SUMMER INTERNSHIP PROJECT REPORT

A.K. CAPITAL SERVICES LIMITED

Merchant Banking:
Primary and Secondary Markets

- SAPNA BAID

SUBMITTED IN PARTIAL FULFILLMENT OF THE MBA COURSE (20092011)

N.L.Dalmia Institute of Management Studies & Research

Certificate of Approval

We approve this Summer Project Report titled "Merchant Banking: Primary and Secondary
Markets" as a certified study in management carried out and presented in a manner
satisfactory to warrant its acceptance as a prerequisite for the award of Masters in
Management Studies for which it has been submitted. It is understood that by this approval we
do not necessarily endorse or approve any statement made, opinion expressed or conclusion
drawn therein but approve the Summer Project Report only for the purpose it is submitted.
Summer Project Report Examination Committee for evaluation of Summer Project Report
Name

Faculty Examiner

Signature

Certificate from Summer Project Guide

This is to certify that Ms. Sapna Baid, a student of the Masters in Management Studies (MMS)
Program, has worked under our guidance and supervision. This Summer Project Report has the requisite
standard and to the best of our knowledge no part of it has been reproduced from any other summer
project, monograph, report or book.

Mr. Hitesh Shah

Asst. Vice President
Investment Banking Team
A.K Capital Services Ltd.
3rd Floor, Free Press Journal Marg,
Nariman Point,
Mumbai 400 021.

DECLARATION

I hereby declare, to the best of my knowledge and ability that my work on the Summer
Internship project titled Merchant Banking: Primary and Secondary Markets is a genuine
research work undertaken by me. It has not been published anywhere earlier and is prepared at
completion of the Summer Internship Program with A.K Capital Services Ltd. In addition to this,
as some of the results are confidential in nature, detail analysis of the same is not included in
this report.

Sapna Baid
MMS (Batch 2009-2011)
N. L. Dalmia Institute of Management Studies & Research, Mumbai.
Date: 07-07-2010

ACKNOWLEDGEMENTS

With immense pleasure, I would like to present this project report for A.K. CAPITAL SERVICES
LIMITED. It has been an enriching experience for me to undergo my summer training at A.K.
Capital because of the constant support and guidance from the people around. As a student
of N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH, I would like to express
my sincere gratitude to all those who helped me during my practical training programme.
Words are insufficient to express my gratitude toward Mrs. Aditi Mittal, the Director of A.K.
CAPITAL. I would like to give my heartily thanks to Mr. Hitesh Shah, the Vice President, for
giving me the opportunity to work at A.K. CAPITAL ,he has played a significant role in
imparting knowledge that he has gained in the Merchant Banking Industry. He was my
project guide and has in every way been kind & generous.

I am extremely thankful to Mr. Yashesh Thakkar, from the Investment Banking Team, who
has helped me at every step whenever needed. His kind gestures have indeed been of
immense help in the completion of my Report.

I would also like to thank my Faculty mentor Prof. Manish Gupta. I humbly realize that it is
not only the two months of guidance that has helped me learn and interpret the nuances of
the finance sector, therefore, I would like to thank all my faculty members for the assistance
extended by them throughout this programme.

I am also very grateful to my parents & friends who have been a constant source of
Inspiration & encouragement.

EXECUTIVE SUMMARY

Merchant Banking: Primary and Secondary Markets

By
Sapna Baid

This report covers three different aspects of Merchant Banking. All three parts were unrelated
but gave a great insight into different types of services offered by Merchant Banks. Working on
this project has extended my learning curve, helping me gain exposure into a real corporate
environment which has proven to be priceless, both, in terms of value addition and in enriching
my work experience.

The topics covered in this report can be divided as follows:

1. FII investments in corporate debt markets in India

2. Valuation of an Initial Public Offering (IPO)
3. Trend analysis of 10 Year Government Securities Yields and its Determinants in India

1. FII Investment in Corporate Debt markets in India

Scope: The main objective of this part of the project was to find out:
The FIIs that have been recently allocated limits to invest in corporate debt market in India.
To identify the decision makers in India or Asia, who are endorsed with the responsibility to
invest on behalf of the FIIs and handle the FII Debt Books.
To understand what are the guidelines and criteria each of them follow while investing in
corporate debt market in India.

Method: To successfully complete this part of the project it was important to :

To understand RBI & SEBI regulations in corporate debt and its allocation methodologies.
Then, find through Press Releases (SEBI), the recent limit allocations and names of FIIs that
have been allocated these limits.
A database was then developed with addresses and contact details of these FIIs in India or
Asia.
I contacted the person from the concerned department and spoke to the decision makers.
Arranged for and met these decision makers, in order to understand their investment
policies.

Conclusion: On meeting the Investment heads of Nomura Bank, Credit Suisse and Deutsche
Bank, a list of investment criteria and policies were made that included:
The type of rated papers that they were interested in investing,
The benchmarks they followed and preferred,
Their willingness or apprehensions on particular investments were studied,
Their long term and short term positions in India etc., details of which cannot be given as
they are confidential in nature.

2. Valuation of IPO:

Scope: The main objective of this part of the project was to price two IPOs Parabolic Drugs
Ltd. and PNC Infratech Ltd. Appropriately.

Method: In order to valuate these IPOs a systematic approach was required that involved:
Industry/Sector Analysis
A Detailed study of the Draft Red Herring Prospectus (DRHP) (helping in understanding the
business, industry, financial strength, its scope etc.)
Peer Group Selection
Pricing Multiple Selection
Calculation of Price

Conclusion: The Price bands as estimated were:

Parabolic Drugs Ltd:

Price = Rs 63, Price Band = Rs 60 - 72

PNC Infratech Ltd:

Price = Rs 161, Price Band = Rs 160 192

3. Trend analysis of 10 Year Government Securities Yields and its Determinants

in India

Scope: To analyze the trends that G-sec Yields have followed over the last 10 years and to
determine which factors most likely have affected it.
Method: Analysing the Government security yields required:
Firstly, Understanding the Debt Market (various Instruments used by the Government and
the purpose for which these instruments are floated in the market)

 Understanding the Government security needs & an analysis of the factors that could
influence G-sec yields,
Macroeconomic study was performed and the effects of certain variables on some other
economic variables were studied to have a clear understanding of the economy.
The next step that followed was to collect data and create a database with historical prices
of G-sec and its determinants for the last 10 years.
Then to find factors which are most important in determining G-sec Yields, correlation
analysis was performed. The next step was to select highly correlated factors and perform a
regression analysis to determine their effects on G-sec Yields.

