUCTION

INTRODUCTION
India is a developing country. Nowadays many people are interested to
invest in financial markets especially on equities to get high returns, and to
save tax in honest way. Equities are playing a major role in contribution
of capital to the business from the beginning. Since the introduction
of shares concept, large numbers of investors are showing interest to invest
in stock market. In an industry plagued with skepticism and a stock market
increasingly difficult to predict t and contend with, if one looks hard
enough there may still be a genuine aid for the Day Trader and Short
Term Investor.
The price of a security represents a consensus. It is the price at which
one person agrees to buy and another agrees to sell. The price at
which an investor is will ing to buy or sell depends primarily on his
expectations. If he expects the security's price to rise, he will buy
it; if the investor expects the price to fall, he will sell it. These simple
statements are the cause of a major challenge in forecasting security prices,
because they refer to human e x p e c t a t i o n s .
As
are

weall

neither

know

fi r s t h a n d ,

humans

expectations

e a s i l y quantifi able nor predictable. If prices are

based on investor expectations, then knowingwhat a security

should sell for (i.e., fundamental analysis) becomes less important
thanknowin g what other investors expect it to sell for. That's not
to say that knowing what a security should sell for isn't important--it is.
But there is usually a fairly strong consensusof a stock's future earnings that
the average investor cannot disproveFundamental analysis and technical
analysis can co-exist in peace and complement eacho t h e r. S i n c e a l l t h e
in v e s t ors in t h e s t oc k ma rke t w a n t t o ma ke t h e m a x im u m

p r o fi t s possible, they just cannot afford to ignore either fundamental or

technical analysis

LITERATURE
REVIEW

SECURITY ANALYSIS

Investment success is pretty much a matter of careful selection and timing of stock purchases
coupled with perfect matching to an individuals risk tolerance. In order to carry out selection,
timing and matching actions an investor must conduct deep security analysis.
Investors purchase equity shares with two basic objectives;
1.

To make capital profits by selling shares at higher prices.

2.

To earn dividend income.

These two factors are affected by a host of factors. An investor has to carefully understand and
analyze all these factors. There are basically two approaches to study security prices and
valuation i.e. fundamental analysis and technical analysis

The value of common stock is determined in large measure by the performance of the firm that
issued the stock. If the company is healthy and can demonstrate strength and growth, the value of
the stock will increase. When values increase then prices follow and returns on an investment
will increase. However, just to keep the savvy investor on their toes, the mix is complicated by
the risk factors involved. Fundamental analysis examines all the dimensions of risk exposure and
the probabilities of return, and merges them with broader economic analysis and greater industry
analysis to formulate the valuation of a stock.
FUNDAMENTAL ANALYSIS

Fundamental analysis is a method of forecasting the future price movements of a financial

instrument based on economic, political, environmental and other relevant factors and statistics
that will affect the basic supply and demand of whatever underlies the financial instrument. It is
the study of economic, industry and company conditions in an effort to determine the value of a
companys stock. Fundamental analysis typically focuses on key statistics in companys financial
statements to determine if the stock price is correctly valued. The term simply refers to the
analysis of the economic well-being of a financial entity as opposed to only its price movements.

Fundamental analysis is the cornerstone of investing. The basic philosophy underlying the
fundamental analysis is that if an investor invests re.1 in buying a share of a company, how much
expected returns from this investment he has.

The fundamental analysis is to appraise the intrinsic value of a security. It insists that no one
should purchase or sell a share on the basis of tips and rumors. The fundamental approach calls
upon the investors to make his buy or sell decision on the basis of a detailed analysis of the
information about the company, about the industry, and the economy. It is also known as topdown approach. This approach attempts to study the economic scenario, industry position and
the company expectations and is also known as economic-industry-company approach (EIC
approach).
Thus the EIC approach involves three steps:
1.

Economic analysis

2.

Industry analysis

3.

