Religare P

1
SUMMER TRANING PROJECT REPORT
Submitted to the
SHIVA INSTITUTE OF MANAGEMENT STUDIES
UNDER THE GUIDANCE OF

Kapil bansal (R.M)
SUBIMITED BY
B. jagadeswar rao.
PGDBM (2005-07)
ROLL No. 10
Enrollment No. 205210
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ACKNOWLEDGEMENT
I express my sincerest gratitude and thanks to hon`ble,

Deepak khurna (Branch manger) pitampura, for whose
kindness I had the precious opportunity of attaining training
at Religare. Under his brilliant untiring guidance I could
complete the project being undertaken on the “A
project on derivative market in India”
successfully in time. His meticulous attention and
invaluable suggestions have helped me in simplifying
the problem involved in the work. I would also like to
thank the overwhelming support of all the people who
gave me an opportunity to learn and gain knowledge about
the various aspects of the industry.
I would like to thanks for Kapil bansal for his constant
enthusiastic encouragement and valuable suggestions
without which this project would not been successfully
completed.
B. JAGADESWAR
RAO.
(2005-07)
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PREFACE
To maintain and cope up with the growing scope of

derivative in India, Religare needs to find potential clients,
also the new investors and satisfy there needs.
The Broad object is to equipped the trainees with all the

quality which is essential to face any circumstances which
can arise while providing service to the clients.
The project also helps in understanding the trend of the

scripts of the particular sector (Banking sector) in different
market condition.
All these steps help me to understand how to cope up with

different type of people and there diversified need and
satisfaction.
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CONTENTS
1. Acknowledgement.
2. Preface.
3. Contents.
4. Executive Summary.
5. Objective.
6. Company Profile.
7. Introduction to Derivative.
8. Types of Derivative.
9. Future & Option.
10. Future Market Watch.
11. IT Sector Involvement.
12. NSE and CNX IT Sector Index.
13. Findings.
14. Recommendations.
15. Conclusion.
16. Bibliography.
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EXECUTIVE SUMMARY
The research work executed by the team had an object

oriented realistic approach towards the derivative market in
India as well as covering the globe by and large, precisely
speaking economic giants.
The team did follow market research procedure to get an
extensive idea about the general perception in the mass when
derivative market is considered; the exact figures are involved
in derivative. To acquire customers in favor of Religare was
also an integral part of the job. The team members covered
Delhi and NCR for this purpose. A brief profile about the
organization was also intimated to each and every respondent
in order to increase the popularity of Religare.
The next phase was all about to have an international look in
this field of Derivative market. The team examined thoroughly
areas such as the number of players, technology they are
offering, their customer base, whether this is appealing to the
common people or not, how they market their services etc.
In this project report I have made an overview of investment in
Derivative market of IT sector in India. Here I have explained
what is Derivative and Derivative market in India with the
examples of some IT sectors which help to understand the
investment in Derivative market.
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OBJECTIVES OF THE PROJECT
Until or unless we know what we have to do? We can’t do

anything, so we must keep in mind the clear objectives of the
project. Because in the absence of the objectives one cannot reach
to the conclusion or goal of the project.
I, therefore, had the following objectives:-
1 To understand the growth of Indian Derivative Market
1 To understand various types of derivative instruments of

derivative market
2 To know about various types of investment strategies in

derivative market
3 This project helps in selecting market out-performer

companies in IT sector
COMPANY PROFILE
7
Religare is driven by ethical and dynamic process for wealth creation. Based
on this, the company started its endeavor in the financial market.
Religare Enterprises Limited (A Ranbaxy Promoter Group Company)

through Religare Securities Limited, Religare Finevest Limited, Religare
Commodities Limited and Religare Insurance Advisory Services Limited
provides integrated financial solutions to its corporate, retail and wealth
management clients. Today, we provide various financial services which
include Investment Banking, Corporate Finance, Portfolio Management
Services, Equity & Commodity Broking, Insurance and Mutual Funds. Plus,
there’s a lot more to come your way.
Religare is proud of being a truly professional financial service provider

managed by a highly skilled team, who have proven track record in their
respective domains. Religare operations are managed by more than 1500
highly skilled professionals who subscribe to Religare philosophy and are
spread across its country wide branches.
Today, we have a growing network of 150 branches and more than 300
business partners spread across 180 cities in India and a fully operational
international office at London. However, our target is to have 350 branches
and 1000 business partners in 300 cities of India and more than 7
International offices by the end of 2006.
Unlike a traditional broking firm, Religare group works on the philosophy of

partnering for wealth creation. We not only execute trades for our clients but
also provide them critical and timely investment advice. The growing list of
financial institutions with which Religare is empanelled as an approved
broker is a reflection of the high level service standard maintained by the
company.
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MISSION AND VISION
MISSION
To be India's first Multinational providing complete financial

services solution across the globe.
VISION
Providing integrated financial care driven by the relationship of

trust & confidence
GROUP PROFILE
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India’s largest pharmaceutical Company

-Manufactures & markets
Generics Branded generic pharmaceuticals
Active pharmaceutical ingredients.
Amongst the top ten generic companies worldwide.
-Started by the promoters of Ranbaxy

-Vision: “To become an integrated
Caring partner for…HEALTH thru
Fortis Healthcare Limited&WEALTH
Fortis Securities Limited.”
-A leading solutions provider in

• Screening
• Diagnosis
• Monitoring of every illness and disease in the
community.
-Aim to provide world class services
MANAGEMENT PROFILE
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Religare team is led by a very eminent Board of Directors

who provide policy guidance and work under the active leadership
of its CEO & Managing Director and support of its Central
Guidance Team.
BOARD OF DIRECTORS:-
Chairman Mr.Harpal Singh
Managing Director Mr. Sunil Godhwani
Director Mr.Vinay Kumar Kaul
Director Mr.Malvinder Mohan Singh
Director Mr.Shivinder Mohan Singh
SERVICES PROVIDED
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CORE FACILITATOR ADVISORY
1. EQUITY TRADING 1.MARGINE FINANCING 1.RESEARCH &

TECHNICAL
ANALYSIS
2. DERIVATIVE TRADING 2.NRIs DESK Mgt. 2. PORTFOLIO Mgt.
3. COMMODITIES 3.PROVIDE CLIENT Mgt.
TRADING
4. DIPOSATORY SERVICES
BUSINESS & OPERATIONS
BUSINESS
Over a period of time RSL has recorded a healthy growth rate both in
business volumes and profitability as it is one the major players in this line of
business. The business thrust has been mainly in the development of business
from Financial Institutions, Mutual Funds and Corporate.
OPERATIONS
The operations of the company are broadly organized along the
following functions.
Research & Analysis
This group is focused on doing daily stock picks and periodical scrip \
segment specific research. It provides the best of analysis in the industry and
is valued by both our Institutional and Retail clientele.
Marketing
This group is focused on tracking potential business opportunities and
converting them into business relationships. Evaluating the needs of the
clients and tailoring products to meet their specific requirements helps the
company to build lasting relationships.
Dealing
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Enabling the clients to procure the best rates on their transactions is the
core function of this group.
Back Office
This group ensures timely deliveries of securities traded, liaison with
stock exchange authorities on operational matters, statutory compliance,
handling tasks like pay-in, pay-out, etc.
This section is fully automated to enable the staff to focus on the
technicalities of securities trading and is manned by professionals having
long experience in the field.
INFRASTRUCTURE
Offices
The company has offices located at prime locations in Mumbai, New
Delhi, Kolkatta and Chennai. The offices are centrally located to cater to the
requirements of institutional and corporate clients and retails clients, and for
ease of operations due to proximity to stock exchanges and banks.
Communications
The company has its disposal, an efficient network of advance
communication system and intends to install CRM facility; besides this it is
implementing interactive client information dissemination system which
enables clients to view their latest client information on web. It has an
installed multiple WAN to interconnect the branches to communicate on real
time basis.
The company is equipped with most advanced systems to facilitate smooth
functioning of operations. It has installed its major application on IBM
machines and uses latest state of art financial software.
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INTRODUCTION TO DERIVATIVES
The emergence of the market for derivative products, most notably
forwards, futures and options, can be traced back to the willingness of risk-
averse economic agents to guard themselves against uncertainties arising out
of fluctuations in asset prices. By their very nature, the financial markets are
marked by a very high degree of volatility. Through the use of derivative
products, it is possible to partially or fully transfer price risks by locking–in
asset prices. As instruments of risk management, these generally do not
influence the fluctuations in the underlying asset prices. However, by
locking-in asset prices, derivative products minimize the impact of
fluctuations in asset prices on the profitability and cash flow situation of risk-
averse investors.
DERIVATIVES
Derivative is a product whose value is derived from the value of one or

more basic variables, called bases (underlying asset, index, or reference rate),
in a contractual manner. The underlying asset can be equity, forex,
commodity or any other asset. For example, Rice farmers
may wish to sell their harvest at a future date to eliminate the risk of a change
in prices by that date. Such a transaction is an example of a derivative. The
price of this derivative is driven by the spot price of Rice which is the
“underlying”.
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EMERGENCE OF DERIVATIVES
Derivative products initially emerged as hedging devices against

fluctuations in commodity prices, and commodity-linked derivatives
remained the sole form of such products for almost three hundred years.
Financial derivatives came into spotlight in the post-1970 period due to
growing instability in the financial markets. However, since their emergence,
these products have become very popular and by 1990s, they accounted for
about two-thirds of total transactions in derivative products. In recent years,
the market for financial derivatives has grown tremendously in terms of
variety of instruments available, their complexity and also turnover. In the
class of equity derivatives the world over, futures and options on stock
indices have gained more popularity than on individual stocks, especially
among institutional investors, who are major users of index-linked
derivatives. Even small investors find these useful due to high correlation of
the popular indexes with various portfolios and ease of use. The lower costs
associated with index derivatives vies–a–vies derivative products based on
individual securities is another reason for their growing use.
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HISTORY OF DERIVATIVES
Early forward contracts in the US addressed merchants’ concerns about

ensuring that there were buyers and sellers for commodities. However “credit
risk” remained a serious problem. To deal with this problem, a group of
Chicago businessmen formed the Chicago Board of Trade (CBOT) in 1848.
The primary intention of the CBOT was to provide a centralized location
known in advance for buyers and sellers to negotiate forward contracts. In
1865, the CBOT went one step further and listed the first “exchange traded”
derivatives contract in the US; these contracts were called “futures
contracts”. In 1919, Chicago Butter and Egg Board, a spin-off of CBOT, was
reorganized to allow futures trading. Its name was changed to Chicago
Mercantile Exchange (CME). The CBOT and the CME remain the two
largest organized futures exchanges, indeed the two largest “financial”
exchanges of any kind in the world today.
The first stock index futures contract was traded at Kansas City
Board of Trade. Currently the most popular stock index futures contract in
the world is based on S&P 500 index, traded on Chicago Mercantile
Exchange. During the mid eighties, financial futures became the most active
derivative instruments generating volumes many times more than the
commodity futures. Index futures, futures on T-bills and Euro-Dollar futures
are the three most popular futures contracts traded today. Other popular
international exchanges that trade derivatives are LIFFE in England, DTB in
Germany, SGX in Singapore, TIFFE in Japan, MATIF in France, Eurex etc.
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GLOBAL DERIVATIVE MARKETS
The derivatives markets have grown manifold in the last two decades...
According to the Bank for International Settlements (BIS), the approximate
size of global derivatives market was US$ 109.5 trillion as at end–December
2000. The total estimated notional amount of outstanding over–the–counter
(OTC) contracts stood at US$ 95.2 trillion as at end–December 2000, an
increase of 7.9% over end–December 1999. Growth
In OTC derivatives market is mainly attributable to the continued rapid

expansion of interest rate contracts, which reflected growing corporate bond
markets and increased interest rate uncertainty at the end of 2000. The
amount outstanding in organized exchange markets increased by 5.8% from
US$ 13.5 trillion as at end December 1999 to US$ 14.3 trillion as at end–
December 2000.
The turnover data are available only for exchange–traded derivatives

contracts. The turnover in derivative contracts traded on exchanges has
increased by 9.8% during 2000 to US$ 384 trillion as compared to US$ 350
trillion in 1999(Table 1.2). While interest rate futures and options accounted
for nearly 90% of total turnover during 2000, the popularity of stock market
index futures and options grew modestly during the year. According to BIS,
the turnover in exchange–traded derivative markets rose by a record amount
in the first quarter of 2001, while there was some moderation in the OTC
volumes.
DERIVATIVES MARKET IN INDIA

