Capital Market

Session 6

1
 Learning
Introduction to the capital market
Primary & Secondary market
IPO Listing
Risk & Return , PE, EPS
Fundamental Analysis

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 Primary Vs Secondary Market

3
 Primary Market
Initial Public Offer: Sale of securities to the members of the
public.
Rights Issue: Method of raising further capital from the
existing shareholders / debenture holders by offering
additional shares to them on a preemptive basis.
Private Placements: As the name suggests it involves selling
securities privately to a group of investors.

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 GDR & ADR

5
 IPO Listing

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 DMart
Radhakishan Damani promoted-Avenue Supermarts, the owner
and operator of supermarket retail chain D-Mart, is set to raise Rs
1,810-Rs 1,866 crore by offering 6.23 crore shares priced
between Rs 290-299, say merchant bankers to the issue.
The issue opened for bidding from March 8 to March 10.
Avenue Supermarts has reserved 1.87 crore shares for anchor
investors' book, 1.24 crore for qualified institutional buyers,
93.59 lakh for non-institutional investors and 2.18 crore shares for
retail investors.
In its draft prospectus, the company had said that a large chunk of
the funds raised through the issue will be used to repay debt.

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 D-Mart operates close to 120 stories, most of them
concentrated in Maharashtra and Gujarat.
As of March 31, 2016, the company had a topline of about Rs
8600 crore, and a net profit of about Rs 320 crore,
translating into an earnings per share of Rs 5.72.
The companys earnings have been growing at 31 percent
compounded for the preceding two years. Extrapolating that,
the company is expected to report an earnings per share of
roughly Rs 7.6 for this financial year.

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9
 IPO of Dmart was subscribed by 104.5 times

The D-Mart IPO received bids for 463.61 crore shares

against the total issue size of 4.43 crore shares

Current share price is Rs 956

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 Dmart Chart

11
 Risk & Return

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 Assume the Following
Investment Alternatives
Economy Prob. T-Bill Alta Repo Am F. MP

Recession 0.10 8.0% -22.0% 28.0% 10.0% -13.0%

Below avg. 0.20 8.0 -2.0 14.7 -10.0 1.0

Average 0.40 8.0 20.0 0.0 7.0 15.0

Above avg. 0.20 8.0 35.0 -10.0 45.0 29.0

Boom 0.10 8.0 50.0 -20.0 30.0 43.0

1.00

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 What is unique about
the T-bill return?

The T-bill will return 8% regardless of the state of the

economy.

Is the T-bill riskless? Explain.

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 Calculate the expected rate of return
on each alternative.
r = Expected Rate of Return

n
r= rP .
i=1
i i

^
rAlta = 0.10(-22%) + 0.20(-2%)
+ 0.40(20%) + 0.20(35%)
+ 0.10(50%) = 17.4%.

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 Alta has the highest rate of return.
Does that make it best?

Alta 17.4%
Market 15.0
Am. Foam 13.8
T-bill 8.0
Repo Men 1.7

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 Do the returns of Alta Inds. and Repo Men
move with or counter to the economy?

Alta Inds. moves with the economy, so it is positively

correlated with the economy. This is the typical situation.
Repo Men moves counter to the economy. Such negative
correlation is unusual.

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 What is investment risk?
Typically, investment returns are not known with certainty.
Investment risk pertains to the probability of earning a
return less than that expected.
The greater the chance of a return far below the expected
return, the greater the risk.

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 Concept of Variance - Risk

The average of Sachin and

Sehwag both is 50.

Match Sachin Sehwag

1 49 90
2 49 0
3 50 90
4 52 20
Average 50 50

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 Probability distribution

Stock X

Stock Y

Rate of
-20 0 15 50 return (%)
Which stock is riskier? Why?

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 Calculation of Risk

Standrad Deviation and

Variance are measures of
Risk.
2
n

ri r Pi .
i 1

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 Calculate the Var

Economy Prob. T-Bill Alta Repo Am F. MP

Recession 0.10 8.0% -22.0% 28.0% 10.0% -13.0%

Below avg. 0.20 8.0 -2.0 14.7 -10.0 1.0

Average 0.40 8.0 20.0 0.0 7.0 15.0

Above avg. 0.20 8.0 35.0 -10.0 45.0 29.0

Boom 0.10 8.0 50.0 -20.0 30.0 43.0

1.00

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 Risk For Alta Inds
Alta Inds:
= ((-22 - 17.4)^2*0.10 + (-2 - 17.4)^2*0.20
+ (20 - 17.4)^2*0.40 + (35 - 17.4)^2*0.20
+ (50 - 17.4)^2*0.10)^1/2 = 20.0%.