Company analysis

1. 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 show rapid growth and vice versa. When the level of
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 macro economic environment is essential to understand the behavior of the stock
prices.
The commonly analyzed macro economic factors are as follows:
Gross Domestic Product (GDP): GDP indicates the rate of growth of the economy. It represents
the aggregate value of the goods and services produced in the economy. It consists of personal
consumption expenditure, gross private domestic investment and government expenditure on
goods and services and net exports of goods and services. The growth rate of economy points out
the prospects for the industrial sector and the return investors can expect from investment in
shares. The higher growth rate is more favorable to the stock market.

Savings and investment: It is obvious that growth requires investment which in turn requires
substantial amount of domestic savings. Stock market is a channel through which the savings are
made available to the corporate bodies. Savings are distributed over various assets like equity

shares, deposits, mutual funds, real estate and bullion. The savings and investment patterns of the
public affect the stock to a great extent.

Inflation: Along with the growth of GDP, if the inflation rate also increases, then the real growth
would be very little. The effects of inflation on capital markets are numerous. An increase in the
expected rate of inflation is expected to cause a nominal rise in interest rates. Also, it increases
uncertainty of future business and investment decisions. As inflation increases, it results in extra
costs to businesses, thereby squeezing their profit margins and leading to real declines in
profitability.

Interest rates: The interest rate affects the cost of financing to the firms. A decrease in interest
rate implies lower cost of finance for firms and more profitability. More money is available at a
lower interest rate for the brokers who are doing business with borrowed money. Availability of
cheap funds encourages speculation and rise in the price of shares.

Tax structure: Every year in March, the business community eagerly awaits the Governments
announcement regarding the tax policy. Concessions and incentives given to a certain industry
encourage investment in that particular industry. Tax reliefs given to savings encourage savings.
The type of tax exemption has impact on the profitability of the industries.

Infrastructure facilities: Infrastructure facilities are essential for the growth of industrial and
agricultural sector. A wide network of communication system is a must for the growth of the
economy. Regular supply of power without any power cut would

boost the production. Banking and financial sectors also should be sound enough to provide
adequate support to the industry. Good infrastructure facilities affect the stock market favorably.

2. INDUSTRY ANALYSIS

An industry is a group of firms that have similar technological structure of production and
produce similar products and Industry analysis is a type of business research that focuses on the
status of an industry or an industrial sector (a broad industry classification, like
"manufacturing"). Irrespective of specific economic situations, some industries might be
expected to perform better, and share prices in these industries may not decline as much as in
other industries. This identification of economic and industry specific factors influencing share
prices will help investors to identify the shares that fit individual expectations

Industry Life Cycle: The industry life cycle theory is generally attributed to Julius Grodensky.
The life cycle of the industry is separated into four well defined stages.

Pioneering stage: The prospective demand for the product is promising in this stage and
the technology of the product is low. The demand for the product attracts many producers
to produce the particular product. There would be severe competition and only fittest
companies survive this stage. The producers try to develop brand name, differentiate the
product and create a product image. In this situation, it is difficult to select companies for
investment because the survival rate is unknown.

Rapid growth stage: This stage starts with the appearance of surviving firms from the
pioneering stage. The companies that have withstood the competition grow strongly in
market share and financial performance. The technology of the production would have
improved resulting in low cost of production and good quality products. The companies
have stable growth rate in this stage and they declare dividend to the shareholders. It is
advisable to invest in the shares of these companies.

Maturity and stabilization stage: the growth rate tends to moderate and the rate of
growth would be more or less equal to the industrial growth rate or the gross domestic
product growth rate. Symptoms of obsolescence may appear in the technology. To keep

going, technological innovations in the production process and products should be

introduced. The investors have to closely monitor the events that take place in the
maturity stage of the industry.

Decline stage: demand for the particular product and the earnings of the companies in the
industry decline. It is better to avoid investing in the shares of the low growth industry
even in the boom period. Investment in the shares of these types of companies leads to
erosion of capital.