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The first step towards introduction of derivatives trading in India was

the promulgation of the Securities Laws (Amendment) Ordinance, 1995,
which withdrew the prohibition on options in securities. The market for
derivatives, however, did not take off, as there was no regulatory framework
to govern trading of derivatives. SEBI set up a 24–member committee under
the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop
appropriate regulatory framework for derivatives trading in India. The
committee submitted its report on March 17, 1998 prescribing necessary pre–
conditions for introduction of derivatives trading in India. The committee
recommended that derivatives should be declared as ‘securities’ so that
regulatory framework applicable to trading of ‘securities’ could also govern
trading of securities. SEBI also set up a group in June 1998 under the
Chairmanship of Prof.J.R.Varma, to recommend measures for risk
containment in derivatives market in India. The report, which was submitted
in October 1998, worked out the operational details of margining system,
methodology for charging initial margins, broker net worth, deposit
requirement and real–time monitoring requirements.
The SCRA was amended in December 1999 to include derivatives

within the ambit of ‘securities’ and the regulatory framework were developed
for governing .Derivatives trading. The act also made it clear that derivatives
shall be legal and valid only if such contracts are traded on a recognized
stock exchange, thus precluding OTC derivatives. The government also
rescinded in March 2000, the three–decade old notification, which prohibited
forward trading in securities.
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Derivatives trading commenced in India in June 2000 after SEBI
granted the final approval to this effect in May 2000. SEBI permitted the
derivative segments of two stock
exchanges, NSE and BSE, and their clearing house/corporation to commence

trading and settlement in approved derivatives contracts. To begin with, SEBI
approved trading in index futures contracts based on S&P CNX Nifty and
BSE–30 (Sensex) index. This was followed by approval for trading in options
based on these two indexes and options on individual securities. The trading
in index options commenced in June 2001 and the trading in options on
individual securities commenced in July 2001. Futures contracts on
individual stocks were launched in November 2001. Trading and settlement
in derivative contracts is done in accordance with the rules, byelaws, and
regulations of the respective exchanges and their clearing house/corporation
duly approved by SEBI and notified in the official gazette.
The derivatives trading on the exchange commenced with S&P CNX Nifty
Index futures on June 12, 2000. The trading in index options commenced on
June 4, 2001 and trading in options on individual securities commenced on
July 2, 2001. Single stockfutures were launched on November 9, 2001. The
index futures and options contract on NSE are based on S&P CNX Nifty
Index. Currently, the futures contracts have a maximum of 3-month
expiration cycles. Three contracts are available for trading, with 1 month, 2
months and 3 months expiry.
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PARTICIPANTS
Derivative contracts have several variants. The most common variants

are forwards, futures, options and swaps. The following three broad
categories of participants –
Hedgers: - Hedgers face risk associated with the price of an asset. They use
futures or options markets to reduce or eliminate this risk
Speculators: - Speculators wish to bet on future movements in the price of
an asset. Futures and options contracts can give them an extra leverage; that
is, they can increase both the potential gains and potential losses in a
speculative venture.
Arbitrageurs: - Arbitrageurs are in business to take advantage of a
discrepancy between prices in two different markets. If, for example, they see
the futures price of an asset getting out of line with the cash price, they will
take offsetting positions in the two markets to lock in a profit.
FUNCTIONS
The derivatives market performs a number of economic functions.

1. Prices in an organized derivatives market reflect the perception of
market participants about the future and lead the prices of underlying
to the perceived future level. The prices of derivatives converge with
the prices of the underlying at the expiration of the derivative contract.
Thus derivatives help in discovery of future as well as current prices.
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2. The derivatives market helps to transfer risks from those who have
them but may not like them to those who have an appetite for them.
3. Derivatives, due to their inherent nature, are linked to the underlying

cash markets. With the introduction of derivatives, the underlying
market witnesses higher trading volumes because of participation by
more players who would not otherwise participate for lack of an
arrangement to transfer risk.
4. Speculative trades shift to a more controlled environment of

derivatives market. In the absence of an organized derivatives market,
speculators trade in the underlying cash markets. Margining,
monitoring and surveillance of the activities of various participants
become extremely difficult in these kinds of mixed markets.
An important incidental benefit that flows from derivatives trading is
that it acts as a catalyst for new entrepreneurial activity. The
derivatives have a history of attracting many bright, creative, well-
educated people with an entrepreneurial attitude. They often energize
others to create new businesses, new products and new employment
opportunities, the benefit of which are immense.
5. Derivatives markets help increase savings and investment in the long

run. Transfer of risk enables market participants to expand their
volume of activity.
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TYPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures

and options which we shall discuss in detail later. Here we take a brief look at
various derivatives contracts that have come to be used.
Forwards: A forward contract is a customized contract between two entities,
where settlement takes place on a specific date in the future at today’s pre-
agreed price.
Futures: A futures contract is an agreement between two parties to buy or
sell an asset at a certain time in the future at a certain price. Futures contracts
are special types of forward contracts in the sense that the former are
standardized exchange-traded contracts.
Options: Options are of two types - calls and puts. Calls give the buyer the
right but not the obligation to buy a given quantity of the underlying asset, at
a given price on or before a given future date. Puts give the buyer the right,
but not the obligation to sell a given quantity of the underlying asset at a
given price on or before a given date.
Warrants: Options generally have lives of upto one year, the majority of
options traded on options Exchanges having a maximum maturity of nine
months. Longer-dated options are called warrants and are generally traded
over-the-counter.
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation
Securities. These are options having a maturity of upto three years.
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Baskets: Basket options are options on portfolios of underlying assets. The

underlying asset is usually a moving average of a basket of assets. Equity
index options are a form of basket options.
Swaps: Swaps are private agreements between two parties to exchange cash
flows in the future according in the future according to a prearranged
formula. They can be regarded as portfolios of forward contracts.
The two commonly used swaps are: Interest rate swaps: These entail
swapping only the interest related cash flows between the parties in the same
currency.
Currency swaps: These entail swapping both principal and interest between
the parties, with the cash flows in one direction being in a different currency
than those in the opposite direction.
Swaptions: Swaptions are options to buy or sell a swap that will become
operative at the expiry of the options. Thus a swaption is an option on a
forward swap. Rather than have calls and puts, the swaptions market has
receiver swaptions and payer swaptions. A receiver swaption is an option to
receive fixed and pay floating. A payer swaption is an option to pay fixed and
receive floating.
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INTRODUCTION TO FUTURES AND OPTIONS

In recent years, derivatives have become increasingly important in the
field of finance. While futures and options are now actively traded on many
exchanges, forward contracts are popular on the OTC market.
FUTURES
Futures markets were designed to solve the problems that exist in
forward markets. A futures contract is an agreement between two parties to
buy or sell an asset at a certain time in the future at a certain price. But unlike
forward contracts, the futures contracts are standardized and exchange traded.
To facilitate liquidity in the futures contracts, the exchange specifies certain
standard features of the contract. It is a standardized contract with standard
underlying instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference
purposes in settlement) and a standard timing of such settlement.
A futures contract may be offset prior to maturity by entering into an equal

and opposite transaction. More than 99% of futures transactions are offset
this way.
The standardized items in a futures contract are:
1 Quantity of the underlying

2 Quality of the underlying
3 The date and the month of delivery
4 The units of price quotation and minimum price change
5 Location of settlement
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SUMMARY
Derivatives - Derivative is a product whose value is derived from the

value of one or more basic variables, called bases (underlying asset, index, or
reference rate), in a contractual manner. The underlying asset can be equity,
forex, commodity or any other asset. The price of this derivative is driven by
the spot price of Rice which is the “underlying”.
Futures and Options are the most commonly used equity derivative
instruments. Derivatives market has been in existence for years in an
unorganized manner. In India we are yet to see the full-fledged derivatives
trading. As per the global standards, derivatives trading volumes are
generally 4-5 times the cash market volumes. Whereas, in India the
derivatives volumes are 2-3 times the cash market volumes
Derivatives are used for three categories of participants:-

Hedgers - Hedgers face risk associated with the price of an asset. They
use futures or options markets to reduce or eliminate this risk
Speculators - Speculators wish to bet on future movements in the price
of an asset. Futures and options contracts can give them an extra leverage;
that is, they can increase both the potential gains and potential losses in a
speculative venture
Arbitragers - Arbitrageurs are in business to take advantage of a
discrepancy between prices in two different markets. If, for example, they see
25
the futures price of an asset getting out of line with the cash price, they will
take offsetting positions in the two markets to lock in a profit.
Derivatives market reflects the perception of the market player about
the market. They help in discovery of future as well as current prices. They
transfer risk from those who have it but may not like to have them to those
who have an appetite for it. Transfer of risk enables market participants to
expand their volume of activity.
FUTURES MARKET WATCH: SPOT THE MISPRICING
In all the applications so far, we assumed that there was a single futures price.
In reality when one trades on the futures market, one encounters two prices -
a bid and an ask. In the following section, we shall discuss two trading
strategies that can be implemented by an investor following the market watch
screen.
Do you sometimes think that a futures contract is mispriced? As per the
cost-of-carry logic, the futures price must be equal to the spot price plus
the cost of carry. If the futures price is less than the spot price plus cost of
carry or if the futures price is greater than the spot plus cost of carry,
arbitrage opportunities exist. If for instance,
Futures >Spot + Cost of Carry

