FUNDAMENTAL ANALYSIS ON AXIS

BANK, HDFC BANK, ICICI BANK

SUBMITTED BY

K. Krishna Shankar
Roll-no-B2-25

UNDER THE GUIDANCE OF

Dr. A. Bhavani, Assistant Professor

SIVA SIVANI INSTITUTE OF MANAGEMENT

SECUNDERABAD
(2008-10)

1
 DECLARATION

I, K.KRISHNA SHANKAR, declare that this project report titled

“FUNDAMENTAL ANALYSIS ON AXIS BANK, HDFC BANK, ICICI BANK.” is an
original work done and submitted by me towards partial fulfillment of my Post Graduate
Diploma in Management (BIFAAS) Batch 2008-10, under the guidance of my corporate
guide, Mr. SATISH KUMAR MANDAVA and my faculty guide, DR. A.BHAVANI.

Place: HYDRABAD, K.KRISHNA SHANKAR,

Signature
Date: JUNE 15, 2009.

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 PREFACE

My modest aim in attempting this project “A Report on FUNDAMENTAL

ANALYSIS ON AXIS BANK, HDFC BANK, ICICI BANK” had been to present the
topic in a way so that it even a common person can gain some knowledge and know the
basic principles of this topic. I have made my honest effort to combine the viewpoint of
the professional and the common person towards this study.

I had tried to get access with every useful material and data available from all the
possible sources. I have explained the concepts and underlying theory of every nook and
corner of banking research and its various parts systematically.

I would like to express my sincere thanks to all those who have directly or in
directly helped me in writing this project.

K.KRISHNA SHANKAR.

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 ACKNOWLDGEMENT

I would like to thank to all people who supported me and were involved in one
way or another in the preparation of this project. With the biggest contribution to this
project, I would like to thank my Corporate Guide, Mr. SATISH KUMAR
MANDAVA. His extraordinary culture and knowledge of the physical and virtual worlds
made easy and inspired me to do this project on “FUNDAMENTAL ANALYSIS ON
AXIS BANK, HDFC BANK, ICICI BANK.”

I would also like to thank to my faculty guide, Ms A.BHAVANI, who taught me

how to complete this project.

I would also like to especially thank to those people whom interviews I had taken
and which helped me to complete my study on this topic. I owe my gratitude to them as
they had given their precious time to me and for my study.

Lastly, I am ever thankful to my family.

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 Chapter-1

INTRODUCTION

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INTRODUCTION ON SECURITIES EXCHANGE

A stock exchange, (formerly a securities exchange) is a corporation or mutual

organization which provides "trading" facilities for stock brokers and traders, to trade
stocks and other securities. Stock exchanges also provide facilities for the issue and
redemption of securities as well as other financial instruments and capital events
including the payment of income and dividends. The securities traded on a stock
exchange include: shares issued by companies, unit trusts, derivatives, pooled investment
products and bonds. To be able to trade a security on a certain stock exchange, it has to
be listed. Usually there is a central location at least for recordkeeping, but trade is less
and less linked to such a physical place, as modern markets are electronic networks,
which gives them advantages of speed and cost of transactions. Trade on an exchange is
by members only. The initial offering of stocks and bonds to investors is by definition
done in the primary market and subsequent trading is done in the secondary market. A
stock exchange is often the most important component of a stock market. Supply and
demand in stock markets is driven by various factors which, as in all free markets, affect
the price of stocks.
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to be off exchange or
over-the-counter. This is the usual way that derivatives and bonds are traded.
Increasingly, stock exchanges are part of a global market for securities.

INTRODUCTION TO THE FUNDAMENTAL ANALYSIS

Fundamental analysis is the examination of the underlying forces that affect the well
being of the economy, industry groups, and companies. As with most analysis, the goal is
to derive a forecast and profit from future price movements. At the company level,
fundamental analysis may involve examination of financial data, management, business
concept and competition. At the industry level, there might be an examination of supply
and demand forces for the products offered. For the national economy, fundamental
analysis might focus on economic data to assess the present and future growth of the
economy. To forecast future stock prices, fundamental analysis combines economic,
industry, and company analysis to derive a stock's current fair value and forecast future
value. If fair value is not equal to the current stock price, fundamental analysts believe
that the stock is either over or under valued and the market price will ultimately gravitate
towards fair value. Fundamentalists do not heed the advice of the random walkers and
believe that markets are weak-form efficient. By believing that prices do not accurately
reflect all available information, fundamental analysts look to capitalize on perceived
price discrepancies.

To a fundamentalist, the market price of a stock tends to move towards its “real value” or
“intrinsic value”. If the “intrinsic/real value” of a stock is above the current market price,
the investor would purchase the stock because he knows that the stock price would rise
and move towards its “intrinsic or real value”. If the intrinsic value of a stock was below
the market price, the investor would sell the stock because he knows that the stock price
is going to fall and come closer to its intrinsic value.

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All this seems simple. Now the next obvious question is how do you find out what the
intrinsic value of a company is? Once you know this, you will be able to compare this
price to the market price of the company and decide whether you want to buy it (or sell it
if you already own that stock).To start finding out the intrinsic value, the fundamentalist
analyzer makes an examination of the current and future overall health of the economy as
a whole. After you analyzed the overall economy, you have to analyze firm you are
interested in. You should analyze factors that give the firm a competitive advantage in its
sector such as management experience, history of performance, growth potential, low
cost producer, brand name etc. Find out as much as possible about the company and their
products.

NEED FOR THE STUDY

The primary motive of buying a share is to sell it subsequently at higher price. In many
cases, dividends are also expected. It depends upon the person who is buying shares,
some people prefer current income in the form of dividend where as others prefer capital
appreciation. From the above statement we can come to conclusion that company
performance has to be analyzed before investing. It is not that easy to analyse to
performance of the company the basic thing that we should do is fundamental analysis
which involves company analysis, industry analysis, and economy analysis.
Consequently, an investor would be interested to know the financial performance,
management decision making, dividend to be paid on the shares in the future as also the
future prices of the shares. These values can only be estimated and not predicted with
certainty. These value are primarily determine by the performance of the company which
in turn is influenced by the performance of the industry to which the company belongs
and the general economic and social political scenario of the country.

The stocks of the company depends to the large extent on firm’s quality of management,
operational effiency, profitability, capital structure, dividend policy thus the investor
must know the present and feature development of the industry as well as the company
while investing .

Objective of the Study:

• To understand the performance of the company of past years and to expect the
future performance of the company.
• To do fundamental analysis for the selected companies.
• To study capital market fluctuations by using fundamental analysis.
• To study to what extent we can rely on fundamentals of a company.
• To analyze the Indian economy

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 CHAPTER-2
INDUSTRY PROFILE

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INDUSTRY PROFILE

The Indian broking industry is one of the oldest trading industries that have been around
even before the establishment of the BSE in 1875. Despite passing through a number of
changes in the post liberalisation period, the industry has found its way towards
sustainable growth.

The product offerings of brokerage firms today go much beyond the traditional trading of
equities. A typical brokerage firm today offers trading in equities and derivatives online,
most probably commodities futures, exchange traded funds, distributes mutual funds and
insurance and also offers personal loans for housing, consumptions and other related
loans, offers portfolio management services, and some even go to the extent of creating
niche services such as a brokerage firm offering art advisory services. In the background
of growing opportunities for Investors to invest in India as also abroad, the range of
products and services will widen further. In the offing will be interesting opportunities
that might arise in the exchange enabled corporate bond trading, soon after its
commencement and futures trading that might be introduced in the near future in the
areas of interest rates and Indian currency.

Indian brokerage industry is highly fragmented. Numerous small firms operate in this
space. Given the growing importance of technology in operations and increasing
emphasis on regulatory compliance, smaller firms might find it constrained to make right
type of investments that will help in business growth and promotion of investor interests.

The way the brokerage industry is run and the manner in which several of them pursued
growth and development attracted foreign financial institutions and investment banks to
buy stakes in domestic brokerage firms, paving the way for stronger brokerage entities
and possible scope for consolidation in the future. Foreign firms picked up stake in some
of the leading brokerage firms, which might lead to creating of greater interest in
investing in brokerage firms by entities in India and abroad.