Lastly, a comparative table was made to determine the trends that were most apparent and
common in G-sec Yields.
The news in that period that caused movements greater than ten percentage points on a biannual basis was analysed and reported.
Conclusion: Findings from this research were as follows:
1. G-sec Yields and all its determinants change in a cyclical order
2. G-sec yields generally firm up or down generally on expectations of change in monetary
policies
3. Whenever the government has had plans to borrow significantly, G-sec yields have risen.

TABLE OF CONTENTS

Sr.
Nos.
1.

Topic

Pg. Nos.

Certificate from Summer Project Guide

2.

Certificate of Approval

3.

Declaration

4.

Acknowledgement

5.

Executive Summary

6.

List of Figures

11

7.

List Of Tables

11

8.

Abbreviations

13

9.

Company Overview

14

10. Project Part 1: FII Investment in Corporate Debt Market of India

a. The Objectives
b. The Process
c. The Conclusion

18

11. Project Part 2: Valuation of Initial Public Offerings(IPO)

a. The Objectives
b. The Process
a. The Conclusion1
b. The Conclusion2

31

10

12. Project Part 3: Trend Analysis of Government Securities Yields and its
Determinants
a. The Objectives
b. The Process
c. The Conclusion

58

13. Specimen of the Government Security certificate

76

14. Bibliography

77

LIST OF FIGURES:

Fig. 1: Screenshot of FII database allocated by FCFS Process

Fig. 2: Screenshot of FII database allocated by Open Bidding Process
Fig. 3: Pre-issue vs. Post issue holding Structure (as on Jan 28,2010)
Fig. 4: Use of IPO proceeds
Fig. 5: Key Financial Indicators
Fig. 6: Bloomberg Grab Example
Fig. 7: Screenshot of G-sec database
Fig 8: G-sec Yields Graph
Fig 9: Movement of various Macro-Variables in the economy (period 2000-2005)
Fig 10: Movement of various Macro-Variables in the economy (period 2005-2010)

LIST OF TABLES:
11

Table 1: FII allocation through bidding process

Table 2: FII limit allocation through FCFS process
Table 3: Consolidated Profit and Loss Statement
Table 4: Peer Group Analysis
Table 5: P/E Multiple
Table 6: Price Calculation
Table 7: Key personnel
Table 8: Pre issue vs. Post issue shareholding pattern
Table 9: Use of Issue Proceeds
Table 10: Consolidated Profit and Loss Statements
Table 11: Key Financial Indicators
Table 12: Peer Group Analysis
Table 13: P/E Multiple
Table 14: Price Calculation
Table 15: Correlation Matrix
Table 16: Regression Analysis
Table 17: Comparative Analysis of G-sec vs. Correlated Determinants

12

ABBREVIATIONS:

1. FII Foreign Institutional Investors

2. Sub-Account - Sub-account includes those foreign corporates, foreign individuals, and
institutions, funds or portfolios established or incorporated outside India on whose behalf
investments are proposed to be made in India by a FII.
3. RBI Reserve Bank of India
4. SEBI Securities & Exchange Board of India
5. NSE National Stock Exchange
6. WDM Wholesale Debt Market
7. BSE Bombay Stock Exchange
8. PDL Parabolic Drugs Limited
9. PNC PNC Infratech Limited
10. PSU Public Sector Undertakings
11. FCFS First Come First Serve
12. CRAMS - Contract Research and Manufacturing Services
13. USFDA - The United States Food and Drug Administration
14. IPO Initial Public Offering
15. MNC Multi National Company/Corporation

13

16. QIP Qualified Institutional Placement FPO Follow on Public Offering

17. NMITLI New Millennium Indian Technology Leadership Initiative
18. DPRP Drugs and Pharmaceuticals Research Programme
19. G-sec Government Securities

COMPANY OVERVIEW

A.K Capital Services is a SEBI registered Category 1 Merchant Bank and it is the flagship company
of AK Group established by Mr. A.K Mittal, M.D and CEO. The company has 10 offices in cities
across India with its head office in Mumbai.

About Mr. A.K.Mittal

MD & CEO

Mr. Ashok Kumar Mittal is a Chartered Accountant by profession, Mr.Mittal started his career
with a delhi-based law firm as an apprentice to manage Direct Tax. In 1983, he then established
his own CA firm in Delhi. Over the time, under Mr. Mittals guidance the CA firm reached several
heights.

As a forward-looking individual, in mid-nineties he realized the role the fixed income markets
could play in the growing Indian economy and established AK Capital Services Ltd. He aimed at
facilitating common man to reap the benefits from the fixed income markets and to establish
platforms that would ensure liquidity and transparency in the Indian Bond markets. In 1998 AK

14

Capital Services Ltd. (AK Capital) got registered with Securities & Exchange Board of India (SEBI)
as a Category I Merchant Banker.

Since inception, His leadership mantra has always been Be honest, be transparent and trust
employees.

Strong in relationships, mild and submissive in personality and passion to follow determination
has led to creation of AK Capital as a debt market mammoth.

PORTFOLIO OF SERVICES
AK Capital is not just an investment bank but a complete financial solution provider, aimed at
quenching all the financial and investment related needs of a client under one-roof. They craft
customized solutions to various investment needs. The Company offers a range of financial
products and fee-based services to Corporate, such as:

1. Raising Debt Capital via:

a. Private Placement of Debt
b. Public Issue of Debt
c. Corporate Bond- Secondary Market
d. Working Capital Finance, Project Finance.
e. Treasury Operations
2. Raising Equity Capital via:
a. IPOs & FPOs
b. QIP of Equity
c. Private placement of Equity
d. Venture Capital
e. Mergers & Acquisitions & many more.
f. Advisory & Placement services.

15

VISION
To accelerate evolvement of a robust Indian Corporate Bond Market build unprecedented
shareholder value and transform economies
To ensure liquidity and transparency and facilitate price discovery in the markets by acting as
a catalyst in evolving an electronic platform and set benchmarks to facilitate transactions in
fixed income markets
To deepen the horizon of the Indian bond market and reach at the bottom of the pyramid and
by making bond market accessible to common man

ACCREDITIONS & ACHIEVEMENTS

A.K. Capital Services Ltd has been ranked amongst the Top 5 players in Private Placement of
Fixed Income instruments in Indian market for last 5 consecutive years from Financial Year (FY)
2002-03 to 2006-07 (Source: Prime Database).