Arbitrageurs will borrow funds, buy the spot with these borrowed
funds, sell the futures contract and carry the asset forward to deliver against
the futures
Contract. This is called cash-and-carry arbitrage. If for instance,
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Futures < Spot + Cost of Carry
Arbitrageurs will sell the asset, invest the proceeds from this sale and
buy
Futures cheap. This is called reverse cash-and-carry. As arbitrageurs enter the
market, buying the cheaper of the two (future and spot) and selling the
expensive, prices will return to equilibrium where they obey the cost-of-carry
rule.
Table 1:Fair values vis-à-vis market prices for various futures contracts
Month Quantity Bid Ask Quantity Fair value
November 1000 1009 1010.5 1000 1009.50
December 200 1022 1025 400 1019.00
January 400 1028 1032 200 1028.70
What we spoke of above were arbitrage opportunities arising out of

mispricings. However, when futures price is not equal to its fair value,
speculators too enter the market, buy the cheaply available contract and sell
the expensive one, wait till prices return to their fair values and close out
their positions. Hence identifying mispricings is an essential skill that must
be developed.
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FUTURES SPREAD TRADING
Table 3
Basis and Spreads on various futures contracts
Spot Futures contract Fair values Basis Spread

1000 F1 1010 10
F2 1020 20 10
F3 1030 30 10
As we’ve already defined earlier, basis is the difference between the spot and
the futures prices. Basis should reflect the fair value of the futures contract.
When the basis between spot and futures or the spread between two futures
contracts is incorrect, arbitrage opportunities arise. Table 4,gives the fair
values and basis of the three futures contracts. The last column shows the
spreads between the futures contracts. As we can see, the spread between F1
and F2 is 10. Similarly the spread between F2 and F3 is 10 as well. We shall
first try to get an intuitive understanding of the topic assuming for the time
being that there is just one single futures price.
If the basis happens to be incorrect, there can be arbitrage opportunities.
Exploiting this mispricings involves the following trades. When the spread
between the two futures contracts narrows, buy the far month contract and
sell the near month one. Why do we buy the far month and sell the near
month? Because we know that if the fair spread between two contracts is 10,
but the one observed on the market watch is 6, the far month contract is under
priced and the near month is overpriced. There is a mispricings which will be
28
wiped out as soon as traders start exploiting it. The basis and the spread will
correct it and return close to its fair value. Now is the time to close the
position, i.e. sell the far month contract and buy the near month.
Table 4 Mispricings of Basis and Spreads on various futures contracts

Spot Contract Fair Fair Mkt. Obs. Obs.
Price Basis Spread Price Basis
Spread
1000 F1 1010 10 1012 12
F2 1020 20 10 1018 18 6
F3 1030 30 10 1032 32 14
Refer to Table 4 and similarly observe the spread between F2 and F3.When
the spread between two futures contracts widens, sell the far month contract
and buy the near-month one. Why do we sell the far month and buy the near
month? Because we know that if the fair spread between two contracts is 10,
but the one observed on the market watch is 14, the far month contract is
overpriced and the near month is under priced. There is a mispricings which
will be wiped out as soon as traders start exploiting it. The basis and the
spread will correct it and return close to its fair value. Now is the time to
close the position, i.e. buy the far month contract and sell the near month.
The table shows the basis and spreads on one-month, two-month and three-
month futures contracts. Basis is the difference between the spot and the
futures prices. It is usually negative. The difference between two futures
contracts is referred to as spreads. The fair spread between F1 and F2 is 10.
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However the spread that we observe on the market at the moment is 6. Since
the spread has narrowed, we can profit by selling the near-month contract,
i.e.F1 and buying the far-month contract, i.e. F2 Once we do this, we would
have a position of:
1. Sell F1@ 1012

2. Buy F2@ 1018
After some time, the spread corrects itself and we close our position by
entering into the following trades:
1 Buy F1 @ 1010
2 Sell F2 @ 1020
We end up making a profit of Rs.4 on the round trip.
Similarly observe the spread between F2 and F3. The spread has widened
from an expected value of 10 to an observed value of 14. Hence we sell the
far month contract and buy the near month one. Once we do this we would
have a position of:
1 Sell F3 @ 1032
2 Buy F2 @ 1018
After some time, the spread corrects itself and we close our position by
entering into the following trades:
1 Buy F3 @ 1030
2 Sell F2 @ 1020
We end up making a profit of Rs.4 on the round trip. However a word of
caution. Although transaction costs on the futures market are less than the
transactions costs on the cash market, they exist anyway and should be
factored into these trades. As far as possible, closing out of positions should
be done using limit orders. The Market by Price (MBP) screen gives a fair
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idea of the depth of the market, and should be used while placing the limit
orders.
Bid-ask on various futures contracts at time T1 and time T2

Market watch at time T1
Spot Contract Bid Ask
1000 F1 1012 1013
F2 1014 1016
F3 1027 1037
Market watch at time T2

Spot Contract Bid Ask
1000 F1 1010 1011
F2 1019 1022
F3 1028 1035
Trading to profit from misaligned spreads seems simple when we look at a

single futures price, but in the real world we are faced with two prices, a bid
and an ask. The trick is to get used to detecting misalignment of spreads
across futures contracts, given three bids and three asks.
The table shows the bid and asks for various futures contracts as one would
see them on the market watch at time T1 and T2. If we typically believe that
the spread between the one-month and two-month futures contracts should be
31
10 points, we will buy a spread at time T1 when it is less than 10 and sell a
spread at time T2 when it is greater than 10. Buying a spread basically means
selling the near month and buying the far month contract. So if we think that
the spread between F1 and F2 is narrow, what we really need to look at is the
bid on F1 and the ask on F2 .If the difference between this is narrower than
we expect it to be, we sell F1 and buy F2. Once we do this we would have a
position of:
1 Sell F1 @ 1012
2 Buy F2 @ 1016
We now watch the market to see if the spread corrects itself. To close our
position at time T2 what we should be watching is the difference between ask
on F1 and the bid on F2. Once this returns close to our expected spread, 10 in
this case, we close our position by buying F1 and selling F2 at time T2.
When we do this we would have a position of:
1. Buy F1@ 1011
2. Sell F2 @ 1019
As we can see, we sold F1 at 1012 and bought it back at 1011 making a profit
of 1. We bought F2 at 1016 and sold it at 1019 making a profit of 3. Our net
profit from this set of transactions is 4. The point to note is that when faced
with a bid and an ask price, one must watch the correct prices to calculate the
spread. Familiarizing oneself with this set of transactions will enable one to
quickly detect misaligned spreads on the futures contract and instantly enter
into trades to profit from them.
Summary
32
Arbitrage is the practice of taking advantage of a state of imbalance between
two (or possibly more) markets. A combination of matching deals are struck
that exploit the imbalance, the profit being the difference between the market
prices. A person who engages in arbitrage is called an arbitrageur.
Arbitrage is the safest way to make money in the market. However, the scope
for making money is diminutive. With the help of the arbitrage strategies
discussed above, we can exploit the market condition and earn risk-free
return.
Arbitrage is game of strategy and also funds. A participant with ample funds
can easily earn risk-free returns. On the other hand, a strategist can make
risk-less profits by making use of mispricings in the market.
Arbitrage could be inter-exchange, NSE and BSE. Arbitrage could also be
between two segments of the market, Cash and F&O. Borrowing and lending
is a common practice in arbitrage transaction, therefore, bank and financial
institution are very active in arbitrage activities.
The above states strategies cover all the types of arbitrage possibilities using
equity derivatives.
SPECULATION STRATEGIES
1 Bullish Index, long nifty futures

2 Bearish Index, short nifty futures
33
3 Bullish security, buy futures
4 Bearish security, sell futures
5 Bullish index, buy index calls or sell index puts
6 Bearish index, buy index puts or sell index calls
7 Bullish stock, buy calls or sell puts
8 Bearish stock, buy puts or sell calls
Speculation: Bullish Index, long nifty futures
Do you sometimes think that the market index is going to rise? That you
could make a profit by adopting a position on the index? After a good budget,
or good corporate results, or the onset of a stable government, many people
feel that the index would go up. How does one implement a trading strategy
to benefit from an upward movement in the index? Today, you have two
choices:
1. Buy selected liquid securities which move with the index, and sell
them at a later date: or,
2. Buy the entire index portfolio and then sell it at a later date.
The first alternative is widely used – a lot of the trading volume on liquid
securities is based on using these liquid securities as an index proxy.
However, these positions run the risk of making losses owing to company–
specific news; they are not purely focused upon the index. The second
alternative is cumbersome and expensive in terms of transactions costs.
34
Taking a position on the index is effortless using the index futures
market. Using index futures, an investor can “buy” or “sell” the entire index
by trading on one single security. Once a person is LONG NIFTY using the
futures market, he gains if the index rises and loses if the index falls.
How do we actually do this?
When you think the index will go up, buy the Nifty futures. The minimum
market lot is 200 Nifties. Hence, if Nifty is at 1200, the investment is done in
units of Rs.240,000. When the trade takes place, the investor is only required
to pay up the initial margin, which is something like Rs.20,000. Hence, by
paying an initial margin of Rs.20,000, the investor gets a claim on the index
worth Rs.240,000. Similarly, by paying up Rs.200,000, the investor gets a
claim on Nifty worth Rs.2.4 million.
Futures are available at several different expirations. The investor can

choose any of them to implement this position. The choice is basically about
the horizon of the investor. Longer dated futures go well with long–term
forecasts about the movement of the index. Shorter dated futures tend to be
more liquid.
Example
1. On 1 July 2001, Milan feels the index will rise.
2. He buys 200 Nifties with expiration date on 31st July 2001.
3. At this time, the Nifty July contract costs Rs.960 so his position is
worth Rs.192,000.
4. On 14 July 2001, Nifty has risen to 967.35.
35
5. The Nifty July contract has risen to Rs.980.
6. Milan sells off his position at Rs.980.
7. His profits from the position are Rs.4000.
Speculation: Bearish index, short Nifty futures
Do you sometimes think that the market index is going to fall? That you
could make a profit by adopting a position on the index? After a bad budget,
or bad corporate results, or the onset of a coalition government, many people
feel that the index would go down. How does one implement a trading
strategy to benefit from a downward movement in the index? Today, you
have two choices:
1. Sell selected liquid securities which move with the index, and buy
them at a later date: or,
2. Sell the entire index portfolio and then buy it at a later date.
The first alternative is widely used – a lot of the trading volume on liquid
securities is based on using these securities as an index proxy. However,
these positions run the risk of making losses owing to company–specific
news; they are not purely focused upon the index.
The second alternative is hard to implement. This strategy is also

cumbersome and expensive in terms of transactions costs. Taking a position
on the index is effortless using the index futures market. Using index futures,
an investor can “buy” or “sell” the entire index by trading on one single
security. Once a person is SHORT NIFTY using the futures market, he gains
if the index falls and loses if the index rises.
36
How do we actually do this?