Growth of the industry: The historical performance of the industry in terms of growth and
profitability should be analyzed. The past variability in return and growth in reaction to macro
economic factors provide an insight into the future.

Nature of competition: Nature of competition is an essential factor that determines the demand
for the particular product, its profitability and the price of the concerned company scrips. The
companies' ability to withstand the local as well as the multinational competition counts much. If
too many firms are present in the organized sector, the competition would be severe. The
competition would lead to a decline in the price of the product. The investor before investing in
the scrip of a company should analyze the market share of the particular company's product and
should compare it with the top five companies.

SWOT analysis: SWOT analysis represents the strength, weakness, opportunity and threat for
an industry. Every investor should carry out a SWOT analysis for the chosen industry. Take for
instance, increase in demand for the industrys product becomes its strength, presence of
numerous players in the market, i.e. competition becomes the threat to a particular company. The
progress in R & D in that industry is an opportunity and entry of multinationals in the industry is
a threat. In this way the factors are to be arranged and analyzed.

3. COMPANY ANALYSIS
In the company analysis the investor assimilates the several bits of information related to the
company and evaluates the present and future values of the stock. The risk and return associated
with the purchase of the stock is analyzed to take better investment decisions. The present and
future values are affected by a number of factors.

Competitive edge of the company: Major industries in India are composed of hundreds of
individual companies. Though the number of companies is large, only few companies control the
major market share. The competitiveness of the company can be studied with the help of the
following;

Market share: The market share of the annual sales helps to determine a companys
relative competitive position within the industry. If the market share is high, the company
would be able to meet the competition successfully. The companies in the market should
be compared with like product groups otherwise, the results will be misleading.

Growth of sales: The rapid growth in sales would keep the shareholder in a better
position than one with stagnant growth rate. Investors generally prefer size and growth in
sales because the larger size companies may be able to withstand the business cycle
rather than the company of smaller size.

Stability of sales: If a firm has stable sales revenue, it will have more stable earnings. The
fall in the market share indicates the declining trend of company, even if the sales are
stable. Hence the stability of sales should be compared with its market share and the
competitors market share.

Earnings of the company: Sales alone do not increase the earnings but the costs and expenses
of the company also influence the earnings. Further, earnings do not always increase with
increase in sales. The companys sales might have increased but its earnings per share may
decline due to rise in costs. Hence, the investor should not only depend on the sales, but should
analyze the earnings of the company.

Financial analysis: The best source of financial information about a company is its own
financial statements. This is a primary source of information for evaluating the investment
prospects in the particular companys stock. Financial statement analysis is the study of a
companys financial statement from various viewpoints. The statement gives the historical and
current information about the companys operations. Historical financial statement helps to
predict the future and the current information aids to analyze the present status of the company.
The two main statements used in the analysis are Balance sheet and Profit and Loss Account.

The balance sheet is one of the financial statements that companies prepare every year for their
shareholders. It is like a financial snapshot, the company's financial situation at a moment in
time. It is prepared at the year end, listing the company's current assets and liabilities. It helps to
study the capital structure of the company. It is better for the investor to avoid a company with
excessive debt component in its capital structure. From the balance sheet, liquidity position of
the company can also be assessed with the information on current assets and current liabilities.

Ratio analysis: Ratio is a relationship between two figures expressed mathematically. Financial
ratios provide numerical relationship between two relevant financial data. Financial ratios are
calculated from the balance sheet and profit and loss account. The relationship can be either
expressed as a percent or as a quotient. Ratios summarize the data for easy understanding,
comparison and interpretations.