AK Capital won IFR - Asia Bond Deal of the Year Award for successfully structuring & placing
Indias First Perpetual Bond Issue for UCO Bank, 2006

A.K. Capital Services Ltd has participated in placements of Fixed Income Securities of Rs 445000,
Rs 174,829 million (approx USD 4.3 billion) in F.Y. 2006-07 & Rs. 231,070 million (approx USD 5.8
billion) in F.Y. 2005-06 (Source: Prime Database)
It has won the 15th National level Entrepreneurship Excellence Award for Development of
Indian Bond Market on Friday July 9, 2010 at Mumbai. AK Capital Services Ltd. has been

16

dedicated to the growth of Indian Bond Market for the past 15 years and is one of the larger
arranger of bonds for PSUs, NBFCs, Corporate and Banks. The organization was been recognized
for structuring and placing many innovative deals in the market like 1st Perpetual Bond issue,
1st ever buy back of bond, 1st ever tax free bond, deep discount bond, to name a few.
A recent 1st ever Perpetual bond issue of 300 million rupees by Magma Fincorp. via an
unsecured, non-convertible, sub-ordinate-d perpetual debenture, was issued for an NBFC &
A.K. Capital was the sole arranger of this issue.

EVOLUTION
A.K. Capital Services Ltd has in time emerged as one of Indias leading Merchant Banker for the
Indian Corporate Debt / Fixed Income Securities market.

17

Project Part 1:
Foreign Institutional Investors (FII) Investment in Corporate
Debt Market of India

A.The Objectives:
18

The main objectives of this part of the project were as follows:

1. To understand the current scope of FII investment in India.
2. To understand the regulations laid down by Securities Exchange Board of India (SEBI) for the
FII investment in Debt Market, concentrating on Corporate Debt.
3. To understand limit allocation methodology and guidelines.
4. To find out which FIIs currently hold limits to invest in corporate debt & through which of
the Sub-Accounts do they invest.
5. To prepare a database with details of 100% debt FIIs & others.
6. To arrange meetings with those people working with these FIIs who take decisions regarding
their investments in India
7. To meet them and understand their investment criteria and offer A.K Capitals services to
them.

B. The Process:
An FII means an entity established or incorporated outside India which proposes to make
investment in India. The FII registration is valid for 5 years. After expiry of 5 years, the
registration needs to be renewed. India, the second fastest growing economy after China, has
recently seen positive foreign institutional investor (FII) inflows driven by the sound
fundamentals and growth opportunities.
Routes followed by the FIIs for Investments:
A. Equity & Debt Route ( 70 : 30)
B. 100% Debt.
Foreign Institutional Investors (FII) includes the following foreign based categories:

Pension Funds

Mutual Funds

19

Investment Trust

Insurance or reinsurance companies

Investment Trusts

Banks

Endowments

University Funds

Foundations

Charitable Trusts or Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds, are also eligible
to be registered as FIIs:

Asset Management Companies

Institutional Portfolio Managers

Trustees

Power of Attorney Holders

Debt Markets In India:

The debt market is more popular than the equity markets in most parts of the world. But, in
India the reverse has been true. This has been due to the dominance of the government
securities in the debt market and that too, a market where government was borrowing at preannounced coupon rates from basically a captive group of investors, such as banks. Thus there
existed a passive internal debt management policy. This, coupled with automatic monetisation
of fiscal deficit prevented a deep and vibrant government securities market.
The debt market in India comprises broadly two segments, viz., Government Securities Market
and Corporate Debt Market. The latter is further classified as Market for PSU Bonds and Private
Sector Bonds.

20

The market for government securities is the oldest and has the most outstanding securities,
trading volume and number of participants. Over the years, there have been new products
introduced by the RBI like zero coupon bonds, floating rate bonds, inflation indexed bonds, etc.
The trading platforms for government securities are the Negotiated Dealing System and the
Wholesale Debt Market (WDM) segment of National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE).
The PSU bonds were generally treated as surrogates of sovereign paper, sometimes due to
explicit guarantee of government, and often due to the comfort of government ownership. The
perception and reality are two different aspects. The listed PSU bonds are traded on the
Wholesale Debt Market of NSE.
According to analysts, the upward revision of economic growth from 5.8 per cent to 6.1 per
cent, better-than-expected performance of companies in the quarter ended-June 30, the
proposed new direct taxes code that might lead to savings in the tax payers money, and the
trade policy with an ambitious target of US$ 200 billion exports for 2010-11 have all revived the
confidence of FIIs investing in India. FIIs have made net investments of US$ 10 billion in the first
six months (April to September) of 2009-10. A major portion of these investments have come
through the primary market, than through buying via secondary markets. (Source: India Brand
Equity Foundation)
FII inflows into Indian equities have been steady ever since the markets were opened up to FIIs
in 1993. With the exception of FY99 and FY09, net flows have been positive. FIIs own a
dominant 16% of Indian equities (worth US$147bn) and account for 10-15% of the equity
volumes. (Source: CLSA Asia-Pacific Markets)
In the Debt market also, FII investment has really picked up over the last quarter of FY 09 and
the first quarter of FY 10.
The ongoing European Debt Crisis though, has led to a deterring effect in the 2 nd quarter, but
the overall growth in this market has been robust over the last few years compared to the

21

previous decade. Most of this growth is due to relaxation in allocation limits and regulations by
RBI and also due to Indias growing expenditure and need for more money to fund various
projects.