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 COMPANY PROFILE
About vertex securities:

VERTEX is a premier brokerage house in India on the fast growth track. In the
last one-decade, we have emerged as a powerhouse in the financial services industry. We
started functioning in the stock market in 1993. Over the years, we grew from strength to
strength to become a major player in India's broking services sector.

Today VERTEX is one of the foremost brokerage houses, being a member of

various exchanges in the capital and commodity markets. VERTEX is a member of the
National Stock Exchange of India (NSE), the Bombay Stock Exchange, the National
Multi Commodity Exchange of India Ltd (NMCEIL), the National Commodities
Derivatives Exchange Ltd (NCDEX), and Multi Commodity Exchange of India Ltd
(MCX). VERTEX is a full-fledged depository participant of the National Securities
Depository Ltd.

VERTEX constantly infuses quality into service. We provide our clients full
expertise to play in the market with confidence. They avail full-fledged trading facilities
and services through our nation-wide offices in securities and in commodities. To help
our clients better, we have located our offices in major towns and placed highly qualified
and experienced financial experts to man them. A team of dynamic finance professionals
with decades of experience leads them. These professionals share a common vision not
only to transform the company into a highly professional organization, but also make
their clients earn the maximum from their hard-earned money.

What has made this remarkable growth possible at VERTEX?

• Trust.
• Commitment
• Integrity.

Our transparency, commitment and integrity in all dealings have earned us trust,
which in turn has enabled us to build long term relationships.

Vision:-

VERTEX Securities Limited was born out of a vision to explore the immense
investment opportunities in the Indian financial market, to benefit the investors. The
company is built on the pillars of financial expertise, professionalism, exemplary ethics
and a commitment to provide ultimate customer satisfaction

VERTEX constantly strives to meet the changing market needs and trends.

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We take pride to tell the world that we had a modest beginning. We began as a sub-
brokerage house in the year 1992. Our financial expertise and professionalism coupled
with ethics and a commitment has made VERTEX one of the major players in Indian
financial market.

We cater efficiently to the diverse and complex needs of over 200,000 customers,
most of whom are individual traders, institutions and money managers.

The vision of the VERTEX Group is to be a Financial Super Market. It aims to

provide all types of financial services to its clients at one place to save them from going
from place to place to meet their investment needs.

With the opening up of the Indian economy and the advent of IT enabled trading,
the Indian capital market has become a whole new ball game. From floor trading, the
custom is fast shifting to Internet trading. Equally fast is the role of the financial service
provider, which is being redefined. Earlier, a financial service provider's responsibility
was limited to executing customer's instructions to buy and sell. Now, the whole
operational paradigm has progressively shifted with the opening of more and more
avenues to offer strategic customer supports.

The guiding principles that lead us:

• Serve the clients with the highest level of responsiveness and integrity.

• Place the client's interests and protection of their investments as the top priorities.

• Operate on predefined and constantly updated service standards. Be customer

driven, rather than deal driven.

• Adopt futuristic technology to gather vital information on real time basis to

optimize investor protection and investor returns.

Group of Companies:

Your search ends with us, the VERTEX Group, a leading financial and
investment Service Company in India. From a modest beginning a decade back,
VERTEX is today a power to reckon with in the financial services industry through the
following VERTEX Group of Companies:

• Vertex Securities Ltd

• Vertex Commodities & Finpro (P) Ltd.

VERTEX Securities Limited is a big player in financial market that has put the
brokerage business on a fast growth track over years.
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 VERTEX Commodities & Finpro (P) Ltd is a fast moving company in the commodity
broking business in India.

Over the years, VERTEX has set a new trend in the financial industry. But the bigger
story is with hundreds of Thousands of our clients, who have grown with us.

Management:
VERTEX Board of Directors:

The VERTEX Board is constituted by independent professionals. Its Board of

Directors comprises veterans from the fields of banking, stock broking and other
financial services. Their experience and expertise have helped the company become a
premier broking house in the country.

KUMAR NAIR CHAIRMAN

RANJAN VERGHESE MANAGING DIRECTOR
N.R.ACHAN DIRECTOR
G.K.PREMKUMAR DIRECTOR

Services:

These are the services provided by the vertex securities to their customers.
• Equity trading
• Futures
• Options
• Commodities
• Forex
• IPO’s

Equity trading:
Equity is a share in the ownership of a company. It represents a claim on the
company’s assets and earnings. As you acquire more stock, your ownership stake in the
company increases. The terms share; equity and stock mean the same thing and can be
used interchangeably. Holding a company’s stock means that you are one of the many
owners (shareholders) of a company. In equity trading there will be less risk than in the
futures and options. The equity trading is entirely depended on fundamental analysis and
technical analysis and analysis of the person.

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Futures:
A future, in financial terminology, is a financial contract that obligates the buyer
(seller) to purchase (sell and deliver) financial instruments or physical commodities at a
future date, unless the holder's position is closed prior to expiration. Mutual funds and
large institutions to hedge their positions when the markets are rocky, preventing large
losses in value often use futures. The primary difference between options and futures is
that options provide the holder the right to buy or sell the underlying asset at expiration,
while futures contracts holders are obligated to fulfill the terms of their contract. There
are two types of contracts in future trading.
• Forward contracts
• Futures contract

Forward contracts:

A forward contract is an agreement between two parties to buy or sell an asset

(which can be of any kind) at a pre-agreed future date. Therefore, the trade date and
delivery date are separate. Beside other instruments, such as Options or Futures, it is used
to control and hedge risk.

One party agrees to buy, the other to sell, for a forward price agreed in advance. In a
forward transaction, no actual cash changes hands. If the transaction is collaterised,
exchange of margin will take place according to a pre-agreed rule or schedule. Otherwise,
no asset of any kind will actually change hands until the maturity of the contract.

The forward price of such a contract is commonly contrasted with the spot price, which is
the price at which the asset changes hands (on the spot date, usually the next business
day). The difference between the spot and the forward price is the forward premium or
forward discount. A forward contract is the simplest mode of a derivative transaction. No
cash is exchanged when the contract is entered into.

Futures contract:
A futures contract is a form of forward contract, a contract to buy or sell an asset
of any kind at a pre-agreed future point in time that has been standardized for a wide
range of uses. It is traded on a futures exchange. Futures may also differ from forwards in
terms of margin and delivery requirements.

Options:
An option is a privilege sold by one party to another that offers the buyer the right,
but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during
a certain period of time or on a specific date. Options are extremely versatile securities
that can be used in many different ways. Traders use options to speculate, which are a
relatively risky practice, while hedgers use options to reduce the risk of holding an asset.
These are the two types of options which are traded in the market.

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 • Call Option
• Put Option

Call option:
A call option is a financial contract between two parties. The buyer of the option
has the right but not the obligation to buy an agreed quantity of a particular commodity or
financial instrument from the seller of the option at a certain time for a certain price The
seller assumes the corresponding obligations. "Selling" in this context is not the
supplying of a physical or financial asset (the underlying instrument), rather it is the
granting of the right to buy the underlying, against a fee - the option price or premium.

Exact specifications may differ depending on option style. However, options are traded
on many other financial instruments such as interest rates as well as on physical assets
like gold or crude oil.

Put options:

A put option is a financial contract between two parties. The put allows the buyer
the right but not the obligation to sell a commodity or financial instrument (the
underlying instrument) to the seller of the option at a certain time for a certain price (the
strike price). The seller assumes the corresponding obligations. Note that the seller of the
option undertakes to buy the underlying. In exchange for being granted this option, the
buyer pays.

Commodity:
Commodities are more than what you think they are. Almost everything you see
around is made of what market considers commodity. A commodity could be an article, a
product or material that is bought and sold. It could be any kind of movable property,
except actionable claims, money and securities. Commodity trade forms the backbone of
world economy.

The Indian commodity market is estimated to be around Rs. 11 million, and forms
almost 50 percent of the Indian GDP. It deals with agricultural commodities such as rice,
wheat, groundnut, tea, coffee, jute, rubber, spices and cotton. Besides precious metals
such gold and silver, the commodity market also deals with base metals like iron and
aluminum and energy commodities such as crude oil and coal. The list is long.

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IPOS’:

Initial Public Offering (IPO) is when an unlisted company makes either a fresh
issue of securities or an offer for sale of its existing securities or both for the first time to
the public.