When you think the index will go down, sell the Nifty futures. The minimum
market lot is 200 Nifties. Hence, if Nifty is at 1200, the investment is done in
units of Rs.240,000. When the trade takes place, the investor is only required
to pay up the initial margin, which is something like Rs.20,000. Hence, by
paying an initial margin of Rs.20,000 the investor gets a claim on the index
worth Rs.240,000. Similarly, by paying up Rs.200,000, the investor gets a
claim on Nifty worth Rs.2.4 million.
Futures are available at several different expirations. The investor can choose
any of them to implement this position. The choice is basically about the
horizon of the investor. Longer dated futures go well with long–term
forecasts about the movement of the index. Shorter dated futures tend to be
more liquid.
Example
1. On 1 June 2001, Milan feels the index will fall.
2. He sells 200 Nifties with a expiration date of 26th June 2001.
3. At this time, the Nifty June contract costs Rs.1,060 so his position is
worth Rs.212,000.
4. On 10 June 2001, Nifty has fallen to 962.90.
37
5. The Nifty June contract has fallen to Rs.990. Milan squares off his
position.
6. His profits from the position work out to be Rs.14,000.
Speculation: Bullish security, buy futures
Take the case of a speculator who has a view on the direction of the market.
He would like to trade based on this view. He believes that a particular
security that trades at Rs.1000 is undervalued and expects its price to go up in
the next two–three months. How can he trade based on this belief? In the
absence of a deferral product, he would have to buy the security and hold on
to it. Assume he buys a 100 shares which cost him one lakh rupees. His
hunch proves correct and two months later the security closes at Rs.1010. He
makes a profit of Rs.1000 on an investment of Rs.1,00,000 for a period of
two months. This works out to an annual return of 6 percent.
Today a speculator can take exactly the same position on the security by
using futures contracts. Let us see how this works. The security trades at
Rs.1000 and the two-month futures trades at 1006. Just for the sake of
comparison, assume that the minimum contract value is 1,00,000. He buys
100 security futures for which he pays a margin of Rs.20,000. Two months
later the security closes at 1010. On the day of expiration, the futures price
converges to the spot price and he makes a profit of Rs.400 on an investment
of Rs.20,000.
Speculation: Bearish security, sell futures
Stock futures can be used by a speculator, who believes that a particular

security is over–valued and is likely to see a fall in price. How can he trade
38
based on his opinion? In the absence of a deferral product, there wasn’t much
he could do to profit from his opinion. Today all he needs to do is sell stock
futures.
Let us understand how this works. Simple arbitrage ensures that futures on
individual securities move correspondingly with the underlying security, as
long as there is sufficient liquidity in the market for the security. If the
security price rises, so will the futures price. If the security price falls, so will
the futures price. Now take the case of the trader who expects to see a fall in
the price of SBI. He sells one two–month contract of futures on SBI at
Rs.240 (each contact for 100 underlying shares). He pays a small margin on
the same. Two months later, when the futures contract expires, SBI closes at
220. On the day of expiration, the spot and the futures price converges. He
has made a clean profit of Rs.20 per share. For the one contract that he
bought, this works out to be Rs.2000.
Speculation: Bullish index, buy Nifty calls or sell Nifty puts
There are times when investors believe that the market is going to rise. For
instance, after a good budget, or good corporate results, or the onset of a
39
stable government. How does one implement a trading strategy to benefit
from an upward movement in the index? Today, using options you have two
choices:
1. Buy call options on the index; or,
2. Sell put options on the index
We have already seen the payoff of a call option. The downside to the buyer
of the call option is limited to the option premium he pays for buying the
option. His upside however is potentially unlimited. Suppose you have a
hunch that the market index is going to rise in a month’s time. Your hunch
proves correct and the index does indeed rise, it is this upside that you cash in
on. However, if your hunch proves to be wrong and the market index plunges
down, what you lose is only the option premium.
Having decided to buy a call, which one should you buy? Given that
there are a number of one–month calls trading, each with a different strike
price, the obvious question is: which strike should you choose? Let us take a
look at call options with different strike prices. Assume that the current index
level is 1250, risk-free rate is 12% per year and index volatility is 30%.
The following options are available:

1. A one month calls on the Nifty with a strike of 1200.
4. A one month call on the Nifty with a strike of 1275.
5. A one month call on the Nifty with a strike of 1300.
40
Which of these options you choose largely depends on how strongly you feel
about the likelihood of the upward movement in the market index, and how
much you are willing to lose should this upward movement not come about.
There are five one–month calls and five one– month puts trading in the
market. The call with a strike of 1200 is deep in–
the–money and hence trades at a higher premium. The call with a strike of
1275 is out–of–the–money and trades at a low premium. The call with a
strike of 1300 is deep–out–of–money. Its execution depends on the unlikely
event that the Nifty will raise by more than 50 points on the expiration date.
Hence buying this call is basically like buying a lottery. There is a small
probability that it may be in–the–money by expiration, in which case the
buyer will make profits. In the more likely event of the call expiring out–of–
the–money, the buyer simply loses the small premium amount of Rs.27.50.
As a person who wants to speculate on the hunch that the market index
may rise, you can also do so by selling or writing puts. As the writer of puts,
you face a limited upside and an unlimited downside. If the index does rise,
the buyer of the put will let the option expire and you will earn the premium.
If however your hunch about an upward movement in the market proves to
be wrong and the index actually falls, then your losses directly increase with
the falling index level. If for instance the index falls to 1230 and you’ve sold
a put with an exercise of 1300, the buyer of the put will exercise the option
and you’ll end up losing Rs.70. Taking into account the premium earned by
you when you sold the put, the net loss on the trade is Rs.5.20.
Having decided to write a put, which one should you write? Given that there
are a number of one-month puts trading, each with a different strike price, the
41
obvious question is: which strike should you choose? This largely depends on
how strongly you feel about the likelihood of the upward movement in the
market index. If you write an at–the–money put, the option premium earned
by you will be higher than if you write an out–of–the–money put. However
the chances of an at–the–money put being exercised on you are higher as
well. In the example, at a Nifty level of 1250, one option is in–the–money
and one is out–of–the–money. As expected, the in–the–money option fetches
the highest premium of Rs.64.80 whereas the out–of–the–money option has
the lowest premium of Rs.18.15.
The spot Nifty level is 1250. There are five one-month calls and five
one-month puts trading in the market. The call with a strike of 1200 is deep
in-the-money and hence trades at a higher premium. The call with a strike of
1275 is out-of-the-money and trades at a low premium. The call with a strike
of 1300 is deep-out-of-money. Its execution depends on the unlikely event
that the Nifty will raise by more than 50 points on the expiration date. Hence
buying this call is basically like buying a lottery. There is a small probability
that it may be in-the-money by expiration in which case the buyer will profit.
In the more likely event of the call expiring out-of-the-money, the buyer
simply loses the small premium amount of Rs. 27.50
Similarly, the put with a strike of 1300 is deep in-the-money and trades
at a higher premium than the at-the-money put at a strike of 1250. The put
with a strike of 1200 is deep out-of-the-money and will only be exercised in
the unlikely event that Nifty falls by 50 points on the expiration date
Table: one month calls and puts trading at different prices

42
Nifty Strike price of option Call Premium (Rs.) Put Premium
(Rs.)
1250 1200 80.10 18.15
1250 1225 63.65 26.50
1250 1250 49.45 37.00
1250 1275 37.50 49.80
1250 1300 27.50 64.80
Speculation: Bearish index: sell Nifty calls or buy Nifty puts
Do you sometimes think that the market index is going to drop? That you
could make a profit by adopting a position on the index? Due to poor
corporate results, or the instability of the government, many people feel that
the index would go down. How does one implement a trading strategy to
benefit from a downward movement in the index? Today, using options, you
have two choices:
43
1. Sell call options on the index; or,

2. Buy put options on the index
We have already seen the payoff of a call option. The upside to the writer of
the call option is limited to the option premium he receives upright for
writing the option. His downside however is potentially unlimited. Suppose
you have a hunch that the market index is going to fall in a month’s time.
Your hunch proves correct and the index does indeed fall, it is this downside
that you cash in on. When the index falls, the buyer of the call lets the call
expire and you get to keep the premium. However, if your hunch proves to be
wrong and the market index soars up instead, what you lose is directly
proportional to the rise in the index.
Having decided to write a call, which one should you write? Given that
there are a number of one-month calls trading, each with a different strike
price, the obvious question is: which strike should you choose? Let us take a
look at call options with different strike prices. Assume that the current index
level is 1250, risk-free rate is 12% per year and index volatility is 30%. You
could write the following options:
Which of these options you write largely depends on how strongly you feel
about the likelihood of the downward movement in the market index and how
much you are willing to lose should this downward movement not come
about. There are five one-month calls and five one-month puts trading in the
44
market. The call with a strike of 1200 is deep in-the-money and hence trades
at a higher premium. The call with a strike of 1275 is out-of-the-money and
trades at a low premium. The call with a strike of 1300 is deep-out-of-money.
Its execution depends on the unlikely event that the Nifty will raise by more
than 50 points on the expiration date. Hence writing this call is a fairly safe
bet. There is a small probability that it may be in-the-money by expiration in
which case the buyer exercises and the writer suffers losses to the extent that
the Nifty is above 1300. In the more likely event of the call expiring out-of-
the-money, the writer earns the premium amount of Rs.27.50.
As a person who wants to speculate on the hunch that the market index
may fall, you can also buy puts. As the buyer of puts you face an unlimited
upside but a limited downside. If the index does fall, you profit to the extent
the index falls below the strike of the put purchased by you. If however your
hunch about a downward movement in the market proves to be wrong and
the index actually rises, all you lose is the option premium. If for instance the
index rises to 1300 and you’ve bought a put with an exercise of 1250, you
simply let the put expire. If however the market index does fall to say 1225
on expiration date, you make a neat profit of Rs.25.
Having decided to buy a put, which one should you buy? Given that there are
a number of one-month puts trading, each with a different strike price, the
obvious question is: which strike should you choose? This largely depends on
how strongly you feel about the likelihood of the downward movement in the
market index. If you buy an at-the-money put, the option premium paid by
you will by higher than if you buy an out-of-the-money put. However the
chances of an at-the-money put expiring in-the-money are higher as well.
Speculation: Anticipate volatility; buy a call and a put

45
Do you sometimes think that the market index is going to go through large
swings in a given period, but have no opinion on the direction of the swing?
This could typically happen around budget time, or during times of political
uncertainty when a change in the government is anticipated. How does one
implement a trading strategy to benefit from market volatility? Combinations
of call and put options provide an excellent way to trade on volatility. Here is
what you would have to do:
1. Buy call options on the index at a strike K and maturity T, and
2. Buy put options on the index at the same strike K and of maturity
T.
This combination of options is often referred to as a Straddle and is an
appropriate strategy for an investor who expects a large move in the index
but does not know in which direction the move will be.
Consider an investor who feels that the index, which currently stands
at 1252, could move significantly in three months. The investor could create
a straddle by buying both a put and a call with a strike close to 1252 and an
expiration date in three months. Suppose a three-month call at a strike of
1250 costs Rs.95.00 and a three month put at the same strike cost Rs.57.00.
To enter into this positions, the investor faces a cost of Rs.152.00. If at the
end of three months, the index remains at 1252, the strategy costs the investor
Rs.150. (An up-front payment of Rs.152, the put expires worthless and the
call expires worth Rs.2). If at expiration the index settles around 1252, the
investor incurs losses.
However, if as expected by the investors, the index jumps or falls
significantly, he profits. For a straddle to be an effective strategy, the
investor’s beliefs about the market movement must be different from those of
46
most other market participants. If the general view is that there will be a large
jump in the index, this will reflect in the prices of the options.
SECTOR - INFORMATION TECHNOLOGY OVERVIEW
Information technology (IT) is a broad field that covers all aspects of

managing and processing information. IT professionals design, develop,
support, and manage computer software, hardware, and networks. From the
exuberant growth of its early years to the uncertainty of recent times, the IT
industry has stabilized—with job growth rates now rising steadily—and
continues to change in order to meet the needs of the business world.
While the wild optimism that surrounded the IT industry a few years back
has been deflated, the IT industry is adapting to a changing market. New
developments such as creating infrastructure for mobile technologies will
continue to ensure the vitality and viability of the industry. And as the
industry responds to new business needs, it will continue to evolve into a
mature profession, a profession versatile enough to adapt to new demands
and stable enough to support new innovations and developments.
Market segmentation: Some of the upcoming service lines include higher value
added services such as Engineering and Design, Knowledge processing,
logistics, etc. While customer care continues to be the largest service line,
finance and administration services are expected to grow significantly over the
next few years. Slowly
47
Gradually Indian BPO industry is moving up the value chain – from call
centers catering to customer care the BPO offerings now include an entire
gamut of high-end services like equity research, healthcare solutions.
Focus on emerging areas:

Annual revenue projections for India’s IT industry in 2008 are US $ 87
billion and market openings are emerging across four broad sectors, IT
services, software e-products, IT enabled services, and e-business thus
creating a number of opportunities for Indian companies.
In addition to the export market, all of these segments have a domestic market
component as well.
• Software & Services will contribute over 7.5 % of the overall GDP growth
of India (Source: NASSCOM-McKinsey)
• IT Exports will account for 35% of the total exports from India
• Potential for 2.2 million jobs in IT by 2008
• IT industry will attract Foreign Direct Investment (FDI) of U.S. $ 4-5 billion
• Market capitalization of IT shares will be around U.S. $ 225 billion
48
(Source: Religare securities.com)

TRENDS IN INDIAN IT MARKET
Software product development: Software product development is a market

that has remained elusive for the Indian software and services players, until
recently, when companies have begun venturing into this vast and almost
unexplored arena. During 2002-03, the Indian packaged software market
totaled Rs. 1,000 crore, accounting for 0.2 percent of the overall global
software products opportunity. Clearly, a massive untapped potential exists
for software companies playing on this turf.
49
Offshore product development: Another development that is creating a

push for the software products industry among Indian software majors is
offshore outsourcing of software development by large global IT companies
to Indian shores. While some companies including Microsoft, IBM, Texas
Instruments, Adobe, Novell, SAP, Intel, and Cisco have taken the direct route
and set up captive development centers in India, others have collaborated
with Indian companies for these projects. Indian companies outsourcing
product development activities include large players such as Wipro, TCS,
Infosys and smaller niche players with domain expertise in particular
verticals such as Sasken, Mindtree, among others.
Embedded software: The embedded software solutions market touched US$

21 billion in 2003 and is estimated to grow at 16 percent over the next year.
Considering the high growth expected from the global embedded software
solutions market, Indian companies would do well to tap into this rapidly
expanding opportunity. Indian software companies have started participating
in this space by developing “outsourced” embedded solutions for global
50
Independent Software Vendors (ISVs) such as Samsung, Texas Instruments,
Delphi and Honeywell Industrial Controls.
TRENDS IN INDIAN IT HARDWARE MARKET

The growth of the Indian IT hardware sector has traditionally been lagging
behind the software and services segment, with hardware exports continuing
to remain low-key. The share of hardware in the overall revenues of the
Indian ITITES industry has been witnessing a decline over the past few years
on account of immense competitive pricing pressures and relatively faster
growth in services segment revenues. Almost 90 percent of the revenues
generated by the hardware industry came from domestic market in 2003-04.
PERFORMANCE SUMMARY
The fourth quarter of FY05 saw Indian software majors reporting a slower
(relative to previous quarter) sequential growth in the top line and a dip in
bottom-line, much due to lackluster performance from TCS and the
appreciation in the value of rupee vis-à-vis the US dollar. The effect was also
seen on the operating margins front. In this write up, we analyze the
performance of the sector (through consolidation of results of the four
majors) and see what investors in software stocks can expect going forward.
Indian IT: 4QFY05 performance...
(Rs m) 3QFY04 4QFY05 Change FY04 FY05 Change
51
Consolidated to include results of Infosys, Wipro, Satyam and TCS The

solid performance of the IT companies in Q3 FY05 (after factoring the
sharp Rupee appreciation) has burdened the sector with high expectations
with regard to their performance in last quarter of the fiscal i.e. Q4 FY05.
Overall the quarter has been marked by robust volumes, stable pricing,
appreciating rupee (2.8% on average quarter rate basis) and absence of
any cost inflating events such as salary hikes, etc. Keeping this scenario in
mind and after factoring the company specific developments, we expect
our coverage universe to witness a revenue growth of\6.9% and earnings
growth of 6.8% on sequential basis during the quarter.
KEY HIGHLIGHTS OF THE SECTORAL PERFORMANCE
IN Q4 FY05.
Robust volume growth momentum continues: The demand for Indian
offshore vendors have never been so good if one considers the strong volume
growth momentum (mainly offshore) witnessed by the industry in the last
52
few quarters. The significant growth in offshore traction has been on account
of increasing offshore penetration, rising adoption, increasing credibility and
expansion of services by the Indian offshore vendors. The continuation of
this trend in Q4 FY05 should thereby translate into higher volumes for the
companies in the sector..
Pricing remains stable: The overall billing rates have been relatively stable
in the quarter, which is again in inline with flat prices witnessed in the past
few quarters. Though most of the Tier I and some of the Tier II companies
have secured higher than average prices (~4-5%) from new customers, the
positive impact of the above on the overall pricing scenario is expected to be
minimal at best, as 90% of their business comes from old customers.
The adverse impact of Rupee appreciation on topline growth would be
limited:Though the Rupee/Dollar rate remained stable throughout the quarter
near the ~Rs43.75 mark, the quarterly average rate of Rs43.71 represents a
sharp Rupee appreciation of 2.8% on sequential basis. However, the adverse
impact of this appreciation on the top line growth of the companies is
expected to be limited (as opposed to that in the previous quarter) due to
aggressive forex cover taken by majority of the companies before the quarter
anticipating the Dollar slide. Therefore, the sequential dip in the
Rupee/Dollar rate realized by the companies in the quarter would be
relatively lower. Infosys, TCS and Satyam amongst the Tier I companies.
Operating margins to remain stable overall and improve for selected few:
In the absence of any major cost-push factors, we expect the minor adverse
impact of rupee appreciation to be fully offset by higher fixed cost leverage
derived from strong volume growth thereby enabling majority of the players
to maintain operating margins near their Q3 FY05 level. We also expect
53
marginal margin expansion for companies where traditional levers such as
lower offshore contribution, higher SG&A cost, lower manpower utilization
etc are available. We therefore expect TCS, Satyam, Hexaware, Mphasis and
KPIT to register some margin expansion on sequential basis.
Sequential net profit growth to be determined by forex gains/losses of
previous quarter: With the operating margins expected to remain at similar
levels as in the previous quarter, the sequential net profit growth should be in
line with the sequential revenue growth. However, this is not expected, as
some of the companies recorded extreme net forex gains/losses during the
previous quarter on the back of sharp Rupee appreciation, both on end of
quarter rate and average quarter rate basis. Therefore the sequential net profit
growth would be differentiated and company specific in the absence of such
extreme forex gains/losses during the quarter. Companies such as TCS,
Infosys and Patni, which recorded sizeable forex gains in the previous quarter
are expected to post lower sequential net profit growth whereas companies
like Satyam, Mphasis, Polaris and Geometric, which witnessed forex losses
in the pervious quarter are expected to record more than proportional
sequential net profit growth. HCL Tech is expected to deliver superior profit
performance as the acquisition of minority stake in DSL Software takes full
effect in the quarter.
54
Some Interesting Facts
For Indian software companies, the past two years have marked a shift in
demand from low-end services to high-end ones, like IT consulting, package
implementation and systems integration. Now, while Indian software
companies are increasingly facing competition from global MNCs who are
replicating the Indian off shoring model, the need of the hour is to rapidly
move up the software value chain.
Increasingly, the demand for technology is likely to be more guided by the

'Return on Investment' factor, i.e., how much of cost saving or return on
investment can be obtained by clients from their IT spending when quality
execution capabilities is a given attribute.
As such, large Indian IT companies that have provide a broad range of

services and have proven capabilities in executing large and complex projects
are likely to emerge winners. However, to maintain strong growth in the
long-term, scalability and quality offerings would be the key.
55
A SURVEY ON THE FINANCIAL PERFORMANCE OF IT
COMPANIES
FACTS & FIGURES:
Aggregate revenue growth below expectation; but mid-caps

outperform large-caps: The aggregate revenues of the companies under
review were Rs109.21bn in the quarter, representing a growth of 5.5% on
sequential basis and 32.8% on yoy basis. On segregation of the aggregate
revenues between Tier-1 and Tier-2 companies it is apparent that the latter
outperformed the former. The aggregate revenues of Tier-2 companies grew
6.1% sequentially higher than the 5.4% sequential growth registered by Tier-
1 companies. During the quarter, some of the Tier-1 companies recorded
lower volumes with reasons varying between compliance issues at client’s
end (Infosys), delay in client ramp up and deferment (TCS and Wipro) and
client restructuring. The topline growth of these companies was also hit by
the lower Rupee rate realized in the quarter on sequential basis due to Rupee
appreciation. The second rung top tier companies such as Satyam, HCL and
Patni registered a rather robust sequential revenue growth in the quarter.
Amongst the Tier-2 companies, the relatively strong group revenue
performance (compared to Tier 1 players) was led by Mphasis, Mastek and
KPIT Cummins.