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 Standard deviation measures the stand-alone risk of an
investment.
The larger the standard deviation, the higher the probability
that returns will be far below the expected return.
Coefficient of variation is an alternative measure of stand-
alone risk.

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 Risk Vs Return so ,
where will you invest ??

Security Return Risk

T Bill 8% 0%
Alta 17.4% 20%
Repo 1.7% 13.4%
AmF 13.8% 18.8%
MP 15% 15.3%

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 Coefficient of Variation
CV = Standard deviation/expected return
CVT-BILLS = 0.0%/8.0% = 0.0.
CVAlta Inds = 20.0%/17.4% = 1.1.
CVRepo Men = 13.4%/1.7% = 7.9.
CVAm. Foam = 18.8%/13.8% = 1.4.
CVM = 15.3%/15.0% = 1.0.

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 What does Coefficient of Variation tries
to measure

Risk that an investor faces for per unit of

return

For an investment to be attractive the

Coefficient of variance should be high or
low??

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 Where will you Invest ??

Expected Risk: Risk:

Security return CV
Alta Inds 17.40% 20.00% 1.1
Market 15 15.3 1
Am. Foam 13.8 18.8 1.4
T-bills 8 0 0
Repo Men 1.7 13.4 7.9
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 Fundamental Analysis

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 Fundamental Analysis
It is the practice of studying fundamentals of a
company to determine if a business is a good investment.
It involves studying financial statements such as the balance
sheet.
It attempts to determine whether the company is financially
sound and will continue to earn.
This aids in taking the investment decision

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 Approach to Fundamental Analysis

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 Top Down Approach
Begins analysis on a Global Macroeconomic level right from
the start, moving to consecutive narrower economic levels
until you reach the individual business itself.
Goal is to look at how different factors affect performance at
each of the specific levels being analyzed.
Approach
Global Economy
Local Economy
Sector Level
Industry Level
Specific Business Level

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 Bottom up Approach
Beginning analysis on a microeconomic level right from the
start, typically starting with a particular company itself.
Goals is to look at how different factors affect performance at
each of the specific levels being analyzed.
Approach
Specific Business Level
Industry Level
Sector Level
Local Economy
Global Economy

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 Economic Analysis
One need to develop a sound economic understanding and be able
to interpret the impact of important economic indicators on stock
markets.
Important economic analysis indicators are:
Monsoon
War
Inflation
Foreign exchange reserves
Public debt and foreign debt
Budgetary deficit
Capital output ratio
Infrastructure
Government policy etc.

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 Industry Analysis
The second stage of fundamental analysis consists of a
detailed analysis of a specific industry; its characteristics, its
past record, its future prospects.
The purpose of this part is to identify those industries which
are likely grow in the future.
Industry level analysis will help investors to select the
industries on innovation, technology, cyclical blues, etc.

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 Industry Analysis & Business Life Cycle

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 Company Analysis
Non financial aspects: It covers the study about:
History and track record of the promoters
Relevant technology
Brand image of products
Industrial relations
Industry reputation in the market
Market share of the company likewise

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 Company Analysis
Financial Analysis
Equity , sales, book vale, operating profit, gross profit, net
profit, earning per share, price earning ratio,
dividend, are some of the above factors to study.
In the financial aspects, an investor identifies a stock
whether overpriced or under priced.
Ratios help in decision making for an investor

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 Earnings Per Share (EPS)
EPS = net income average outstanding common
shares
EPS = (net income dividends on preferred stock) /
average outstanding common shares

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 Price to Earning Ratio
It shows the sum of money you are ready to pay for each
rupee worth of the earnings of the company
PE = Market price / EPS

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 Earning Yield
Earnings yield is defined as EPS divided by the stock price
(E/P). In other words, it is the reciprocal of the P/E ratio.
Thus, Earnings Yield = EPS / Price = 1 / (P/E Ratio),
expressed as a percentage.
If Stock A is trading at $10 and its EPS for the past year (or
trailing 12 months, abbreviated as ttm) was 50 cents, it has
a P/E of 20 (i.e. $10/50 cents) and an earnings yield of 5%
(50 cents/$10).
If Stock B is trading at $20 and its EPS (ttm) was $2, it has a
P/E of 10 and an earnings yield of 10% ($2/$20).

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