Book Building and Fixed Price Issue are the two types of Initial Public Offerings
(IPOs) through which a corporate can raise money in the capital market.
In a book building public issue the bids are received at different price levels and the
demand for the issue is built up over a period of time. Depending upon the bids received
at different price levels the issue price is ascertained. In a fixed price issue the issue price
is pre ascertained by the issuer.

COMPETITORS:

These are the companies which are existing in the market and competitors to the
vertex securities ltd.
• HDFC
• INDIA BULLS
• SHARE KHAN
• 5 PAISE (India info line)
• MOTILAL OSWAL
• ANGEL TRADE
• USECTRADE
• RELIANCE MONEY
• IDBI PAISA BUILDER
• NET WORTH
• KOTAK SEC
• ICICI DIRECT
• ZEN SECURITES LTD.

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 HIERARCHY OF HEAD OFFICE

HIERARCHY OF STATE LEVEL OFFICES

16
CHAPTER-3

17
 RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

The study consists of economic analysis and company analysis. These areas cannot be
researched through primary resources since the gathering of primary data is time
consuming and costing. I had to restore to the sources of secondary data information to
facilitate quick analysis and decision making it would be useful to collect the data from
such sources like that have already done data analysis and considered them into a primary
Research
and secondary data. Hence the study &is mainly depended on secondary data.
Analysis
The performance of the companies highly depends on its external environment. In
assessing a company’s performance, one needs to have a look at both the internal and
external environment of the organization. The external environment is the economy of
the contrary and the industry in which the firm is actually doing the business. The
fundamental basically talks about this and the study including all these aspects such as
economic, industry and companies analysis .the economy is assessed on the basis of
macroeconomic factors like GDP, inflation, etc. industries are assessed on the basis of
output exports, and their contribution to the economic growth and lastly the companies
were analysis on the basis of some calculations on their financials like ratios, intrinsic
values of shares and performance metrics like economic value added and market value
added.

Market Fundamental
Analysis Analysis

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18
Technical Economy Industry Company
Analysis Analysis Analysis Analysis
METHODS OF DATA COLLECTION

Economic and investment data:

• Monthly abstract of statistics and statistics of production of industry in India are

obtained from Central statistical organization. This provides a good deal of
economic and industrial data useful for projecting the trend and direction of the
economy.
• The economic survey, the explanatory memorandum on the budget if the
government of India need a careful study to access the economic scene.
• Day to day developments published by the financial dailies like economic times,
financial express, business line, business time ,etc and some foreign journals like
wall street journal, London economist, far east economic review, and Indian
journals like business India, fortune India, dalal street, banking updates etc. IMF
news survey, World Bank and IMF quarterly journal etc also contain develops of
economic and financial natures.
• The daily news paper particularly financial papers like economic and political
weekly, business India, data line business, Hindu, business standard, business
today, fortune India contain economic developments.

Market data:

• Stock exchanges daily official list.

• Reports and news letters of investment and consoling firm.

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 • Bombay stock exchange directory.
• National exchange stock directory, money control and other stock broking
companies.

Company data

• Company annual reports and prospectus are the major source of company
specific data.
• The fortnightly journals like capital market, dalal street, and business India etc
contain lots of information on industry and company which are listed in the
stock exchange.
• Credit ratings given by the agencies like ICRA, CRISIL CARE etc will be
considered.

The information can be classified in to various types and impact of each on the corporate
performance varies in both degree and direction. The table below presents the different
classes of information both internal and external.

INTERNAL INFORMATION

Financial Financial Physical Input & their Sales and

Statements Results Operations availability Inventory

EXTERNAL INFORMATION

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 External
Information

Industry,
Economy, Competitors, Govt.policy, Political Intl.factors,
Inflation Market Taxes, factors, Output,
Agriculture share, Exim policy, Stability, Trade,
Banking, etc. Sales, etc. M&C policy, Policies, Mkt.conditio
etc. Parties, etc. ns

TOOLS AND TECHNIQUES USED FOR ANALYSIS

The tools and techniques which are used to study fundamental analysis are:

• Analysis of the economy using macro economic factors such as GDP growth rate,
inflation rate, interest rate etc.
• Analysis of industry using factors like contribution to GDP growth, contribution
to the exports of the country.
• Analysis of the companies using various tools like latest development, financial
statement analysis and ratio analysis of the financial of the companies.
• Various ratios of the financials like balance sheet and profit and loss account of
the company and intrinsic of the shares have been looked at in order to facilitate
decisions up o the investment aspects.
• Economic value added of the financials of the companies has been calculated to
know the performance in the economist’s point of view.

Specific Fundamental Analysis Tools

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These are the most popular tools of fundamental analysis. They focus on earnings,
growth, and value in the market. For convenience, I have broken them into separate
articles. Each article discusses related ratios. There are links in each article to the other
articles and back to this article.

The articles are:

1. Earnings per Share – EPS

2. Price to Earnings Ratio – P/E
3. Projected Earnings Growth – PEG
4. Price to Sales – P/S
5. Price to Book – P/B
6. Dividend Payout Ratio
7. Dividend Yield
8. Book Value
9. Return on Equity

No single number from this list is a magic bullet that will give you a buy or sell
recommendation by itself, however as you begin developing a picture of what you want
in a stock; these numbers will become benchmarks to measure the worth of potential
investments.

INFORMATION NEEDED FOR ANALYSIS

The securities market is a perfect auction market where demand and supply
determines the price. The demand/supply pressures depend up on the available money
and the flow of information. Besides the security analysis and estimate of the intrinsic
value around which the market price revolves, an analysis of the flow of information
is also important.

Relevant information for analysis

World affairs:

International factors, which influence domestic income, output and employment and
for investment in the domestic market by F.F.I., O.C.Bs., etc. Also foreign political
affairs, wars, etc. affect our markets.

Domestic economic and political factors:

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 GDP, Agricultural output, monsoon, money supply, inflation, government’s policies,
taxation, etc. influence the market forces.

Industry information:

Market information, installed capacity, competing units, capacity utilization, market

share of the major units, market leaders, prospects of industry, international demand
for exports, inputs and capital goods abroad, import competing products, labored
problems, government problems towards the industry are all relevant factors to be
considered in investment decisions making.

Company information:

Corporate data, annual report stock, exchange publications, department of company

affairs and their circular, press releases on corporate affairs by government, industry
or association of industries are also relevant for security price analysis.

Security market information:

The credit rating of the companies, data on market trends, security market analysis
and market reports, equity research reports, trade and settlement data, listing
companies and delisting, record dates and book closures, BETA factor, etc. are the
needed information for investment management.

Security price quotation:

Price indices, price & volume data, breadth, daily volatility, range and rate of changes
of these variables, etc. are also needed for technical analysis.

Data on related markets:

Government securities, money markets, forex market, etc are also required as they are
also alternative averages of investment.

Economic value added

• Economic value added is the financial performance measure that comes closer
than any other to capturing the true economic profit of an enterprise. EVA also is
the performance measure directly linked to the creation of share holder wealth
over time. It is calculated by using the following formula
• EVA=Net Operating Profit after Taxes – (capital employed* cost of capital)
• Put more simple, EVA is net operating profit minus an appropriate change for the
opportunity cost of all capital invested in an enterprise. As such, EVA is an
estimate of true “economic” profits, or the amount by which earnings exceed or

23
 fall short of the required minimum rate of return that share holder and lenders
could get by investing in other securities of comparable risk.
• Market value added is calculated for the companies to know the actual market
value added by the company to create share holders wealth.
• Market value added
• The MVA is the difference between the market value of a company and the
contribution by investors, in other words, it is the sum of all equity. The following
is the formula used to calculate the market value added for a company
• MVA=Market Value of Capital- Capital employed
• The higher the MVA, the better it is for the company. A high MVA indicates the
company has created substantial weather for the share holders. A negative MVA
means that the value of the action and investment of management is less than the
value of the capital contributed to the company by the capital market, measuring
wealth or value has been destroyed.

Limitation of the study

• The course of study has been limited towards the published information or the
secondary data. The confidential reports or the internal information of the
company could not be revealed.
• The study is dependent mainly on secondary data.
• The annual reports released by the company may or may not be transformed in
showing the exact details.
• The intrinsic value of the shares cannot be considered as the major source for
taking the investment decisions as the performance of the company in market
depend on various other factors.