FII Regulations & Limits:

The SEBI has kept strict regulations for FII investment in India in order to restrict the influence
FIIs can have on Primary and Secondary Markets.
The SEBI FII Regulations, 1995 gives a detailed outline of rules and procedures to be followed by
FIIs in order to invest in India. Some of the Key Regulations were as follows:
1. FII can only be of the type: Pension Funds, Mutual Funds, Investment Trust, Insurance or
reinsurance companies, Investment Trusts, Banks, Endowments, University Funds,
Foundations, Charitable Trusts or Charitable Societies, Asset Management Companies,
Institutional Portfolio Managers, Trustees, Power of Attorney Holders
2. Ordinary FIIs must ensure that at least 70% of the investments made are in equity or equity
related instruments. This implies that the aggregate investment made for each sub-account
was required to have the composition of equity and debt in the ratio of 70:30 with at least
70% in equity.
3. To invest only in debt, the FII must register as a 100% Debt FII.
FII investments have traditionally concentrated in the government securities (G-sec) market in
India, but their interest have grown towards corporate debt and due to this demand, and the
inclination of India to expand towards a more open economy, SEBI has revised and raised the
limits of FII investment in both G-sec and Corporate Debt markets.
FII limits in government securities are raised from 3.2 Billion USD in June 2008 to 5 Billion USD
in September 2008 while FII limits in corporate debt has jumped from 1.5 Billion USD in June
2008 to 6 Billion USD in October 2008 to 15 Billion USD in February 2009.

22

FII Limits Allocation Methodology:

Traditionally, FIIs were allocated limits to invest in government securities by an open bidding
process or an auction, whereas for corporate debt FIIs were allocated limits on a First Come
First Serve Basis (FCFS).
In the February 2009 circular, where SEBI announced the raise in limits for investment in
corporate debt by 9 Billion USD (from 6 Billion to 15 Billion USD), It also announced the
introduction of an open bidding process through which 8 Billion USD from the total of 15 Billion
USD would be allocated to the FIIs. The remaining limits will be allocated on FCFS basis.

The Open Bidding/Auction process for allocation of corporate debt limits is as follows (as per
April 2010 amendment):
1. Duration of bidding - Two hours
2. Access to platform - The existing trading members shall have access to the bidding platform.
FIIs/subaccounts shall provide the mandate to these trading members, who in turn shall bid
for the limits
3. Amount of bid - The minimum amount which can be bid for is Rs 200 cr. The minimum tick
size shall be Rs 200 cr.
4. Price of bid - Bid price shall be expressed in basis point. A minimum flat fee of Rs 1000 per
successful bid shall be levied for the allocated amount. Thus the amount payable by the
successful bid shall be minimum flat fee of Rs 1000 or bid price, whichever is higher.
5. Allocation method -Successful bids shall be based on price and within that time priority. No
single entity shall be allocated more that Rs 2, 000 cr. of the investment limit
6. Time period for utilization of the limits allocated in this manner shall be 45 days

23

The First Come First Serve Basis (FCFS) process will be used to allocate the remaining 7 Billion
USD among the FIIs/sub-accounts subject to a ceiling of Rs.199 cr. per registered entity.

Current Allocation of Limits:

As per SEBI Press Release on April 16, 2010 named Allocation of limits to FIIs/sub-accounts for
investment

in

Government

&

Corporate

debt

through

bidding

process

Table 1: FII allocation through bidding process

SR
NO
1.

NAME OF THE FII

NOMURA MAURITIUS LIMITED

NAME OF THE SUB ACCOUNT

-

ALLOCATED
AMOUNT
(Rs. in Crore)
1000

2.

NOMURA MAURITIUS LIMITED

1000

STANDARD CHARTERED BANK

STD CHARTERED BANK

(MAURITIUS)

(MAURITIUS) - DEBT

2000

3.

DEUTSCHE BANK
4.

INTERNATIONAL ASIA - DEBT FUND

2000

5.

BANK OF AMERICA SINGAPORE LTD.

600

BARCLAYS BANK PLC

BARCLAYS MERCHANT BANK

6.

(SINGAPORE) LTD.

2000

BARCLAYS BANK PLC-SINGAPORE

7.

BRANCH

2000

8.

HSBC Bank (Mauritius) Limited

2000

9.

CREDIT SUISSE (SINGAPORE) LIMITED

200

CITICORP INVESTMENT BANK

10.

(SINGAPORE) LIMITED

1000

11.

PRUDENTIAL ASSET MANAGEMENT

INTERNATIONAL

400

24

(SINGAPORE) LIMITED

OPPORTUNITIES PORTFOLIO
MANAGEMENT LIMITED

BNP PARIBAS

12.

1000

(MAURITIUS) LIMITED

EMERGING INDIA FOCUS FUNDS

200

FRANKLIN ADVISERS INC.

TEMPLETON INCOME TRUST -

STANDARD CHARTERED BANK

13.

TEMPLETON GLOBAL BOND

14.

FUND
FRANKLIN ADVISERS INC.

2000

TEMPLETON GLOBAL BOND

FUND (A SUB-FUND OF
FRANKLIN TEMPLETON

15.

INVESTMENT FUNDS)
FRANKLIN ADVISERS INC.

2000

TEMPLETON GLOBAL INCOME

16.

FUND
FRANKLIN ADVISERS INC.

200

TEMPLETON GLOBAL BOND

17.

FUND
FRANKLIN ADVISERS INC.

200

TEMPLETON EMERGING
MARKETS BOND FUND (A SUBFUND OF FRANKLIN TEMPLETON

18.

INVESTMENT FUNDS)

200

As per Sebi Press Release dated April 19, 2010 named Allocation of limits to FIIs/sub-accounts
for investment in Corporate debt through first come first served process

Table 2: FII limit allocation through FCFS process

25

Sr No
1.

Name of Entity

Allocated
Quantity
in Rs.Crores

UBS AG

49

LEGG MASON GLOBAL FUNDS PLC - WESTERN ASSET ASIAN

49

2.

OPPORTUNITIES FUND

3.

CREDIT SUISSE SINGAPORE BRANCH

4.

UTI Spectrum Fund

5.

Global Investment Opportunities Fund

6.

Kotak Investment Opportunities Fund Ltd

7.

Kotak Global Funds

8.

Kotak Infinity Fund

9.

DBS Bank Ltd

10.

Emerging India Focus Funds

TCW ASSET MGMT CO. A/C TCW AMERICAS DEVELOPMENT

11.

ASSOCIATION, L.P.

12.

CREDIT SUISSE (SINGAPORE) LIMITED

Japan Trustee Services Bank, Ltd. as trustee for

49
49
199
199
199
199
199
50
1

199
25

Resona Bank, Limited as trustee for Asia Sovereign Open Mother

13.

Fund

14.