Ratios for investment purposes can be classified into profitability ratios, turnover ratios, and
leverage ratios. Profitability ratios are the most popular ratios since investors prefer to measure
the present profit performance and use this information to forecast the future strength of the
company. The most often used profitability ratios are return on assets, price earnings multiplier,
price to book value, price to cash flow, and price to sales, dividend yield, return on equity,
present value of cash flows, and profit margins.

a) Return on Assets (ROA)

ROA is computed as the product of the net profit margin and the total asset turnover ratios.
ROA = (Net Profit/Total income) x (Total income/Total Assets)

This ratio indicates the firm's strategic success. Companies can have one of two strategies: cost
leadership, or product differentiation. ROA should be rising or keeping pace with the company's
competitors if the company is successfully pursuing either of these strategies, but how ROA rises
will depend on the company's strategy. ROA should rise with a successful cost leadership
strategy because the companys increasing operating efficiency. An example is an increasing,
total asset, turnover ratio as the company expands into new markets, increasing its market share.
The company may achieve leadership by using its assets more efficiently. With a successful
product differentiation strategy, ROA will rise because of a rising profit margin.

b) Return on Investment (ROI)

ROI is the return on capital invested in business, i.e., if an investment Rs 1 crore in men,
machines, land and material is made to generate Rs. 25 lakhs of net profit, then the ROI is 25%.
The computation of return on investment is as follows:

Return on Investment (ROI) = (Net profit/Equity investments) x 100

As this ratio reveals how well the resources of a firm are being used, higher the ratio, better are
the results. The return on shareholders investment should be compared with the return of other
similar firms in the same industry. The inert-firm comparison of this ratio determines whether the

investments in the firm are attractive or not as the investors would like to invest only where the
return is higher.

c) Return on Equity
Return on equity measures how much an equity shareholder's investment is actually earning. The
return on equity tells the investor how much the invested rupee is earning from the company. The
higher the number, the better is the performance of the company and suggests the usefulness of
the projects the company has invested in.
The computation of return on equity is as follows:

Return on equity = (Net profit to owners/value of the specific owner's

Contribution to the business) x 100

The ratio is more meaningful to the equity shareholders who are invested to know profits earned
by the company and those profits which can be made available to pay dividend to them.

d) Earnings per Share (EPS)

This ratio determines what the company is earning for every share. For many investors, earnings
are the most important tool. EPS is calculated by dividing the earnings (net profit) by the total
number of equity shares.
The computation of EPS is as follows:

Earnings per share = Net profit/Number of shares outstanding

The EPS is a good measure of profitability and when compared with EPS of similar other
companies, it gives a view of the comparative earnings or earnings power of a firm. EPS
calculated for a number of years indicates whether or not earning power of the company has
increased.

e) Dividend per Share (DPS)

The extent of payment of dividend to the shareholders is measured in the form of dividend per
share. The dividend per share gives the amount of cash flow from the company to the owners and
is calculated as follows:

Dividend per share = Total dividend payment / Number of shares outstanding

The payment of dividend can have several interpretations to the shareholder. The distribution of
dividend could be thought of as the distribution of excess profits/abnormal profits by the
company. On the other hand, it could also be negatively interpreted as lack of investment
opportunities. In all, dividend payout gives the extent of inflows to the shareholders from the
company.

f) Dividend Payout Ratio

From the profits of each company a cash flow called dividend is distributed among its
shareholders. This is the continuous stream of cash flow to the owners of shares, apart from the
price differentials (capital gains) in the market. The return to the shareholders, in the form of
dividend, out of the company's profit is measured through the payout ratio. The payout ratio is
computed as follows:

Payout Ratio = (Dividend per share / Earnings per share) * 100

The percentage of payout ratio can also be used to compute the percentage of retained earnings.
The profits available for distribution are either paid as dividends or retained internally for
business growth opportunities. Hence, when dividends are not declared, the entire profit is
ploughed back into the business for its future investments.

g) Dividend Yield
Dividend yield is computed by relating the dividend per share to the market price of the share.
The market place provides opportunities for the investor to buy the company's share at any point
of time. The price at which the share has been bought from the market is the actual cost of the
investment to the shareholder. The market price is to be taken as the cum-dividend price.
Dividend yield relates the actual cost to the cash flows received from the company. The
computation of dividend yield is as follows