24
 CHAPTER-4
INDIAN ECONOMY ANALYSIS

INDIAN ECONOMY ANALYSIS

India economic analysis provides various inputs on economic condition of this south-east
Asian country. It can be done both at a microeconomic as well as a macroeconomic level.
India economic analysis could also be described as being an explanation of various
economic phenomena going on in this country.

In April 2008, industrial sector in India had recorded a growth of 7 percent. However,
this figure is lesser than 11 percent development, which had been achieved in April 2007.
Much of this critical condition could be attributed to an increase in prices of oil.
Measures that have been taken by Reserve Bank of India, like upward revision of repo
rate and CRR, have also contributed to decrease in industrial production.

25
Manufacturing and electric sector have suffered as well in recent times. Their growth
rates have come down too. For manufacturing sector it was 7.5 percent and for electricity
sector, rate of development stood at 1.4 percent in April 2008. This rate is significantly
low when compared to statistics of April 2007, when rates of development for
manufacturing and electricity were 12.4 percent and 8.7 percent respectively.

In case of manufacturing sector much of this slump could be attributed to increase in

input costs like expenses of oil, raw materials, rates of interest and prices of goods and
services. Mining sector has been comparatively better off as it has managed to grow at a
rate of 8 percent in April 2008 compared to 2.6 percent that was achieved in April 2007.

In core infrastructural industries, there has been deceleration as well, but it is still better
off compared to non infrastructural industries in India. Growth in April 2008 has been
around 3.6 percent, which is less than 5.9 percent achieved in April 2007. Industries like
crude oil production, electricity and petroleum refinery have been performing below
expectations but coal, finished steel and cement have performed better than April 2007.

In financial year 2007-08, average inflation in India was around 4.66 percent. This rate
was lower than average inflation of financial year 2006-07. In 2007-08, fiscal high prices
of food items were primary cause behind high rates of inflation.

That high rate of inflation had to be controlled by banning a number of necessary

commodities as well as various financial steps. High prices of oil were responsible for
proportionately high rate of inflation in 2008-09.

The latest snapshots of the India GDP growth rate are as follows

• 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.
• India's economy grew at 9.3% in quarter April-June and it was driven by
manufacturing, construction and services sector and agriculture sector.
• The annual inflation rate was 4.45% for the week ended July 28, 2007
• India's Balance of Payments is expected to remain comfortable.
• Merchandise Exports recorded strong growth
• Manufacturing registered 11.95 growth
• The passenger vehicles sector grew by 11.61% during April-May 2007
• Electricity, gas & water supply performed well and recorded an impressive
growth rate of 8.3%
• Construction growth rate rose to 10.7%
• Trade, hotels, transport and communication registered a growth rate of 12%
• Financing, insurance, real estate and business services recorded an impressive
growth rate of at 11% during the 1st quarter of this fiscal year 2007
• Community, social and personal services maintained a decent growth rate of 7.6%
• The growth rate of agriculture, forestry & fishing' and 'mining & quarrying' are
estimated at 3.8 %, and 3.2 %, respectively during the 1st quarter of 2007-2008

26
 • Exports grew by 18.11% during the 1st quarter of 2007-2008 and the imports
shoot up by 34.30% during the same period
• India's FOREX reserves (excluding Gold and SDRs) stood at $219.75 billion at
the end of July ' 07
• The food sector is estimated to be of US$ 200 billion and it is expected to grow to
$310 billion by 2015 Stocks of food-grains grew by 13.1% to 17.73 million tones.

The productivity growth rate of Indian economy is estimated to be around 8% and it is

expected to sustain until 2020. Moreover, at this rate of GDP growth, India is poised to
become the second largest economy in the world after China. Further, the World Bank
has ranked India as one of the top economic reformers worldwide, in the last decade.
India has simplified business registration, cross-border trade, and payment of taxes, eased
access to credit and strengthened investor's interest. The stupendous growth of Indian
industries especially manufacturing, construction, and services together with bullish stock
market suggests that the recent growth is likely to continue further. The factors like
industrial growth, FIIs and FDIs inflow, Balance-of-payments, merchandise exports,
invisible accounts and Foreign-exchange-reserves had substantial contribution towards
the growth rate of Indian GDP.

The Indian Gross Domestic Product is calculated either by 'cost factor' or 'actual price'
method and thus the statistics of the Indian GDP reflects both the results. The present
status of Indian gross domestic product factor is encouraging and is much higher than the
world's annual average GDP growth of 5.5%. It is estimated that at this rate of GDP
growth, the Indian economy will become the second largest economy after China in the
next 40 to 45 years.

According to the agriculture situation

India is mainly an agricultural country. Agriculture accounts for approximately 33

percent of India's GDP and employs nearly 62 percent of the population. It accounts for
8.56 % of India’s exports. About 43 % of India's geographical area is used for
agricultural activity. In the past, India had to import most of its food. But improved
farming techniques and the using of irrigation and high-yield grains has greatly increased.
In India, since most of the cropped area even now does not have any assured irrigation,
the monsoon assumes a crucial role in influencing agricultural production.

INCREASING PRODUCTION

One of the main challenges facing India was producing enough food for the increasing
population. As not more than the existing land is fit for cultivation, India has to strive to
develop productivity on existing land. Over the past four decades, India more than tripled
its food production. The high yield varieties of wheat and rice in the mid-1960s led to this
dramatic increase. Although 30 percent of this production growth (known as the Green
Revolution) came from expanding farmland area, most of the increase since the late
1970s, has come from increased average yields. In other words, farmers using the new
varieties of grain were growing more food on the same amount of land.

27
India has the world's largest cattle population (193 million), large numbers of sheep and
goats, and more water buffalo and camels than any other country. This has placed heavy
demands on the grazing lands. Both grasslands and forest areas suffer as a result.

Growth in milk and egg production also increased dramatically. Dairy and poultry
enterprises now provide substantially higher financial returns per hectare than crop
farming. Such enterprises create new jobs and bring about health and nutritional
improvements.

According to infrastructure INDUSTRY

Infrastructure Industry in India have been experiencing a rapid growth in its different
sectors with the development of urbanization and increasing involvement of foreign
investments in this field. The Indian government has taken initiatives to develop the
infrastructure sector, with major emphasis on construction, engineering, IT,
entertainment, textiles, food, and utility to name some.

The section of the construction industry of Infrastructure Industry in India reported an

estimated growth of 7.68% year-on-year in 2008. The industry in India is highly
fragmented and has about 300,000 construction companies operating nationwide.

Heavy Engineering Industry is one of the largest segments of Infrastructure Industry

in India. It includes a whole range of industries such as Heavy Electricity Machinery,
Turbines, Generators, Transformers, Switchgears, and Textile Machinery etc. all of
which are essential infrastructure for the development of industrial sector in India. For
proper industrial development the utility commodities like the switchgear and control
gear, MCBs, air circuit breakers, switches, rewire able fuses and HRC fuses with their
respective fuse bases, holders and starters are produced. Construction machinery,
equipment for irrigation projects, diesel engines, tractors, and transport vehicles, cotton
textile and sugar mill machinery are other manufactured objects of great demand of the
Infrastructure Industry.

INDUSTRY GROWTH RATE IN GDP

Industry Growth Rate in India GDP has been impressive in the last few years. The
Growth Rate of the Industry in the India GDP has grown due to sustained manufacturing
activity over the years. This has given a major boost to the Indian economy.

India gross domestic product (GDP) means the market value of all the services and goods
that are manufactured within the territory of the nation during the specified period of
time. The Indian economy is the twelfth biggest in the world for it has the GDP of US$
1.09 trillion in 2007. The country has the second fastest major growing economy in the
whole world for it has the GDP rate of 9.4% in 2007- 2008.

28
The industrial sector is one of the main sectors that contribute to the Indian GDP. The
country ranks fourteenth in the factory output in the world. The industrial sector is made
up of manufacturing, mining and quarrying, and electricity, water supply, and gas sectors.
The industrial sector accounts for around 27.6% of the India GDP and it employs over
27% of the total workforce in the country.

The reasons for the rise of Industry Growth Rate in India GDP
The reasons for the increase of Industry Growth Rate in India GDP are that huge amounts
of investments are being made in this sector and this has helped the industries to grow.
Further the reasons for the rise of the Growth Rate of the Industrial Sector in India are
that the consumption of the industrial goods has increased a great deal in the country,
which in its turn has boosted the industrial sector. Also the reasons for the increase of
Industry Growth Rate in India GDP are that the industrial goods are being exported in
huge quantities from the country.