Tata India Income Opportunities Fund (TIIOF)*

Cooperative Centrale Raiffeisen- Boerenleenbank B.A. (Trading

15.

as Rabobank International) Hong Kong Branch

16.

UTI Spectrum Fund

17.

East Sail

26

199
199

199
22

18.

India Optima Fund

111

Database Creation:
An interesting observation was that all the above FIIs and their respective sub-accounts were
registered with an address that was located at tax havens like Mauritius, British Virgin Islands,
Singapore.
Such companies are generally shell companies and it is important to find the actual holding
company or parent company that makes the actual investments.
The following are the database screenshots containing details of the FIIs including the
registered addresses of the shell companies and the address of their head office or Indian
Subsidiaries:

Figure 1: Screenshot of FII database allocated by FCFS Process:

27

Figure 2: Screenshot of FII database allocated by Open Bidding Process:

28

Meetings

29

The next step in the project was to find those individuals working for the above companies that
are directly responsible for investments through their FII books.
Once the above was achieved, it was important to arrange meetings with these individuals.
The objective of the meeting was to introduce A.K Capital and the services it provides to the
client and also to find out the investment criteria the company follows in order to invest
through its FII books.
I accompanied my senior to these meetings, where my goal was to gain experience, learn, listen
and make notes about everything discussed in the meeting.

C. The Conclusion:

General Investment Criteria followed by FIIs

Some of the companies visited, include Nomura Bank, Credit Suisse and Deutsche Bank etc.
Each company had specific criteria as to when, where and what to invest in, under their FII
books.
Some of the general investment criteria that were common to all these companies include:
1. Owing to the Europe Debt Crisis there was an aversion of spending on any debt instrument
that was less than AAA rating. i.e. On the FII trading book, investment was done at minimum
risk
2. Most FIIs were using their limits to invest in the secondary market, hence their FII books
were currently being used as a trading book rather than long term investment.
3. There was a general wait and watch mentality, as every bank or NBFC was waiting for July 1,
2010 when the new base rates for lending by each banks were going to be announced.
Hence they wanted some clarity before they could start investing.

30

4. These FIIs were looking at maturity periods of not more than one year, hence we came to a
conclusion that their FII books were meant to be kept extremely liquid.

FII Statistics Current Scenario:

Net investments made by FIIs in securities stood at a mere Rs 740.70 crore in June 2010 as
compared with Rs 4,014.80 crore in May 2010, SEBI data showed.

31

Project Part 2:
Valuation of Initial Public Offerings (IPOs)

A. The Objectives:
Merchant Bankers play a key role in issuing of IPOs.
Price at which Investors subscribe to IPOs is decided by Merchant Bankers using two methods,
1. Book Building
It is essentially a process used by Merchant Bankers to aid price and demand discovery. It is a
mechanism where, during the period for which the book for the offer is open, the bids are
collected from investors at various prices, which are within the price band specified by the
issuer in contention with the Merchant Banker. The issue price is determined after the bid
closure based on the demand generated in the process.
2. Fixed Price
The issuer fixes a single price at which it must offer the IPO to the investors. This fixed price is
generally decided by the merchant banker which advices the issuer on all such matters.
A.K Capital is a merchant banker and valuation of IPOs is a key function or service performed by
it.

32

I was given two companies to valuate. i.e. to find out what should be the price band or fixed
price at which these companies IPOs should be offered to the public.
I.

A Pharmaceutical company Parabolic Drugs Ltd.

II.

An Infrastructure/Construction Company PNC Infratech Ltd.

The main objectives of this part of the project were as follows:

1. To understand the sector/industry in which the companies operated.
2. To study in detail the Draft Red Herring Prospectus with emphasis on
a.

Structure of Shareholding

b.

IPO offer details

c.

Company Order Book Composition

d.

Financial Statement Analysis

3. To select a Peer Group for comparison

4. To select a appropriate Pricing Multiple
5. To decide on a Value of IPO

B. The Process

I. Parabolic Drugs Ltd:

Industry Analysis:
The Indian Pharmaceutical industry is one of the worlds largest, ranking 4th in Volume terms
and 13th in Value terms and expected to grow at a CAGR of 14.2% to around USD 50 billion in
2015-16. In the API segment, India ranks third in the world, producing about 500 different APIs.
It has the largest number of USFDA approved plants outside US (approximately 119) and
around 844 UK MHRA approved plants.
Exports are a particularly lucrative segment of the pharmaceutical industry and are expected to
grow at a CAGR of 16.2% while the domestic market is expected to grow by 12.5%.

33

International markets account for more than half of the total revenues of Indian pharma
players, and a significant part of this activity is in the API and API Intermediaries segment.
Indias bulk drug/API exports account for 21% of Indias pharmaceutical industry and around
64% of total outsourcing is in the area of APIs and Intermediates.
The key growth drivers for the Indian Pharmaceutical Industry are the large number of products
going off-patent in developed markets, pressure to contain rising healthcare costs, intensifying
competition and a shift to the networked pharmaceutical operating model. India, with its cost
manufacturing facilities, abundant talent pool and significant presence in the generics market is
an attractive destination for global Contract Research and Manufacturing Services (CRAMS).
The total market for CRAMS activities in India, estimated at approximately $1.5 billion -$2
billion in 2010, accounts for only 3% share of the USD 51 billion global outsourcing market,
indicating significant opportunity for growth in this segment. The Contract Research segment in
India, is growing at 65% - more than three-and-half times the global growth rate.
The Indian Pharmaceutical industry is the beneficiary of several policy initiatives by the
Government of India. These include fiscal incentives to R&D pharmaceutical units, reduction in
Customs Duty on select life-saving drugs, the launch of New Millennium Indian Technology
Leadership Initiative (NMITLI), and the Drugs and Pharmaceuticals Research Programme
(DPRP), infrastructure support such as building Pharmazones and the streamlining of
regulatory procedures.
PDL is currently engaged in manufacturing (including contract manufacturing) of APIs and API
Intermediates, and its key strategies for future growth include the manufacturing of nonantibiotic range of APIs, entering into the CRAMS segment with a focus on partnering with
Innovator companies and increased penetration in regulated markets where margins are
significantly higher.