Dividend yield = (Dividend per share / Market price per share) * 100

High dividend yield ratios are usually interpreted as undervalued companies in the market. The
market price is a measure of future discounted values, while the dividend per share is the present
return from the investment. Hence, a high dividend yield implies that the share has been under
priced in the market. On the other hand a low dividend yield need not be interpreted as
overvaluation of shares. A company that does not pay out dividends will not have a dividend
yield and the real measure of the market price will be in terms of earnings per share and not
through the dividend payments.

h) Price/Earnings Ratio (P/E)

The P/E multiplier or the price earnings ratio relates the current market price of the share to the
earnings per share. This is computed as follows:

Price/earnings ratio = Current market price / Earnings per share

This ratio is calculated to make an estimate of appreciation in the value of a share of a company
and is widely used by investors to decide whether or not to buy shares in a particular company.
Many investors prefer to buy the company's shares at a low P/E ratio since the general
interpretation is that the market is undervaluing the share and there will be a correction in the
market price sooner or later. A very high P/E ratio on the other hand implies that the company's
shares are overvalued and the investor can benefit by selling the shares at this high market price.

i) Debt-to-Equity Ratio
Debt-Equity ratio is used to measure the claims of outsiders and the owners against the firms
assets.
Debt-to-equity ratio = Outsiders Funds / Shareholders Funds

The debt-equity ratio is calculated to measure the extent to which debt financing has been used in
a business. It indicates the proportionate claims of owners and the outsiders against the firms
assets. The purpose is to get an idea of the cushion available to outsiders on the liquidation of the
firm.

Research Gap:
Investment decisions are influenced by various motives. Some people invest in a business to
acquire control and enjoy the prestige associated with it. Some people invest in expensive yachts
and famous villas to display their wealth. Most investors however are largely guided by the
pecuniary motive of earning a return on their investment.
Return is the primary motivating force that drives investment. It represents the reward for
undertaking investment. Since the game of investing is about returns (after allowing for risk),
measurement of realized (historical) returns is necessary to access how well the investment
manager has done. In addition, historical returns are often used as an important input in
estimating future (prospective) returns.

Objectives

1. To calculate the risk and return of a particular stock to estimate weather the company is reliable
for the investor to invest in the shares of the company.
2. To analyze the various risks and returns patterns in shares.
3. To know the risk involved with invests in equities.
4. To analyze which is the best performance
5. To study the investors reference in investing in Stocks.

Hypothesis
Hypothesis 1
The null hypothesis of the study assumes,
H0 : There is no significant impact of Equity analysis while investor investing in a
security,
H1: There is a significant impact of Equity analysis while investor investing in a
security,.
Hypothesis 2
H0: The investment performance of Equity are not done by the hedging,
H1: The investment performance of Equity are done by the hedging

Hypothesis 3
H0: The risk and return of the Equity are not considered while investors making
decisions on their investment security,
H1: The risk and return of the Equity are considered while investors making
decisions on their investment

Hypothesis 4
H0: The risk and return of the Equity will not have major impact on the securities
H1: The risk and return of the Equity will have major impact on the securities.

Hypothesis 5
H0: The sample Equity may not influence the whole industry,

H1: The sample Equity will influence the whole industry

Scope of the study:

The study for risk return analysis is carried out by taking 10 different companies of 5 different sectors viz.
IT , Textile , Telecommunications , Parma and Petroleum.

The present project work has

been undertaken to provide information regarding risk return on equities. The following are the
limitations of the study.

The study is based on the secondary data which is available from various websites.
The study is limited to only ten securities viz Wipro, HCL, Tata Motors, Maruthi Suzuki, Bharti
Airtel, Reliance Communication, Biocon, Cipla, Gail, ONGC
The time taken to undertaken the project work is very short; hence only ten securities were
chosen for the study.

Period of the study

The duration of the project is 45days only

REASEARCH METHODOLOGY

Research Design
The present study is based on Secondary data. The various source of secondary data include

Internet

Share prices of different BSE Sensex companies.

Information provide by networth stock broking

Magazines