Service sector in Indian economy

Service Sector of Indian Economy contributes to around 55 percent of India's GDP

during 2006-07. This sector plays a leading role in the economy of India, and contributes
to around 68.6 percent of the overall average growth in GDP between 2002-03 and 2006-
07. The service sectors of Indian economy that have grown faster than the economy are
as follows:

• Information Technology (the most leading service sectors in Indian economy)

• IT-enabled services (ITeS)

• Telecommunications

• Financial Services

• Community Services

• Hotels and Restaurants

The broad-based services in the trade sector have undergone a large-scale rise. A
statistics concerning the growth of India's service sectors are listed below:

• The software services in Indian economy increased by 33 percent which

registered revenue of USD 31.4 billion.
• Business services grew by 82.4 percent.
• Engineering services and products exports grew by 23 percent and earned revenue
of USD 4.9 billion.
• Services concerning personal, cultural, and recreational had a growth of 96
percent.
• Financial services had a rise of 88.5 percent.

29
 • Travel, transport, and insurance grew by 23 percent.

Banking Industry

• The banking industry faces a challenging year in 2008 as many companies work
through the weaker housing market and mortgage related issues.
• In September 2007, the bank industry's earnings performance slipped for the first
time in many quarters as the housing sector continued to weigh on the mortgage
and investment banking businesses at many of the larger banks. The subprime
mortgage fallout continued to affect the banking industry as it became difficult to
value debt instruments backed by mortgages and caused a temporary credit freeze
in some markets during the late summer.
• More problems may arise in 2008 as rates on adjustable-rate mortgages made in
2005 and 2006 are scheduled to reset. Homeowners could potentially have a
harder time making payments on these higher mortgages which may lead some to
default. There is also a fear that the mortgage related problems may spill over into
the credit card markets which would exacerbate the situation even further.
• The banking-sector crisis is getting better by the minute. What was a financial
disaster has turned into some first-rate political entertainment. Our nation’s
leaders are putting in an award-winning performance.
• I guess the theme of the day is “circular logic.” It does not matter whether we
look at the real estate industry or the banking sector, as long as the government is
involved, things just won’t make sense.
• As if the nation’s bankers do not already have enough on their plates, the FDIC’s
chief, Sheila Bair, is telling the nation her agency’s insurance reserves could run
out later this year. That could be a major Great Depression-era problem. But have
no fear. She has an answer.
• The FDIC merely tends to force the nation’s banks to put more into the reserves.
That’s right, ask the companies that are failing to pay more for the insurance that
protects them.
• Needless to say, the industry is going ballistic. Just as the Obama administration
wants to increase taxes during the worst recession in many of our lives, Bair
wants to raise the price of doing business for the nation’s most-desperate industry.

30
 CHAPTER-5

INTERPRETATION AND FINDINGS OF HDFC BANK

SHAREHOLDING PATTERN

31
Price performance

(%) 1m 3m 6m 12m
Absolute 23.4 25.2 1.7 -24.0
Relative to Sensex 4.5 -2.5 -11.0 12.4

RESULT HIGHLIGHTS

• HDFC Bank has reported a healthy set of numbers for Q4FY2009. While the top
line growth moderated during the quarter, a robust non-interest income growth
coupled with containment of costs led to a healthy bottom line growth (in line
with our expectations) during the period. Importantly, we draw comfort from the
asset quality trend (insignificant restructuring as compared with its peers and a
contained increase in gross non-performing assets [GNPAs]) seen during the
quarter.
• In Q4FY2009, HDFC Bank earned a net profit of Rs630.9 crore (in line with our
estimate), indicating a growth of 33.9% year on year (yoy). The growth was
mainly driven by a higher than expected treasury gain and relatively lower
operating expenses. The Q4FY2009 financials include the effect of the merger of
Centurion Bank of Punjab (CBoP) with HDFC Bank and hence are not strictly
comparable with the bank’s performance a year ago.
• Despite a robust 29.0% year-on-year (y-o-y) increase in its average assets, the net
interest income (NII) for the quarter stood at Rs1,852.0 crore, up 12.8% yoy. The
20-basis-point y-o-y contraction in the reported net interest margin (NIM)
restricted the overall NII growth. On a sequential basis, the NII fell by 6.4%,
driven by a flattish asset growth coupled with a ten-basis-point margin contraction
on a quarter-on-quarter (q-o-q) basis.
• The non-interest income more than doubled to Rs1,114.7 crore on account of a
multi-fold increase in the treasury income to Rs243.6 crore during the quarter vs
Rs11.4 crore in Q4FY2008. Importantly, the core fee income grew by a strong
45.8% yoy, pushing up the overall non-interest income.
• The operating expenses grew by 26.6% yoy to Rs1,396.2 crore but were lower by
4.4% sequentially led by a 13.4% q-o-q decline in the employee expenses.

32
 Consequently, the cost-to-income ratio improved considerably to 47.1% in
Q4FY2009 from ~50% in both the previous quarter and the year-ago period.
• The provisions during the quarter increased by 41.3% yoy to Rs657.4 crore; of
this around Rs600 crore worth of provisions pertained to loan loss provisions. The
bank prudently utilized the healthy treasury gains to step up provisioning during
the quarter.
• The asset quality deterioration for HDFC Bank was under control as the GNPAs
(in absolute terms) registered an increase of 4.0% on a sequential basis. Relatively
speaking, the GNPAs in percentage terms came in at 1.98% in the quarter vs
1.90% in Q3FY2009 while the net non-performing assets (NNPAs) in percentage
terms remained unchanged at 0.60% on a sequential basis. Notably, the provision
coverage ratio improved to 68.4% from 67.9% in the previous quarter.
• In terms of asset restructuring, HDFC Bank restructured assets worth Rs120 crore
during FY2009 and has assets worth Rs305 crore under consideration for
restructuring. Importantly, assets worth Rs69 crore and Rs254 crore are already
classified as non-performing assets (NPAs) among the loans restructured and the
loans under consideration for restructuring categories respectively. The quantum
of assets restructured so far constitutes a meager 0.1% of the total loan portfolio,
which is significantly lower compared with that of its peers. Moreover, we draw
comfort from the fact that a larger chunk of the loans restructured (and to be
restructured) is already classified as NPA and hence indicates limited downside
risk to the asset quality.
• During Q4FY2009, the net advances of the bank grew by a strong 55.9% yoy to
Rs98,883 crore but remained largely flat sequentially. Meanwhile, the deposits
grew by 41.7% yoy to Rs142,812 crore but declined by 1.4% quarter on quarter
(qoq). Importantly, the growth in the current account and savings account
(CASA) balance was much higher, which resulted in an improvement of over 480
basis points sequentially in the CASA ratio to 44.4%.
• The capital adequacy ratio (CAR) as at the end of Q4FY2009 stood comfortable
at 15.7% (as per Basel II norms) compared with 13.6% a year ago and 13.7%
during the previous quarter.
• We are fine tuning our FY2010 earnings estimates and are introducing our
FY2011 estimates in this note. We expect HDFC Bank to report an earnings
growth of 33.8% in FY2011 and estimate its earnings to grow at a CAGR of
30.5% during the period FY2009-11. HDFC Bank has delivered a consistent
performance over the past several years and we recommend the stock to those
who prefer stable growth with moderate returns. At the current market price of
Rs1,110, HDFC Bank trades at 18.2x 2010E earnings per share, 8.0x 2010E pre-
provisioning profit and 2.8x 2010E price-adjusted book value. We maintain our
Buy recommendation on the stock with a revised price target of Rs1,200.

CASA improves sequentially

33
 After the declining trend in the last three quarters, the CASA ratio for HDFC Bank
improved sequentially to 44.4% during Q4FY2009. While the CASA ratio is still
below the year-ago level of 54.5% (due to the absence of the initial public offering
float balance), the sequential improvement seems to be signaling two things: 1)
improving performance of the CBoP branches; and 2) the reversal of the “flight to
safety” trend seen in Q3FY2009. Going forward, further optimization of the CBoP
branches would help improve the CASA ratio.

Trend in CASA ratio

By observing the above graph we can say that the deposits of the HDFC Bank are
going on well but the CASA account is opening is reducing by (qoq). By this we can
say that the bank should concentrate on the CASA account opening and opening of
the new branches for becoming leader of the market in the banking industry. For
opening more CASA Accounts there should more market capitulation and there
should be more benefits to the customers those who opened the account.