Draft Red Herring Prospectus (DRHP):

34

A prospectus is a formal legal document, which is required by and filed with the Securities and
Exchange Board of India and which provides details about an investment offering for sale to the
public. A prospectus should contain the facts that an investor needs to make an informed
investment decision. A Red Herring Prospectus is essentially a preliminary registration
statement and is sometimes updated several times before being called the final prospectus.
The key element in a red herring prospectus is that there is no price or issue size stated.
Some of the key elements required to price the IPO are present in this prospectus.

Company Profile:
Parabolic Drugs Limited was founded in 1996 by Mr. Pranav Gupta & Mr. Vineet Gupta, the first
generation entrepreneurs. The commercial operations commenced in 1998 from Derabassi,
Punjab. Spread over 21 acres, PDLs Derabassi facility has six manufacturing units and has been
certified WHO GMP (Good Manufacturing Practices) and ISO-14001 complaint
In 2005 company started another facility having two units at Panchkula, Haryana. PDL is
engaged in manufacturing of Active Pharmaceutical Ingredients (APIs) and API Intermediates
for the domestic and export markets. PDL currently has exports to approximately 45 countries.
The overall product portfolio of PDL comprises of 42 APIs and seven API intermediates. PDL has
two R&D centers, one at Derabassi with chemical and analytical research laboratories with
focus on developing non-infringing processes for new molecules, existing process
improvements and production cost efficiencies. The other R&D centre is at Barwala, Haryana. In
future Barwala centre will be developed as the core R&D center for PDL. On the back of
substantial R&D efforts company has made eight applications for process patents, of which
seven patent applications have been filed with the Indian Patent Office, and one international
process patent for manufacturing Cefuroxime Axetil filed under the Patent Cooperation
Treaty(the PCT)

35

In addition, company is in the process of setting up more manufacturing facilities at Chachrauli,

and Derabassi, to manufacture the non-antibiotic range of APIs, which is expected to
commence commercial operations in the third quarter of fiscal 2011.
The company has approximately 968 employees which include 81 scientists, 24 of whom hold
PhDs.

Management:
Name

Role

Mr.
Pranav Founder & the Managing Director
Gupta
Has 18 years of experience in the pharmaceutical industry
Before 1994 he worked with the Ford Motor Company, USA as a
Financial analyst.
Mr
Gupta

Vineet Whole Time Director and promoter of company;

He is also the promoter and director of Jamboree Education which is into
coaching of GRE, GMAT, and TOEFL etc.

Mrs. Deepali promoter of PDL

Gupta
(wife of Mr Pranav Gupta)
She is a Dentist and was a Government doctor for 17 years.
Her responsibilities include heading PDLs project management team and
negotiating and finalizing purchase orders.

PDLs organizational structure has strong second line of management comprising of significantly
experienced professionals from pharmaceutical companies like Sun Pharma, Orchid Chemicals,
Nectar Life sciences, J.K. Drugs & Pharmaceuticals Limited, Dabur India Limited, Kanasco
Limited (USA), Ranbaxy Laboratories Limited etc.

36

Business Risk:
The pharmaceutical industry is highly regulated. Quality standards, pricing of drugs and
intermediaries, licensing arrangements, manufacturing & testing facilities and marketing of
pharmaceutical products are subject to regulatory approvals which can be costly and time
consuming.
The company is exposed to these risks.
PDLs future strategy involves expanding in the CRAMS segment and increasing its share of
export revenue from regulated markets.
Entry barriers in regulated markets are very high:
Successful execution of its strategy is dependent on the companys success in obtaining
relevant Certifications / Licenses and also in expanding its customer base.
Despite of natural hedging the company could experience increased foreign currency risk as it
increases its share of export revenue.
The Indian pharmaceutical industry and the Active Pharmaceutical Ingredient ("API") product
segment are highly competitive. Indian pharma industry consists of more than 20000
manufacturers producing over 100,000 drugs. It is also a technologically demanding industry, as
rapid advances in technology and scientific discoveries require up-gradations of the existing
facilities retain cost advantages.
Parabolic Drugs Limited has moderate customer diversification, with the top 5 customers
contributing 40% of total sales.

Shareholding:
The Table below shows the pre and post issue shareholding of the company, but as the price of
issue has not been determined, there is some missing data.

37

Fig 3: Pre-issue vs. Post issue holding Structure (as on Jan 28,2010)

~ indicates approximately
* indicates data which will be decided on fixation of price.
As per SEBI guidelines pertaining to minimum public shareholding in listed firms, the pre-issue
share of the public would be 27.5% that is greater than minimum requirement of 25%

Objectives of the Issue:

Company is undertaking two expansion projects at existing facilities of Derabassi, and two
green field projects at Chachrauli and Panchkula. Company will also be using part of IPO
proceeds to repay loans taken from ICICI bank due to the high interest cost.
The expansion and green field projects will be constructed on existing land owned by the
company. The company has not placed any orders for machinery and project appraisal is not
done by any independent party. Company is planning to deploy approximately 70% of funds in
FY11 and remaining in FY12.

38

Fig 4: Use of IPO proceeds

Financial Performance:
Net Sales for PDL increased from Rs 273.9 Cr in FY08 to Rs. 394.3 Cr in FY09, to Rs 346.1 Cr for 9
months ended as on Dec 09. The sales are expected to be approximately Rs 510 Cr for FY10.
Core Sales of company mainly comprise of income from sale of APIs such as SSPs and
Cephalosporins in both oral and sterile forms and sale of API intermediates such as 6-APA.
The average OPM & NPM for last five years is at 15.0% & 8.0% respectively which is below
industry averages of 25% and 14% respectively. However, company is focused on entering
regulated markets where margins are substantially higher than non regulated markets. The
proposed entry in CRAMS segment (where gross margins are as high as 50%) can enhance
operating margins. The average return on capital employed (ROCE) for last 5 years is at 10.3%,
while average return on net worth (RONW) for same period is at 30.7% this is higher than
industry averages of 8.79% & 13.8% respectively. Parabolics total debt to equity (D/E) ratio
stands at 2.57 as on Dec 2009 which is higher than most of its peers.