56
Overall margin decline sequentially; dragged by Teir-1 companies: The
overall operating margin (OPM) declined by 100bps sequentially to 24.8% in
the quarter. Though any major cost inflating factors (salary hike, etc) were
absent in the quarter, OPM of most of the companies deteriorated
sequentially reflecting the adverse impact of Rupee appreciation (on average
quarter rate basis) during the quarter. The margin decline was more
prominent amongst the Tier-1 companies at 120bps (from 27.6% in Q3 FY05
to 26.4% in Q4 FY05) on aggregate basis with Infosys (reaffirming its cost
management efficiency) being the only company to have registered an
improvement at the operating level. TCS and Wipro recorded the steepest
margin decline. On aggregate basis, the OPM of Tier-2 companies improved
by 40bps sequentially to 16.8%. To some extent this was anticipated as most
of these companies had operating margin levers operating at suboptimal level
before the start of the quarter. I-flex, Mphasis, Felxtronics and Hexaware
were the companies that recorded OPM expansion in the segment.
Other income component determining the profitability of some companies:

As expected, other income (mainly represented by forex gains/loses) played a
critical role in the quarter with respect to some companies. We anticipated in
the preview that while TCS profitability would be capped by the absence of
forex gains, Satyam and Mphasis would be benefited by normalization of
lower forex gains and loses recorded in Q3 FY05. Inline with our
expectation, TCS’s profitability was materially affected by a forex loss while
that of Satyam and Mphasis was enhanced by sizeable forex gains. Overall,
the other income component in the quarter was sequentially lower by 50.1%
at Rs1.09bn.
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Upturn in capex cycle increasing depreciation: The higher depreciation
during the quarter is attributable to continuation of healthy capital spending
by sectoral companies. The companies, responding to higher visibility, are
making huge investments in infrastructure thereby ramping up their delivery
capabilities. These investments have started from second half of FY04 after a
subdued period witnessed in FY02 and FY03.
Net profit de-grows on sequential basis; but Tier-2 companies put up

a better show: The aggregate net profit (pre exceptional items) of our
coverage universe stood at Rs21.59bn, representing a decline of 4.3% on
sequential basis and a growth of 31.9% on yoy basis. The Tier-1 companies
led the dismal profit performance in the quarter with TCS being the
prominent spoilsport. The aggregate net profit of the Tier-2 companies grew
1.7% on sequential basis to Rs3.46bn whereas the aggregate net profit of
Tier-1 companies decreased by 4.6% on sequential basis to Rs20.44bn. The
companies that recorded stellar profitability growth on sequential basis
include Satyam amongst the Tier-1 companies and Mphasis, I-flex and
Flextronics amongst the Tier-2 companies.
Positive bias for billing rate continues: The fourth quarter witnessed
the positive bias for billing rates continue as these IT companies increasingly
saw higher than average billing rates from their existing and new clients. The
strongest growth in rates came for Infosys, which saw its onsite and offshore
rates jump sequentially by around 1% each. On the other hand, while there
was a slight improvement in offshore rates for Wipro, their onsite rates
declined by around 3% QoQ. Overall, while the change in billing rates has
not been significant enough to make a major effect on the top line, volumes
58
have continued to lead the growth in the same (the top line). For instance,
offshore and onsite volumes for Infosys grew QoQ by 5% and 7%
respectively. However, the growth in volumes for all the companies was
relatively lower than what was seen in the previous quarters. Particularly, the
managements of Infosys and TCS have indicated that certain client specific
issues have led to this marginal slowdown in off shoring volumes in the
fourth quarter, something that might have an impact on performance in
1QFY06 as well. 4QFY05 also saw companies report higher utilization
levels, which were possible fallout of a lower rate of hiring in the quarter.
Margins under pressure from rupee appreciation: While Infosys

reported a margin expansion in the quarter and Satyam reported flat margins,
those for Wipro and TCS contracted. However, if one were to consider
margins for the full year, all the four companies have reported improvement
in the same. Increased proportion of revenues coming from offshore services,
higher utilisation levels and leverage on the SG&A front have been the key
factors aiding margin expansion in FY05. We believe that these factors will
continue to help these companies report muted declines in margins going
forward. However, uncertainty on account of rupee dollar movement will
also have an impact on the margins. As a matter of fact, every 1%
appreciation in the value of rupee negatively affects operating margins by 30
basis points (this is assuming that, on an average, 30% of costs are in rupee
terms).
59
TCS casts pressure on the bottom line: The graph below clearly indicates
the kind of pressure exerted by TCS on the net profit growth of the
consolidated entities during the quarter. The company, on account of poor
operating performance and some extraordinary expenses during the quarter,
reported a 34% sequential decline in net profits. If one were to remove the
TCS figures and consolidates only for the other three companies, the
sequential net profit growth stands at 10%, from a negative of 7.3% as shown
in the table above.
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OUTLOOK FOR FUTURE: Continued outsourcing momentum is expected
despite muted earnings guidance by Tier - players. IT companies seems to
have matured to the next phase where they shall strive to get multi million
dollar orders. IT spending has been rather stable while it is the market share
of Indian vendors that has been increasing. Given the fact that in FY05, as
many as 400 out of the global 500 corporations resorted to outsourcing in
some form or the other, up from 300 in FY04 and more are expected to do so
in FY06. The long-term direction is towards growth are strong . Offshoring
will remain core engine of revenue growth. Currently the average P/E of
these four big companies under consideration (TCS, Infosys, Satyam and
Wipro ) is around 17.8 times expected EPS for FY07. This seems pretty
attractive from a long-term basis. As mentioned above, while some
managements have indicated of a sedate growth in 1QFY06, investors should
not base their decision on the expected performance of just one quarter.
Looking further ahead, we expect these software services majors to continue
on the path of a strong growth as the improvement in Indian offshoring story
strengthens. However, there is a risk to the assumptions. For the sector as a
whole, the movement on the currency front is likely to be a strong factor that
could affect profitability in the coming quarters. As seen in recent times, led
by pressures of a huge current account deficit, the US dollar has resumed its
depreciation against the Indian rupee and other major global currencies. If
this were to continue in the future, and that the rupee were to strengthen
further, profitability of these companies would be impacted. The strong
demand for Indian IT services is expected to continue in FY06 on the back of
4-5% growth in global IT spending, increasing outsourcing, rising offshore
penetration (currently just at 2%), increasing instances of break-down of
larger deals, expansion of offerings etc. This coupled with anticipated stable
61
billing rates should lead to robust revenue growth for the sectoral companies.
However, the key beneficiaries of the above favorable macro trends are
expected to be the companies with proven track record, diverse portfolio of
services and efficient delivery capabilities or companies operating and
specializing in niche areas. Though the operating margin in the year would
come under pressure from salary inflation, increasing investments in SG&A
and Rupee appreciation, the sector should be able to deliver decent
profitability growth. NASSCOM expectation is of 30-32% growth. Tough
call to go by this but really this is one guiding factor.
Volume: We expect 6-8% Q/Q volume growth with flat pricing and
broadly flat margins Q/Q. One of the key detrimental factor for the IT sector
is the Dollar which was volatile for past 1 year seems to have stabilized at
around Rs.43.50. While the pound has depreciated by 6% and euro by 7%
this shall have some marginal impact on the earnings however majority of
orders are booked in dollar terms. This quarter has 64 billed days in
comparison to 61 billed days in previous quarter indicating higher billed
revenues. Moreover the September quarter has the highest billing days.
Billing Outlook: Industry has witnessed new contracts signing at 5

10% higher prices. But however the blended rates are still low indicating flat
billing with positive bias. We expect the billing rates to move up in the
September quarter. Second half we expect the billing rate to rise by around 4-
6%. Though the gap between MNC and Indian vendor’s rates is shrinking we
still believe there is some room for some expansion.
62
EBIDTA impact: IT industry continues to face wage inflation in the
offshore space on account of increased hiring and poaching MNC eventually
pushing up the wage structure. We expect Offshore salary hike to be increase
by 15 % and Onsite by 10%. This will impact the operating margins by 300
bps. We foresee the industry to higher more fresher rather than laterals which
can help reduce average cost per employee. We expect the offshore revenues
and utilization rates they key levers to enhance the EBITA margins. We also
expect the vendors to offset wage inflation through SG&A Expenses. As the
vendors gain scale the incremental SG&A cost will be lower. They hall
leverage the cost cutting in G&A part, which would help offset margins by
200-250 ps. 1Q 00506 s all bear the brunt of wage inflation but on annual
basis the pan out well.
TAX: Tax rate is another concern as many units of Tier I players are
nearing the end of tax break under Section 10 A/B. However the percentage
of revenues booked from that unit may not have a major impact on the
earnings. As in the case of Geometric Software which witnessed marginal
increase in average tax rate.
M&A: Balance sheet continues to boast a strong cash position. This
makes it an ideal ground for M&A activity. As Indian vendors work on
diversifying their service offerings, they would be seriously looking at
acquiring companies with niche capabilities and new geographies. Though
there is sever challenges from the MNCs we believe the Indian vendors are
set to poise as a sever challenge to those MNC?s. We note that the Infosys
market cap is marginally lower than Accenture indicating its capabilities to
take on the big fight. As there are on par they will mature from youth to
maturity phase where they shall fight for Multi billion dollar contract. i.e.
Recently won by Satyam (INVISTA is the world's largest integrated fiber,
63
resin and intermediates company, serving the Apparel, Interiors,
Intermediates, Performance Fibers, and Polymer and Resins industries) and
Infosys and TCS (Deutsche bank). The stocks to look out for being Infosys
and Satyam, TCS amongst the large companies and Hexaware, KPIT
Cummins and Subex , Geometric amongst the small and mid-sized
companies.
NATIONAL STOCK EXCHANGE AND CNX IT SECTOR INDEX

The National Stock Exchange (NSE) is India's leading stock exchange
covering various cities and towns across the country. NSE was set up by
leading institutions to provide a modern, fully automated screen-based
trading system with national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety and market integrity. It
has set up facilities that serve as a model for the securities industry in terms
of systems, practices and procedures.
NSE has played a catalytic role in reforming the Indian securities market in
terms of microstructure, market practices and trading volumes. The market
today uses state-of-art information technology to provide an efficient and
transparent trading, clearing and settlement mechanism, and has witnessed
several innovations in products & services viz. demutualisation of stock
exchange governance, screen based trading, compression of settlement
cycles, dematerialisation and electronic transfer of securities, securities
lending and borrowing, professionalisation of trading members, fine-tuned
risk management systems, emergence of clearing corporations to assume
counterparty risks, market of debt and derivative instruments and intensive
use of information
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The Organization
The National Stock Exchange of India Limited has genesis in the

report of the High Powered Study Group on Establishment of New Stock
Exchanges, which recommended promotion of a National Stock Exchange by
financial institutions (FIs) to provide access to investors from all across the
country on an equal footing. Based on the recommendations, NSE was
promoted by leading Financial Institutions at the behest of the Government of
India and was incorporated in November 1992 as a tax-paying company
unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts

(Regulation) Act, 1956 in April 1993, NSE commenced operations in the
Wholesale Debt Market (WDM) segment in June 1994. The Capital Market
(Equities) segment commenced operations in November 1994 and operations
in Derivatives segment commenced in June 2000.
NSE Group
India Index Services & Products Ltd. (IISL)
India Index Services and Products Limited (IISL), a joint venture between
NSE and CRISIL Ltd. (formerly the Credit Rating Information Services of
India Limited), was set up in May 1998 to provide a variety of indices and
index related services and products for the Indian capital markets. It has a
consulting and licensing agreement with Standard and Poor's (S&P), the
world's leading provider of ingestible equity indices, for co-branding equity
indices.
65
National Securities Clearing Corporation Ltd.(NSCCL)

The National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned
subsidiary of NSE, was incorporated in August 1995. It was set up to bring
and sustain confidence in clearing and settlement of securities; to promote
and maintain, short and consistent settlement cycles; to provide counter-party
risk guarantee, and to operate a tight risk containment system. NSCCL
commenced clearing operations in April 1996.
NSE.IT Ltd.
NSE.IT, a 100% subsidiary of National Stock Exchange of India Limited
(NSE), is the information technology arm of the largest stock exchange of the
country. A leading edge technology user, NSE houses state-of-the-art
infrastructure and skills. NSE.IT possesses the wealth of expertise acquired in
the last six years by running the trading and clearing infrastructure of largest
stock exchange of the country. NSE.IT is uniquely positioned to provide
products, services and solutions for the securities industry. There has been a
long felt need for top-of-the-line products, services and solutions in the area
of trading, broker front-end and back-office, clearing and settlement, web-
based trading, risk management, treasury management, asset liability
management, banking, insurance etc. NSE.IT's expertise in these areas is the
primary focus. The company also plans to provide consultancy and
implementation services in the areas of Data Warehousing, Business
Continuity Plans, Stratus Mainframe Facility Management, Site Maintenance
and Backups, Real Time Market Analysis & Financial News over NSE-Net,
etc.
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National Securities Depository Ltd. (NSDL)