Trend in asset quality

34
Asset quality too remains comfortable

Against the trend of accelerating sequential growth in GNPAs seen so far, HDFC Bank
has reported an increase of 4% qoq in its GNPAs, that is lower compared with the 5.25%
q-o-q growth seen in Q3FY2009. On a y-o-y basis, the increase in the GNPAs is quite
high (up ~120%), largely due to the Rs16, 000 crores worth of assets inherited as part of
the CBoP acquisition. In fact, according to bank’s disclosures, the erstwhile CBoP
portfolio (net of run-offs and write-offs) accounted for ~42% of the bank’s GNPAs. The
bank has run off the CBoP portfolio to ~Rs10, 000 crores and would continue to do so in
case of certain loan assets. With this, the percentage of GNPAs at 1.98% and that of
NNPAs at 0.6% are quite comfortable. Furthermore, as a result of the higher loan loss
provisions during the quarter, the provision coverage ratio increased to 68.4% from
67.9% in the previous quarter.

MUTED BALANCE SHEET GROWTH

The advances book of the bank recorded a growth of 55.9% yoy during the quarter but
remained flat sequentially. This was primarily due to the management’s cautious
approach towards lending and due to the repayment of short-term corporate loans during
the quarter. Dissecting further, the retail loans expanded by 55.5% yoy as a result of
which the retail loans now constitute 61% of the gross advances. The credit/deposit ratio
of the bank improved marginally to 69.2% in Q4FY2009 from 68.2% in the previous

35
quarter. Meanwhile, at the end of the quarter the deposits stood at Rs142, 812 crore, up
by 41.2% yoy, but down by 1.4% sequentially.

Trend in advances growth

Car comfortable at 15.7%

The CAR of the bank stood comfortable at 15.1% as on March 31, 2009 as compared
with 13.6% during the year-ago period. During the year the bank raised Rs2, 875 crore
through issue of tier-II bonds which helped it to shore up its CAR. As per Basel II norms,
the CAR stood at 15.7%, with the tier-I CAR at 10.6%. This gives the bank enough
headroom to raise tier-II capital as and when required.

36
Particulars FY07 FY08 FY09 FY10E FY11E

Net profit (Rs cr) 1141.5 1590.2 2245.0 2856.4 3822.2

EPS (Rs) 35.7 44.9 52.8 61.1 81.8

PE (x) 31.1 24.7 21.0 18.2 13.6

BV (Rs/share) 201.4 324.4 344.3 437.7 500.3

P/BV (x) 5.5 3.4 3.2 2.5 2.2

MACRO OUTLOOK

The bank is of the view that while the economic condition of major developed economies
is unlikely to improve in 2009, further deterioration is not expected and the general view
is that the worst is over. The residual effects on job losses and credit delinquencies,
however, will keep demand conditions weak despite the significant stimulus packages
offered by both governments and central banks.

On interest rate trajectory, the bank is of the view that inflationary pressures are expected
to build up gradually, given the infusion of liquidity and the anticipated firmness in prices
of primary products. While weaker non-food credit demand may lead the Reserve Bank
of India (RBI) to announce a moderate cut in policy rates, potential inflationary pressure
is likely to dissuade the RBI from aggressively reducing the short-term policy rates
further.

The combination of a burdened fiscal deficit and a somewhat easy monetary policy is
expected to pull down the short-term yield curve, leading to a decline in the cost of funds
for banks (and hence for corporate). The lower cost of funds would translate into cuts in
lending rates, thereby stimulating credit demand.

The bank expects the general risk perception levels, which are still fairly high, to
gradually decline over 2009-10, resulting in increased capital flows to sectors with
growth opportunities.

INTERPRETATION AND FINDINGS OF ICICIBANK

37
SHAREHOLDING PATTERN

Price performance

(%) 1m 3m 6m 12m
Absolute 29.7 141.5 78.1 -0.8
Relative to Sensex 5.9 41.8 17.1 -0.1

KEY POINTS

• ICICI Bank’s loan book growth has decelerated sharply in the last three years
with FY2009 marking the first instance of contraction in the loan book. The root
cause of this decelerating trend in the loan book growth is the slowdown in the
retail segment. The slowdown in the retail segment is partly due to the weakening
demand and partly due to the management’s objective of re-balancing its loan
portfolio following an uptick in delinquencies.
• In view of the bank’s intent to lower the share of the high yielding retail loans,
growing current account and savings account (CASA) deposits assumes
significant importance for improving margins. During FY2009, the bank was not
able to maintain the momentum in CASA growth due to the flight in deposits to
safety. However, the asset liability mismatch in the domestic balance sheet (<one-
year maturity) should see a major part of the liabilities getting repriced at lower
rates and should help in improving the margins.
• The contraction in the balance sheet and the marginal improvement in the net
interest margin (NIM) had called for a strong control on the operating expenses.
ICICI Bank downsized its work force by 15% and significantly reduced its
reliance on direct marketing agents during FY2009. All these factors have led to
some improvement in the productivity of the bank.

38
 • While the emergence of green shoots at the macro level is encouraging from the
asset quality perspective, ICICI Bank is likely to face tough challenges in
managing its credit quality. ICICI Bank’s position vis-à-vis its peers highlights
our concerns. Further, the non-performing loan (NPL) provisioning coverage ratio
is low compared with that of many of its peers and has been on a decline.
Furthermore, the slippages continued to march upwards in FY2009, reaching
2.3% from 1.6% in FY2008.
• The share of the unsecured loans continued to rise in FY2009 a surprising
development considering the adverse macro background and the bank’s intent to
check the deterioration in its advances. In line with the rising share of unsecured
loans, the risk weighted assets (RWA) remained largely flat while the assets
contracted by ~5%.
• On a positive note, there was a significant decline (31% year on year [yoy]) in the
off balance sheet items on account of a significant reduction in the bank’s
exposure towards interest rate swaps, currency futures, interest rate futures etc.
• There has been a marked change in the management’s stance on growth following
the decisive verdict in the recent Union election. From a largely flattish growth,
the management’s expectations have now grown to an expansion of 15-20% in the
balance sheet driven by the growth in the housing, corporate and car loan
segments.
• At the current market price of Rs733, the stock trades at 17x its FY2011E
earnings per share (EPS) and 1.5x its FY2011E book value (BV). While we are
maintaining our earnings estimates, company is revising their price target to
Rs781 based on our FY2011 estimates.

RETAIL BUSINESS BARELY BREAKS EVEN

At the top line level, the segmental contribution was largely stable in line with the
FY2008 composition. However, a look at the performance at the pre-tax profit level
reveals the weakness in the retail business. As evident in the chart below, the retail
business barely managed to break even (pre-tax) in FY2009, with its contribution
declining to a marginal 1.1% from 18.7% last year. The weakness in the retail business
was driven by a high provisioning cost and a slower business growth during FY2009 as
the bank focused on capital preservation.

Trend in segmental revenues and profits

39
Loan book contracted in FY2009

ICICI Bank’s loan book growth has decelerated sharply in the last three years with
FY2009 marking the first instance of contraction in the loan book. The root cause of this
decelerating trend in the loan book growth is the slowdown in the retail segment. The
slowdown in the retail segment is partly due to the weakening demand and partly due to
the management’s intention to re-balance the loan book following an uptick in
delinquencies. While the management had guided to a flattish/single-digit balance sheet
growth earlier, it has revised its growth expectations upwards to 15-20% recently. The
upward revision comes in the wake of the early signs of a recovery at the macro level and
a marginal improvement in the demand for retail credit. The bank intends to target car,
home and corporate loan segments in the current fiscal.

Trend in loan growth

Industry wise breakup of loan book (FY2008)

40
 Industry wise breakup of loan book (FY2009)

The ICICI Bank providing the loans to all types of industries and it is more concentrating
on the service sector of 34% of loans are given to them and next comming to the iron &
steel manufactures according to the 2008 results.

According to the analysis of 2009 the bank reduced 4% of loan percentage from service
sector and it was increased to the infra sector it was increased from 8% to 12% from 2008
to 2009 and for petroleum from 9% to 18% it was dubled from last year.