39

Companys net sales have been growing at about 55% CAGR since 2004-05, while EBITDA grew
at 72.5% CAGR in same period. As on FY 09 Ranbaxy is the biggest customer with about 13%
revenue share and the top 5 customers contribute about 40% to total revenues. The Top 3
products of company contribute 39% to revenues. PDL has negative Cash Flow from Operation
(CFO) for FY 08 and FY 09 due to their huge working capital requirements. However, company
has good fixed asset turnover ratio of approximately 3.5 4.0x for past few years, compared to
industry average of 2x. The Capex for year 2010 is expected to be Rs 60 Cr and company
expects additional capital expenditure of Rs 80 Cr in 2011 and 2012 each. We believe with
successful deployment of IPO Proceeds the company can have fixed assets of Rs 300 Cr by FY12
and with same efficiency level company can see approximately Rs 1000 Cr of sales by FY12.

Table 3 : Consolidated Profit and Loss Statement:

For six
Month

For the year ended (in Lacs)

Period
Particulars

ended
30-09-09

31-03-09

31-03-08

31-03-07

31-03-06

31-03-05

GROSS SALES

25159.26

42967.43

30025.49

16683.39

9806.27

5682.39

LESS: EXCISE DUTY

1923.99

3530.63

2696.01

1748.97

1078.46

673.16

NET SALES

23235.27

39436.8

27329.48

14934.42

8727.81

5009.23

INCOME FROM JOB WORK

12.05

54.95

2.55

79.89

118.12

70.36

OTHER INCOME

95.24

201.95

61.89

42.02

165.98

9.95

Total

23342.56

39693.7

27393.92

15056.33

9011.91

5089.54

16469.96

28996.34

19756.4

11468.91

6917.79

4092.38

INCOME

EXPENDITURE
MATERIALS CONSUMED

40

MANUFACTURING
EXPENSES

873.71

1727.82

1071.53

660.55

414.09

230.65

PERSONNEL EXPENSES

701.29

1082.58

607.73

177.87

96.45

58.66

ADMINISTRATIVE EXPENSES

245.99

448.05

313.67

139.23

103.84

63.02

EXPENSES

436.82

664.53

473.98

135.33

65.2

63.75

FINANCIAL EXPENSES

1917.46

2833.55

1192.58

589.2

405.79

160.56

287.56

424.09

292.6

169.59

28.71

6.75

8.61

8.05

6.14

4.16

0.36

0.25

DIFFERENCE LOSS

401.43

465.75

18.04

DEPRECIATION

268.48

360.86

182.55

90.27

61.51

38.64

Total

21611.31

37011.62

23915.22

13435.11

8093.74

4714.66

PROFIT BEFORE TAX

1731.25

2682.08

3478.7

1621.22

918.18

374.88

CURRENT YEAR TAX

381.41

345

367.7

206.37

77.54

28.5

DEFERRED TAX

108.61

219.99

137.89

52.87

16.76

19.23

FRINGE BENEFIT TAX

7.89

5.67

2.08

PROFIT AFTER TAX

1241.23

2109.2

2967.44

1358.98

821.8

327.15

SELLING & DISTRIBUTION

RESEARCH & DEVELOPMENT

W/OFF
PRELIMINARY

EXPENSES

W/OFF
FCM ITEM TRANSLATION

LESS:

PROVISION

FOR

TAXATION:

41

Fig. 5: Key Financial Indicators:

Peer Group Selection

In order to select a peer group it is necessary to check a few important conditions like:
1. The type of products produced and type of business the company is into must be similar to
that of Parabolic Drugs Ltd.
2. The Clientele (Foreign or Domestic, Small or Large, etc.) must be similar to PDLs.

42

3. The Revenues generated by the peers should be in the range of 200-300 Cr. Above or below
PDLs Revenues.
4. The Operating Profit Margin and Net Profit Margins of the peers should be similar to PLDs.

After careful research using resources like BSE,NSE and Bloomberg, the following Peers were
selected:
1. Dishman Pharma
2. Nectar Life Sciences
3. Shilpa Medicare
4. Aarti
5. Ajanta

Peer Group Analysis and Choosing Pricing Multiple:

IPO valuation is different from normal valuation as in the case of an IPO, there is no market
price, hence calculating the P/E or other ratios requiring market cap or price etc. are not
possible. Hence In order to valuate an IPO we need to use relative valuation i.e. arriving at price
using a multiple calculated from analyzing comparable firms or peers.
Some multiples commonly used are:
1. EV/EBITDA ratio
2. EV/Sales ratio
3. P/E ratio

Methods like DCF Analysis or Option Valuation cannot be used as it is very difficult to predict
their future earnings or their future growth because most companies that are to be newly listed
have a CAGR ranging from 15% - 60% or more and their capital expenditure can also vary
randomly.
For Parabolic Drugs P/E multiple was chosen in order to arrive at the issue price.

43

Table 4: Peer Group Analysis

TTM (Trailing
Peer Name

Particulars

Jun '09

Sep '09

Dec '09

Mar '10

12 months)

Dishman
Pharma

Nectar
Sciences

Net Profit

22.4

32.6

40.35

21.65

117

Wt. Avg. O/S Shares

8.07

EPS

14.49814126

MPS

197

P/E

13.58794872

life
Net Profit

20.44

29.1

32.15

10.29

91.98

Wt. Avg. O/S Shares

17.03

EPS

5.401056958

MPS

36

P/E

6.665362035

Shilpa
Medicare

AARTI

44

Net Profit

10.85

12.63

13.31

10.71

47.5

Wt. Avg. O/S Shares

2.2

EPS

21.59090909

MPS

291

P/E

13.47789474

Net Profit

7.31

6.78

4.79

7.23

26.11

Wt. Avg. O/S Shares

1.191

EPS

21.92275399

MPS

129

P/E
AJANTA

5.884297204

Net Profit

4.37

6.43

7.69

10.04

28.53

Wt. Avg. O/S Shares

1.18

EPS

24.1779661

MPS

187

P/E

7.734314756

Table 5: P/E Multiple

Company Name

P/E

Dishman Pharma

13.58795

Nectar life Sciences

6.665362

Shilpa Medicare

13.47789

Aarti

5.884297

Ajanta

7.734315

P/E Multiple
Using Mean

9.469963

Using Mean(Adjusted)*

9.292524

Using Median

10.6061

* In order to reduce influence of outliers, the smallest and the largest values are neglected to
find adjusted mean.