In order to solve the myriad problems associated with trading in physical
securities, NSE joined hands with the Industrial Development Bank of India
(IDBI) and the Unit Trust of India (UTI) to promote dematerialization of
securities. Together they set up National Securities Depository Limited
(NSDL), the first depository in India.
DotEx International Limited
DotEx was formed to provide a world-class internet trading platform which

allows members of NSE to offer online trading facilities to their customers.
Members of NSE can service a larger clientele by using the automated risk
management features and thus increase volumes. Investors get
comprehensive and updated information necessary to trade, along with a
single-click convenience to fulfil their obligations. The initial offering of
DotEx is DotEx Plaza where multiple market participants such as members
of NSE, depository participants and banks can offer web-based services to
their customers. As a neutral aggregator and infrastructure provider, DotEx
offers choice and convenience to investors.
67
CNX IT Sector Index
Information Technology (IT) industry has played a major role in the Indian
economy during the last few years. A number of large, profitable Indian
companies today belong to the IT sector and a great deal of investment
interest is now focused on the IT sector. In order to have a good benchmark
of the Indian IT sector, IISL has developed the CNX IT sector index. CNX IT
provides investors and market intermediaries with an appropriate benchmark
that captures the performance of the IT segment of the market.
Companies in this index are those that have more than 50% of their turnover
from IT related activities like software development, hardware manufacture,
vending, support and maintenance.
The average total traded value for the last six months of CNX IT Index
stocks is approximately 91% of the traded value of the IT sector. CNX IT
Index stocks represent about 96% of the total market capitalization of the IT
sector as on March 31, 2005.
The average total traded value for the last six months of all CNX IT
Index constituents is approximately 14% of the traded value of all stocks on
the NSE. CNX IT Index constituents represent about 14% of the total market
capitalization as on March 31, 2005.
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Methodology
The index is a market capitalization weighted index with its base
period being December 1995 and the base date and base value being January
1, 1996 and 1,000 respectively The Base Value of the index is being revised
from 1000 to 100 w.e.f. 28 May 2004.
Selection Criteria
Selection of the index set is based on the following criteria :
1. Company's market capitalization rank in the universe should be less
than 500
2. Company's turnover rank in the universe should be less than 500
3. Company's trading frequency should be at least 90% in the last six

months
4. Company should have a positive net worth.
5. A company which comes out with an IPO will be eligible for inclusion
in the index, if it fulfills the normal eligibility criteria for the index for
a 3 month period instead of a 6 month period.
69
CNX IT Sector Index - Constituent Stocks
Weightage
%
CMC Ltd. CMC 0.31
Electronics Software
Systems Ltd. FSS 0.86
GTL Ltd. GLOBALTELE 0.31
HCL Info systems Ltd. HCL-INSYS 1.1
HCL Technologies Ltd. HCLTECH 5.19
Hex aware Technologies
Ltd. HEXAWARE 0.67
Hinduja TMT Ltd. HTMT 0.53
I-Flex Solutions Ltd. I-FLEX 2.47
iGate Global Solutions
Ltd. IGS 0.28
Infosys Technologies Ltd. INFOSYSTCH 26.69

Mastek Ltd. MASTEK 0.22
Moser Baer India Ltd. MOSERBAER 0.97
Mphasis BFL Ltd. MPHASISBFL 0.9
Patni Computer Systems
Ltd. PATNI 1.81
Polaris Software Lab Ltd. POLARIS 0.47
Rolta India Ltd. ROLTA 0.34
Satyam Computer
Services Ltd. SATYAMCOMP 6.82
Tata Elxsi Ltd. TATAELXSI 0.24
Tata Consultancy Services
Ltd. TCS 27.27
Wipro Ltd. WIPRO 22.56
THE ART OF ANALYSING IT STOCKS

70
A few benchmarks for stocks - A quick and easy measuring stick.
These are a few benchmarks that can help you decide if you should spend
more time on a stock or not. They are easily available and can be of great use
in screening good stocks.
Revenues/Sales growth.
Revenues are how much the company has sold over a given period. Sales are
the direct performance indicators for companies. The rate of growth of sales
over the previous years indicates the forward momentum of the company,
which will have a positive impact on the stock's valuation.
Bottom line growth
The bottom-line is the net profit of a company. The growth in net profit
indicates the attractiveness of the stock. The expected growth rate might
differ from industry to industry. For instance, the IT sector's growth in
bottom-line could be as high as 65-70% from the previous years whereas for
the old economy stocks the range could be anywhere in range of 10- 15%.
ROI - Return on Investment
ROI in layman terms is the return on capital invested in business i.e. if you
invest Rs 1 crore in men, machines, land and material to generate 25 lakhs of
71
net profit, then the ROI is 25%. Again the expected ROI by market analysts
could differ form industry to industry. For the software industry it could be as
high as 35-40%, whereas for a capital intensive industry it could be just 10-
15%
Volume
Many investors look at the volume of shares traded on a day in comparison

with the average daily volume. The investor gets an insight of how active the
stock was on a certain day as compared with previous days. When major
news is announced, a stock can trade tens of times its average daily volume.
Volume is also an indicator of the liquidity in a stock. Highly liquid stocks
can be traded in large batches with low transaction costs. Illiquid stocks trade
infrequently and large sales often cause the price to rise/fall dramatically.
Illiquid stocks tend to carry large spreads i.e. the difference between the
buying price and the selling price. Volume is a key way to measure supply
and demand, and is often the primary indicator of a new price trend. When a
stock moves up in price on unusually high volumes it could indicate that big
institutional investors are accumulating the stock. When a stock moves down
in price on unusually heavy volume, major selling could be the reason.
Market Capitalization.
This is the current market value of the company's shares. Market value is the
total number of shares multiplied by the current price of each share. This
would indicate the sheer size of the company; it's stocks' liquidity etc.
72
Company management
The quality of the top management is the most important of all resources that
a company has access to. An investor has to make a careful assessment of the
competence of the company management as evidenced by the dynamism and
vision. Finally, the results are the single most important barometer of the
company's management. If the company's board includes certain directors
who are well known for their efficiency, honesty and integrity and are
associated with other companies of proven excellence, an investor can
consider it as favourable. Among the directors the MD (Managing Director)
is the most important person. It is essential to know whether the MD is a
person of proven competence.
PSR (Price-to-Sales Ratio)
This is the number you want below 3, and preferably below 1. This measures
a company's stock price against the sales per share. Studies have shown that a
PSR above 3 almost guarantees a loss while those below 1 give you a much
better chance of success.
Return on Equity
Supposedly Warren Buffet's favorite number, these measures how much

your investment is actually earning. Around 20% is considered good.
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Debt-to-Equity Ratio
This measures how much debt a company has compared to the equity. The
debt-to-equity ratio is arrived by dividing the total debt of the company with
the equity capital. You're looking for a very low number here, not necessarily
zero, but less than .5. If you see it at 1, then the company is still okay. A D/E
ratio of more than 2 or greater is risky. It means that the company has a high
interest burden, which will eventually affect the bottom-line. Not all debt is
bad if used prudently. If interest payments are using only a small portion of
the company's revenues, then the company is better off by employing debt
pushing growth. Also note capital intensive industries build on a higher
Debt/Equity ratio; hence this tool is not a right parameter in such cases.
Beta
The Beta factor measures how volatile a stock is when compared with an
index. The higher the beta, the more volatile the stock is. (A negative beta
means that the stock moves inversely to the market so when the index rises
the stock goes down and vice versa).
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. Thus, if AB ltd
has 2 crore shares and has earned Rs 4 crore in the past 12 months, it has an
EPS of Rs 2. EPS Rating factors the long-term and short-term earnings
74
growth of a company as compared with other firms in the segment. Take the
last two quarters of earnings-per-share increase and combine that with the
three-to-five-year earnings growth rate. Then compare this number for a
company to all other companies in your watch list within each sector and rate
the results on how it outperforms all other companies in your watch list in
terms of earnings growth. It’s advisable to invest in stocks that rank in the top
20% of companies in your watch list. This is based on the assumption that
your portfolio of stocks in the "Watch List" have been selected by using
some basic screening tools so as to include the best of the stocks as perceived
and authenticated by the screening tools that you had used.
Price / Earnings Ratio (P/E).

Read about this most important investor tool in the next part of this module.
The P/E ratio as a guide to investment decisions
Earnings per share alone mean absolutely nothing. In order to get a sense of
how expensive or cheap a stock is, you have to look at earnings relative to the
stock price and hence employ the P/E ratio. The P/E ratio takes the stock
price and divides it by the last four quarters' worth of earnings. If AB ltd is
currently trading at Rs. 20 a share with Rs. 4 of earnings per share (EPS), it
would have a P/E of 5. Big increase in earnings is an important factor for
75
share value appreciation. When a stock's P-E ratio is high, the majority of
investors consider it as pricey or overvalued. Stocks with low P-E's are
typically considered a good value. However, studies done and past market
experience have proved that the higher the P/E, the better the stock.
A Company that currently earns Re 1 per share and expects its earnings to
grow at 20% p.a will sell at some multiple of its future earnings. Assuming
that earnings will be Rs 2.50 (i.e. Re 1 compounded at 20% p.a for 5 years).
Also assume that the normal P/E ratio is 15. Then the stock selling at a
normal P/E ratio of 15 times of the expected earnings of Rs 2.50 could sell
for Rs 37.50 (i.e. rs 2.5*15) or 37.5 times of these years earnings.
Thus if a company expects its earnings to grow by 20% per year in the
future, investors will be willing to pay now for those shares an amount based
on those future earnings. In this buying frenzy, the investors would bid the
price up until a share sells at a very high P/E ratio relative to its present
earnings.
First, one can obtain some idea of a reasonable price to pay for the stock by
comparing its present P/E to its past levels of P/E ratio. One can learn what a
high is and what a low P/E are for the individual company. One can compare
the P/E ratio of the company with that of the market giving a relative
measure. One can also use the average P/E ratio over time to help judge the
reasonableness of the present levels of prices. All this suggests that as an
investor one has to attempt to purchase a stock close to what is judged as a
reasonable P/E ratio based on the comparisons made. One must also realize
that we must pay a higher price for a quality company with quality
management and attractive earnings potential.
76
Fundamental Analysis Fundamental Analysis is a conservative and non-

speculative approach based on the "Fundamentals". A fundamentalist is not
swept by what is happening in Dalal street as he looks at a three dimensional
analysis.
The Economy
The Industry
The Company
All the above three dimensions will have to be weighed together and not in
exclusion of each other. In this section we would give you a brief glimpse of
each of these factors for an easy digestion
The Economy Analysis
In the table below are some economic indicators and their possible impact on
the stock market are given in a nut shell.
Impact on the stock