The bank is giving loans according to the growth of the industries and respective sectors
by proper vision and by this we can say that bank can retrieve the loans properly.

The key to margin expansion

41
Despite the encouraging improvement in the CASA balances during the last two fiscals,
the improvement in the NIM has not been quite encouraging as the bank has moved away
from high-yielding retail loans. Going forward, ICICI Bank’s renewed focus on CASA
(plans to add 580 branches during FY2010) should help improve the CASA ratio further
(the bank is targeting 33%). The ongoing rebalancing of the loan book may hinder
margin expansion. Importantly, FY2009 was a tough year for ICICI Bank, which had to
struggle to maintain the momentum in building up its CASA strength in the face of flight
in deposits to safety (refer chart). By maintain the CASA accounts the banks will get the
more amount on their minimum balances, and that money can be used for the borings and
the banks do well on the CASA accounts. So all banks are concentration on increase of
CASA accounts and increase the more new branches for generations of the account
holders.

• Loan to construction might increase more because RBI has reduced the risk
weighted exposure to construction and real estate loans.
• Bank has reduced giving loans to petroleum sector, due to the unusual
fluctuations in the global market
• There is not much noticeable fluctuations in the loan book when compared to the
previously but major portion is occupied by services it is constantly increasing.

Trend in CASA ratio and NIM

Trend in CASA balances

42
 • By observing the above diagram we can say that the current and savings accounts
are increasing year by year.
• Here we are analyzing the top three private sector banks and how they are
performing.
• By this analysis we can say that the icici is having more number of CASA.
• Having number casa will giving fee based income i.e. there is no risk is involved.
• In casa because no fund is involved in it. It is evident when CEO Chanda kochar
felt the same and said the bank is concentrating more on casa.

By seeing the above graph of the CASA accounts holding of the three banks the ICICI
Bank and HDFC Bank is doing simarlly in the year 2009 but in the year 2008 the ICICI
did it well in that year the AXIS is more on the retail banking so it is not more in the
CASA accounts but the CASA accounts will give good returns to the banks for there
future profits.

43
Particulars FY07 FY08 FY09 FY10E FY11E

Net profit (Rs cr) 3110.2 4157.7 3754 4120 4970

EPS (Rs) 34.59 37.37 33.76 39.7 43.4

PE (x) 24.67 20.61 9.85 11.8 15.4

BV (Rs/share) 270.37 417.67 455.17 513.7 620.6

P/BV (x) 11.5 9.98 8.24 8.02 7.6

MACRO OUTLOOK

The bank is of the view that while the economic condition of major developed economies
is unlikely to improve in 2009, further deterioration is not expected and the general view
is that the worst is over. The residual effects on job losses and credit delinquencies,
however, will keep demand conditions weak despite the significant stimulus packages
offered by both governments and central banks.

On interest rate trajectory, the bank is of the view that inflationary pressures are expected
to build up gradually, given the infusion of liquidity and the anticipated firmness in prices
of primary products. While weaker non-food credit demand may lead the Reserve Bank
of India (RBI) to announce a moderate cut in policy rates, potential inflationary pressure
is likely to dissuade the RBI from aggressively reducing the short-term policy rates
further.

The combination of a burdened fiscal deficit and a somewhat easy monetary policy is
expected to pull down the short-term yield curve, leading to a decline in the cost of funds
for banks (and hence for corporate). The lower cost of funds would translate into cuts in
lending rates, thereby stimulating credit demand.

The bank expects the general risk perception levels, which are still fairly high, to
gradually decline over 2009-10, resulting in increased capital flows to sectors with
growth opportunities.

INTEROPERATION AND FINDINGS OF AXIS BANK

44
SHAREHOLDING PATTERN

PRICE PERFORMANCE

(%) 1m 3m 6m 12m
Absolute 40.2 47.0 31.4 -24.4
Relative to Sensex 29.5 19.3 3.6 6.8

The financial year 2009 was tough for the financial sector, be it global or domestic,
owing to certain unprecedented events in the second half of the fiscal. Despite all this,
Axis Bank delivered an impressive earnings growth in the year on the back of a healthy
growth in its business while keeping a check on its asset quality. We have studied the
recently released annual report of the bank. We present the highlights of the report below.

Key points

• The retail banking operations of Axis Bank continued to contribute about 20% to
its total income and 7.3% to its bottom line in FY2009. While the retail division’s
performance was largely stable compared with FY2008, the business of wholesale
banking saw dip in its contribution at revenue, operating profit and profit before
tax (PBT) levels. Meanwhile, the contribution of treasury operations has
improved.

• The core fee income for the bank remained resilient owing to its diverse services
portfolio. The weakness in capital market related fee income streams was
countered by the growth in debt syndication and cash management service (CMS)
businesses.
• The current account and savings account (CASA) ratio dropped for the first time
in last seven years and stood at 43%, though remains better than that of many of

45
 its peers. The drop in the CASA ratio could be attributed to the attractive term
deposit rates seen across banks, healthy credit growth and relatively slower
branch expansion in FY2008.
• The bank addressed the issue of concentrated exposure to certain industries to an
extent by prudentially cutting down its exposure to the non-banking financial
companies (NBFCs; fund based) and gems and jewellery (non-fund based)
companies. The overall concentration too eased compared with the previous fiscal
as indicated by the Herfindahl Index.
• The asset quality cycle turned for the industry as a whole but the same was
comfortable in case of Axis bank (percentage of gross non-performing assets
[GNPA] = 0.96%). With rising delinquencies, the bank shifted its corporate, and
small and medium enterprise (SME) portfolios in favour of quality assets.
Meanwhile, the quantum of restructuring by the bank at 1.8% of its total advances
was much lower than that of its peers (with an average of 3-4%). Moreover, the
growth in the real estate exposure, especially commercial segment, slowed down
in FY2009. Also, the bank actively shed contingent liabilities during the year to
lower the off balance sheet risks.
• We have incorporated the additional information gathered from the annual report
in our estimates and tweaked our estimates for FY2010 and FY2011. Moreover,
we have lowered our slippage assumptions to an extent after drawing comfort
from the lower restructuring and reduced concentration in exposure. At the
current market price of Rs659, the stock trades at 10.6x FY2010E earnings per
share, 5.2x FY2010E pre-provisioning profit per share and 2.2x FY2010E
adjusted book value per share. We maintain our Hold recommendation on the
stock with a revised price target of Rs677 after rolling over our price target to our
FY2011 estimates. We advise investors to book partial profits in the stock.

SEGMENTAL ANALYSIS

Segmental analysis
Rs (cr)
Particulars Treasury Wholesale Retail
Revenues 20279.2 7279.2 6675.2

46
% yoy 62.3 52.3 56.7
% contribution - FY09 59.2 21.3 19.5
% contribution - FY08 58.0 22.2 19.8
Operating profit 990.1 2139.2 600.9
% yoy 123.1 49.3 62.0
% contribution - FY09 26.6 57.4 16.1
% contribution - FY08 19.7 63.7 16.5
Profit before tax 806.2 1782.2 202.4
% yoy 131.8 49.8 54.9
% contribution - FY09 28.9 64.0 7.3
% contribution - FY08 21.1 72.3 7.9

From a segmental perspective, though the retail banking operations continued to

contribute about 20% to the total income, their contribution to the bottom line was much
less at 7.3%, which was marginally lower than the FY2008 contribution. While the retail
business’ performance was largely stable compared with FY2008, the business of
wholesale banking saw relatively more erosion in its contribution at revenue, operating
profit and PBT levels, and all this at the cost of an improvement in the treasury
operations.

RESILIENT FEE INCOME GROWTH

In the last fiscal, most of the banks witnessed deceleration in their business volumes,
which adversely affected their core fee income. However, Axis Bank was able to
maintain a healthy fee income growth during the year on account of a diversified services
portfolio. The bank maintained a strong foothold in the debt syndication space, which
helped it to partially mitigate the effect of the decline seen in the fee income on its other
businesses. Moreover, the bank maintained a sustainable growth in the throughput for its
CMS business, which aided the growth in the overall fee-based income. The diverse fee
revenue streams were instrumental in sustaining a healthy growth even under the
changing circumstances.

Trend in CMS throughput

47
 •

Trend in CASA / outlet

Focus back on extension counters?