Economic indicators
market
1. GNP -Growth -Favorable
-Decline -Unfavorable
2. Price Conditions - Stable -Favorable
- Inflation -Unfavorable
3. Economy - Boom -Favorable
- Recession -Unfavorable
4. Housing Construction
Activity
-Favorable
- Increase in activity
-Unfavorable
- Decrease in Activity
5. Employment - Increase -Favorable
- Decrease -Unfavorable
6. Accumulation of - Favorable under inflation
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Inventories - Unfavorable under
deflation
7. Personal Disposable
Income
-Favorable
- Increase
-Unfavorable
- Decrease
8. Personal Savings - Favorable under inflation
- Unfavorable under
deflation
9. Interest Rates - low -Favorable
- high -Unfavorable
10. Balance of trade
- Positive -Favorable
- Negative -Unfavorable
11. Strength of the Rupee in
Forex market
-Favorable
- Strong
-Unfavorable
- Weak
12. Corporate Taxation (Direct
& Indirect
-Favorable
- Low
-Unfavorable
- High
About Company
On 24th June 1987 Company was incorporated as a Private Limited Co. for
providing Software Development and Consultancy Services to large
corporations. The company was promoted by B Rama Raju and B Ramalinga
Raju. The company has set up two software Technology Parks, one at
Mayfair Centre, Secunderabad and other at Qutuballapur of Ranga Reddy
Dist. of A.P. The company also developed a software Development center in
78
Bangalore. On 26th August 1991 it was converted into a Public Limited
Company.
Share capital
In 1992 The Company went in for a Public Issue of Equity shares. The
company has set up facilities at Secunderabad, Hyderabad and Bangalore.
The Company has created infrastructural facilities consisting of workstations
with modern communication and networking equipment. 1992 The Company
went in for a Public Issue of Equity shares. The company has set up facilities
at Secunderabad, Hyderabad and Bangalore. The Company has created
infrastructural facilities consisting of workstations with modern
communication and networking equipment.
ADR/GDR
The American depositary shares (ADS) of Satyam Computer Services on

May 16 was listed at $11.16 on the New York Stock Exchange (NYSE) at a
premium of 14.9 per cent to the offer price.
Financials
Year 2005/03 2004/03 2003/03 2002/03 2001/03

Sales 3,464.23 2,541.55 2,023.65 1,731.94 1,219.99
Profit After Tax 750.26 555.79 307.42 490.13 486.29
79
The key profitability ratios are:
Return on Total Assets (ROTA)

20.24%
Return on capital employed (ROCE)

23.25%
Net profit margin

21.03%
Miscellaneous
1 During 1995 company issued 37,17,000 12% unsecured fully

convertible debentures part "A" of Rs.100 each on right basis for the
shareholders in proportion of 1 FCD for every 5 shares held. The
company also issued 37, 17,000-12% FCD's-part `B' Rs.60 per
80
debentures in August which can be converted into equity shares of
Rs.10 each at premium of Rs.50 per share on August 1996.
2 In 2003 company Approves enhancement of investment limit by

Foreign Institutional Investors (FII's) under Portfolio Investment
Scheme from 49% to 60.
3 Fidelity Investments buys 245,500 equity shares of the company, stake

increases to 5.05%
FINDING:
1 Product wise stock futures are attracting highest volumes.
Company wise TISCO is leading in number of contracts in may 2005. There

were total 154523 contracts of TISCO and they were 26% of total contracts
81
Stock Futures No. of Contracts in May % of Total

Tisco 154,523 26%
Reliance 69,298 11%
Digital 56,842 9%
Hind Petro 53,319 9%
Infosys 49,412 8%
Others-25 stock futures 221,890 37%
Total 605,284 100%
2 The daily traded volumes in the F&O segment were nearly 2000 crore
in December 2004 which increase to nearly 2100 Crores in may 2005 a
increase of 5% in 7 months.
3 Various records achieve by the various segments.

1. Highest traded value in Index Futures was Rs.7563 Crores
on 22 JAN 2004.
2. Highest traded value in Stock Futures was Rs. 13100 Crores
on 28 JAN 2004.
3. Highest traded value in Index Option was Rs. 1256 Crores
on 28 FEB 2005.
4. Highest traded value in Stock Option was Rs. 1484 Crores
on 29 JAN 2004.
82
5. Highest traded value in Interest Rate futures was Rs. 140
Crores on 24 JAN 2003
6. Highest traded value of Total F&O Traded Value was Rs.
21921 Crores on 28 JAN 2004
4 Month wise Basic Statistics of the F&O Segment:

1. The monthly traded value in F&O segment in December 2004
was Rs. 268227 Crores which decrease to 208380 Crores in May 2005
a decrease of 22.31 % and average daily turn over was Rs. 11662
Crores which decrease to Rs. 9472 Crores in May 2005 a decrease
of18.77% .
2. The total number of contracts in December 2004 were 7515469
which increase to 9137619 in May an increase of 21.58%
6 The percentage of Stock futures and Stock options is decreasing

whereas percentage of Index Futures and Index options is increasing in
monthly trade value in derivative segment.
7 The contribution of institutional investors in total turnover of the

derivative segment was 4.82% in December 2004 which increase to
8.90% in May 2005 while the contribution of retail investors was 58.63
in December 2004 which decrease to 56.56% in May 200
83
8 Index Futures witnessed a significant increase of 144.98% and
156.12% in terms of total number of contracts and daily average of
contracts respectively in May 2005 as compared to December 2004.
9 Total number of contracts and open interest in terms of number of

contracts has soared by 207.89% and 89.79% respectively in May
2005 as compared to December 2004. The total traded value and open
interest in terms of value have increased by 11.35% and 20.56%
respectively as compared to the previous month.
10 NSE was ranked first in number of contracts of Stock Future among all
the stock markets with 4466404 contracts in world while it was ranked
fourth with 3545971 contracts in Index Future. Ranked tenth with
736505 contracts in Index option segment and it ranked twelfth in
Stock Options with 388739 contracts.
Recommendations:
1 In order to generate volumes, the system of sub-brokers be used for

trading in derivatives market.
2 In order to facilitate free arbitrage between cash and derivatives

market, financial institutions and mutual funds may be permitted to
short sell in the cash market.
84
3 Such short sale may, however, be restricted to the extent of

corresponding exposure in the derivatives market. Moreover, such
transactions can also be permitted through a separate dedicated fund.
4 Arbitrage between cash and futures market will also help in better
price discovery in both the markets.
5 SEBI and RBI should jointly examine the issues concerning trading in
derivatives by FIs and FII’s.
6 Legal requirements for copious public information disclosure, and

penalties for false information disclosure, would improve the
information set available to speculators.
7 Institutions in the securities markets which impose the lowest possible

transactions costs upon speculators would improve market efficiency.
CONCLUSION
Derivative market in India has seen a excellent growth in such a short span of
time. The volumes in Derivative market is increasing day by day and they are
now dominating the over all volumes in all the stock market segments.
As far as the market outlook is concerned although the pace of growth had
subsided a bit in the IT sector it is still a force in the Indian economy. The IT
sector stocks are flat for the time being mostly because of cautious attitude of
the traders before the 1QFY06 results are out, which will start coming in
85
JULY. The past year has seen brisk activity in the Tier-2 IT companies rather
than the Tier- 1 companies. This tend is scheduled to continue. Off-shoring
seems to be the mantra for the future.
Facts and figure speak in itself that as from the past years analysis of
derivative market we could see the bullish trend of the Indian stock market.
There has been a tremendous pressure on the Indian IT industries to perform
well as the expectations of the investors are rising with bullish market
sentiments. The IT sector is still on the BULL run.
Indian IT sector is riding on a increase both in export to US market and

exploring new market like China and Brazil.
Indian IT sector has been an excellent growth story world over. Indian IT
companies have not only performed in Indian stock market but also in each
and every stock market wherever they have listed like in US stock, Singapore
stock exchange etc.
BIBLIOGRAPHY
1. BOOKS
1 Capital Market by Sanjeev aggarwal

2 Essential Technical Analysis: Tools and Techniques to Spot
Market Trends – LEIGH STEVENS.
86
3. WEB RESOURCES
2 www.bseindia.com
3 www.nseindia.com
4 www.buzzingstocks.com
5 www.equis.com
3. News Reports & Articles:

6 www.fortissecurities.com
7 www.indiabulls.com
8 www.investopedia.com
9 www.economictimes.com
10 www.indiainfoline.com
11 www.sharekhan.com
12 Business standard (smart investor)

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1

SUMMER TRANING PROJECT REPORT

SHIVA INSTITUTE OF MANAGEMENT STUDIES

UNDER THE GUIDANCE OF

I express my sincerest gratitude and thanks to hon`ble,

To maintain and cope up with the growing scope of

The Broad object is to equipped the trainees with all the

The project also helps in understanding the trend of the

All these steps help me to understand how to cope up with

The research work executed by the team had an object

OBJECTIVES OF THE PROJECT

Until or unless we know what we have to do? We can’t do

1 To understand the growth of Indian Derivative Market

1 To understand various types of derivative instruments of

2 To know about various types of investment strategies in

3 This project helps in selecting market out-performer

Religare Enterprises Limited (A Ranbaxy Promoter Group Company)

Religare is proud of being a truly professional financial service provider

Unlike a traditional broking firm, Religare group works on the philosophy of

MISSION AND VISION

To be India's first Multinational providing complete financial

Providing integrated financial care driven by the relationship of

India’s largest pharmaceutical Company

-Started by the promoters of Ranbaxy

-A leading solutions provider in

Religare team is led by a very eminent Board of Directors

Chairman Mr.Harpal Singh

Managing Director Mr. Sunil Godhwani

Director Mr.Vinay Kumar Kaul

Director Mr.Malvinder Mohan Singh

Director Mr.Shivinder Mohan Singh

1. EQUITY TRADING 1.MARGINE FINANCING 1.RESEARCH &

BUSINESS & OPERATIONS

Derivative is a product whose value is derived from the value of one or

Derivative products initially emerged as hedging devices against

Early forward contracts in the US addressed merchants’ concerns about

In OTC derivatives market is mainly attributable to the continued rapid

The turnover data are available only for exchange–traded derivatives

DERIVATIVES MARKET IN INDIA

The first step towards introduction of derivatives trading in India was

The SCRA was amended in December 1999 to include derivatives

exchanges, NSE and BSE, and their clearing house/corporation to commence

Derivative contracts have several variants. The most common variants

The derivatives market performs a number of economic functions.

3. Derivatives, due to their inherent nature, are linked to the underlying

4. Speculative trades shift to a more controlled environment of

5. Derivatives markets help increase savings and investment in the long

The most commonly used derivatives contracts are forwards, futures

Baskets: Basket options are options on portfolios of underlying assets. The

INTRODUCTION TO FUTURES AND OPTIONS

A futures contract may be offset prior to maturity by entering into an equal

1 Quantity of the underlying

Derivatives - Derivative is a product whose value is derived from the

Derivatives are used for three categories of participants:-

FUTURES MARKET WATCH: SPOT THE MISPRICING

Futures >Spot + Cost of Carry

Month Quantity Bid Ask Quantity Fair value

November 1000 1009 1010.5 1000 1009.50

December 200 1022 1025 400 1019.00

January 400 1028 1032 200 1028.70

What we spoke of above were arbitrage opportunities arising out of

Spot Futures contract Fair values Basis Spread

Table 4 Mispricings of Basis and Spreads on various futures contracts