In terms of branch expansion, the bank added about 164 branches and 831 extension
counters in the last fiscal, taking the number of its total outlets to 4,430, implying an
increase of 29% year on year (yoy). Dissecting further, the growth in the number of
outlets was primarily driven by the growth in the number of extension counters (refer
chart below). Typically, the extension counters act as feeder branches as their primary
objective is to mobilise deposits to enable onward lending. Also, at this point the bank’s
preference for extension counters compared with a full-fledged branch could be possibly
driven by its intention to save costs.

Trends in the CASA accounts

48
The CASA ratio dropped for the first time in the last seven years and stood at 43%,
though the same was better than that of many of its peers. The CASA ratio possibly
dropped due to the attractive term deposit rates seen across banks, a healthy credit growth
and relatively slower branch expansion in FY2008. Even the CASA deposits per outlet
dipped to Rs11.4 crore in FY2009 from Rs11.7 crore in FY2008, as the incremental
outlets ramped up their customer base and business.

Trend in CASA / outlet

Trend in growth of outlets

Asset quality deteriorates but remains comfortable

49
Trend in asset quality

Following the trend of improving asset quality seen in recent years, FY2009 marked the
reversal of the trend not only for the sector but also for Axis Bank. While the
deterioration in the asset quality during Q1FY2009 was driven by the credit card
business, the ongoing slowdown in the real economy has made the credit deterioration
more extensive. As evident in the chart below, the percentage of the GNPA increased to
0.96% by the end of FY2009 from 0.72% at end of the previous fiscal. However, the
percentage of the net non-performing assets (NNPA) registered further improvement as a
result of a higher provisioning coverage (63.6% for FY2009 vs ~50% in FY2008). In
absolute terms, this represents an increase of 81.4% at the gross level and a rise of 31.9%
at the net level during FY2009.

Real estate exposure rises but at slower pace

Real estate exposure
Rs (cr)
Particulars FY2009 % yoy FY2008 % yoy
Direct exposure 17,191 25.5 13,694 58.3
Residential 11,100 42.7 7,780 63.3
Commercial 6,090 3.0 5,914 52.2
Indirect exposure 2,000 32.6 1,508 -41.1
Total 19,191 26.2 15,202 35.6
As a % of advances 23.5 25.5

Axis Bank’s real estate exposure increased by 26.2% to Rs19,191 crore. Of the total
exposure, the direct exposure jumped up by 25.5% yoy while the indirect exposure grew
by 32.6% yoy. Overall, the total real estate exposure formed about 23.5% of the total

50
loans compared with the 25.5% share in FY2008. Notably, the growth in exposure to the
real estate sector too tapered off (a 26.2% growth in FY2009 vs a 35.6% growth in
FY2008). Importantly, the exposure to commercial real estate grew by just 3.0% to
Rs6,090 crore compared with a 52.2% growth during FY2008.

Particulars FY07 FY08 FY09 FY10E FY11E

Net profit (Rs cr) 659.0 1071.0 1815.4 2226.4 2753.9

EPS (Rs) 23.4 29.9 50.6 62.0 76.7

EPS growth (%) 34.4 28.0 68.9 22.6 23.7

PE (x) 28.2 22.0 13.0 10.6 8.6

Book value (Rs/share) 120.5 245.1 284.5 332.1 388.2

P/BV (x) 5.5 2.7 2.3 2.0 1.7

MACRO OUTLOOK

The bank is of the view that while the economic condition of major developed economies
is unlikely to improve in 2009, further deterioration is not expected and the general view
is that the worst is over. The residual effects on job losses and credit delinquencies,
however, will keep demand conditions weak despite the significant stimulus packages
offered by both governments and central banks.

On interest rate trajectory, the bank is of the view that inflationary pressures are expected
to build up gradually, given the infusion of liquidity and the anticipated firmness in prices
of primary products. While weaker non-food credit demand may lead the Reserve Bank
of India (RBI) to announce a moderate cut in policy rates, potential inflationary pressure
is likely to dissuade the RBI from aggressively reducing the short-term policy rates
further.

The combination of a burdened fiscal deficit and a somewhat easy monetary policy is
expected to pull down the short-term yield curve, leading to a decline in the cost of funds
for banks (and hence for corporate). The lower cost of funds would translate into cuts in
lending rates, thereby stimulating credit demand.

The bank expects the general risk perception levels, which are still fairly high, to
gradually decline over 2009-10, resulting in increased capital flows to sectors with
growth opportunities.
51
FINDINGS

• Fundamentals analysis is the basic and the most important factors to find a stock
whether to buy or not.

• The net profit of the axis bank for year 2007 is 650 crores and it was increased in
2008 for 1071 crores and by 2009 the net profit is 1815.4 by this we can say that
the company is performing well.

• The EPS of the axis bank for 2007 is 23.4 and it was increased to 29.9 by 2008
and by 2009 it was increased to 50.6. There is a gastric change in the eps of the
axis bank; due to the increase in the net profits of 2008-09 the eps had increased
gastrically.

• The net profit of the HDFC Bank for year 2007 is 1141.5 crores and it was
increased in 2008 for 1590.2 crores and by 2009 the net profit is 2245.6 by this
we can say that the company is performing well.

• The EPS of the HDFC Bank for 2007 is 35.7 and it was increased to 44.9 by 2008
and by 2009 it was increased to 52.8. There is a gastric change in the eps of the
axis bank; due to the increase in the net profits of 2008-09 the eps had increased
gastrically.

• The net profit of the ICICI Bank for year 2007 is 3110.5 crores and it was
increased in 2008 for 4157.6 crores and by 2009 the net profit is 3754 crores by
seeing this the net profit was reduced to 9% of overall net profit.

• The EPS of the axis bank for 2007 is 34.59 and it was increased to 37.37 by 2008
and by 2009 it was decreased to 33.36. This change in the eps of the ICICI Bank
caused due to the decreased in the net profits of 2008-09.

• The GDP in 2008 is 6.6% and the current GDP is3.4% this indicates that the
economy is having a significant decline, the recession has a low impact on Indian
52
 GDP as our banking and financial sectors are highly regulated and this lead to a
low default.

• The inflation has been at 12.36% at the time of august 2008, and it has drastically
fallen down to 0.27% in the march caused by grate decrease in demand for varies
products and services. At present it is at -1.14% deflations.

SUGGESTIONS

1. The economic analysis made in regarding with the banking industry for three
major private sector banks suggests that an investor opt for long term investment.
2. Organizations have to encourage investors for long term investments.
3. If the company manipulated the financial statements then total fundamental
analysis goes wrong, company should be care full in those situations.
4. Company needs to concentrate on their marketing channel to attract the new
customers.
5. Proper campaigning would bring a change in the existing perception of the people
towards investment in the stock market.

Review of literature

I reviewed 3 articles regarding my project. The articles were not exactly of my topic but
still those articles provided me insights regarding my topic.

How efficient is our stock market in its weak form? A study on BSE 30
(sensex) scrips

RUDRA P. MAHAPATRA AND PRASANNA K. BISWASROY

The study is based on weekend share price data of BSE 30(sensex) scrip’s covering a
time period of 2 years that is from 1st April 2000 to 31st march 2002. Rank correlation
analysis has been extensively used in the study to examine the rank of performance of the
above 30 stocks at different time intervals.

Investor reaction to good and bad news in secondary market: A study relating to
investors behavior

53
ABHIJIT DATTA
The present paper attempts to analyze the behavior of the Indian individual the secondary
market investor’s reaction to good and bad news and their effect on the stock market.
The paper observes that the individual investors have high confidence in themselves and
or not guided by the market discounted asymmetric information.

Mitigate your Equity Risk

ERIC PETROFF, Director of research of wurts & associates

In this article, the author has mentioned that, mere diversification by holding few stocks
will not be helpful in mitigating equity risk. Mitigating equity risk to the fullest extent
possible involves holding multitudes of stocks and asset classes, and doing so in
meaningful allocations across the spectrum of global equity opportunities.

54
BIBLIOGRAPHY
www.vertixsecurites.com

www.capitalmarkets.com

www.nseindia.com

www.bseindia.com

www.investopedia.com

www.moneycontrol.com

www.economicwatch.com

www.axisbank.com

www.icicibank.com

www.hdfcbank.com

www.rbi.org.in

BOOKS
55
Dalal Street (journal)

Financial Management by (khan and Jain)

Investment Analysis and Portfolio Management by (Prasanna Chandra)

56