45

C. The Conclusion 1: Calculation of Price

Table 6: Price Calculation
Particulars

Mean

Mean(Adjusted)

Median

Diluted EPS(March 2010) = 6.74*

P/E Multiple

9.469

9.293

Market Price Per Share

Price (using mean P/E Multiple)~

63.82106

Price (using adjusted mean P/E Multiple)~

62.63482

Price (using median P/E Multiple)~

71.48444

* Latest NPAT given by company to A.K Capital

~ Price Calculated using formula (Market Price per Share = P/E Multiple*Diluted EPS)

Hence Price selected is Rs 63. With Price Band = Rs 60 - 72

46

10.606

II.

PNC Infratech Ltd.

Industry Analysis:
The growth of a construction company depends on government infrastructure spending,
scheduling of proposed expansion projects by manufacturing sectors and macroeconomic
factors which govern investments in real estate sector. In the last few years, the Government of
India has been giving major thrust on the infrastructure sector (primarily for roads, railways,
airports and seaports), which has widened the revenue opportunities for most of the players in
the construction sector. The Planning Commission has envisaged an outlay of about US$ 500
billion during 11th five year plan for infrastructure development in the country. These
investments in different sub segments of infrastructure would be achieved through a
combination of public and public-private partnerships. The proposed investment in the key
industrial sectors is also likely to boost up the order book position of the construction entities.
In the latest Union Budget, the Govt. has reaffirmed its thrust on infrastructure creation.
Government also allowed NBFCs to raise ECBs to provide funds to infrastructure projects.
Despite being highly fragmented, the sector is opening up for foreign players, mainly through
joint ventures.

Draft Red Herring Prospectus:

Company Profile:

PNC Infratech Ltd are an engineering and infrastructure construction company in India, with
expertise in the execution of major infrastructure projects including highways, bridges, flyovers,
airport runways and allied activities and executing projects relating to power transmission lines

47

and infrastructure projects on a BOT basis. They were incorporated in 1999 and thir Registered
Office is at New Delhi and corporate office in Agra, Uttar Pradesh. They have executed or are
executing projects across various states in India covering Haryana, Karnataka, Madhya Pradesh,
Maharashtra, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand and West Bengal. In
general, they execute most of our projects independently. Of the 34 major infrastructure
projects executed by our Company since incorporation, 31 projects have been executed
independently.
Some of the projects successfully completed include:
Four laning of the existing two lane section of the Etawah bypass (km. 307.50 to km. 321.00)
on NH-2 granted by the NHAI;
Construction of the main runway and rapid exit taxi track at the Air Force Station, Pune,
under Military Engineer Services (MES);
Upgradation of airstrips for operation of Boeing 737 type aircrafts at the Saifai Etawah, Uttar
Pradesh, granted by RITES Limited (RITES);
Extension and up gradation of the existing Dehradun Airport for operation of AB-320/B-737800 type aircrafts granted by the AAI;
Construction work under the Uttar Pradesh State Road Project for Package no.
UPSRP/RMC/37 (Kasganj-Hathras) World Bank Funded granted by the Public Works
Department, Lucknow (PWD)

Currently, they are executing 19 infrastructure projects of which two (2) projects with JV
partners. Their Order Book is Rs. 10,389 million as on September 30, 2009. Among the
infrastructure projects that are currently being executed, 15 projects aggregate to a contract
value of Rs. 9,240 million and are related to road construction, two (2) projects aggregating to
Rs. 437 million relate to construction of airport runways and one project each, aggregating to
Rs. 712 million relate to waste management and power transmission and distribution.
Their major clients include:
1. National Highways Authority of India;
2. Airports Authority of India;

48

3. Public Works Department;

4. RITES Limited (a Government of India Enterprises);
5. Military Engineer Services (Ministry of Defence);
6. Madhya Pradesh Road Development Corporation Limited;
7. Uttar Pradesh Power Corporation Limited; and
8. Haryana State Roads and Bridges Development Corporation Limited.

As on September 30, 2009, they had about 1,636 employees, of which 279 employees comprise
engineers and other qualified professionals. They also own a large fleet of sophisticated
construction equipment.

They have ISO 9001:2000 certification for quality assurance from DNV and the SS (Super
Special Class) under MES for unlimited value of contracts. They were awarded a bonus by the
NHAI for the completion of the four laning of the Agra Gwalior section of NH 3 (km. 8.00 to
km. 24.00) in Uttar Pradesh, before the scheduled time.

Management:

Table 7: Key personnel

Name
Mr.

Pradeep

Role
Kumar Chairman cum Managing Director

Jain

Has over 32 years of experience in the construction and

infrastructure sector and allied areas

Mr. Naveen Kumar Jain

Whole Time Director

Has over 23 years of experience in industries such as construction,
cold storage and transportation

49

Mr. Chakresh Kumar Managing Director

Jain

Has over 22 years of experience in construction of roads, airports,

rail over bridges among others

Mr. Sudhanshu Kumar Director ( Independent)

Awasthi

39 years of managerial and leadership experience at Punjab

National Bank in line and staff functions

Mr. Vijay Prakash

Director ( Independent)
Has 35 years of experience in administrative service, including more
than 18 years as an IAS officer

Business Risks:
There are various risks associated with construction companies. Some of which that are specific
to PNC Infratech Ltd. are mentioned below:
Concentrated Portfolio - Portfolio is relatively concentrated in certain large-scale projects. The
five (5) largest contracts in terms of outstanding value represented approximately 70.03% of
their Order Book as of September 30, 2009.
Conflict Of Interest - Certain Promoters and Group Entities are engaged in business activities
similar to theirs hence there is a risk of conflict of interest.
Execution Risk - Project execution risk and payment risk are the major risks associated with the
construction companies

50

Shareholding:
Table 8: Pre issue vs. Post issue shareholding pattern
Particulars

Per issue
No. of Shares

Post Issue
%

No. of Shares

Promoters

1,41,83,400

41.56

[]

31.14

Promoter Group

1,45,84,800

42.74

[]

32.02

Others

[]

Public

53,52,800

15.70

[]

36.84

GRAND TOTAL

3,41,21,000

100.0%

4,55,49,571

100.0%

Public Shareholding in increased from 15.7% to 36.84%

Promoter and Promoter Group Shareholding diluted from 84.3% to 63.16%

Objectives of the issue:

The Company intends to utilize the Issue Proceeds, after deducting the underwriting and issue
management fees, selling commissions and other expenses associated with the Issue (the Net
Proceeds) for the following objects:

1. Investment in capital equipment

2. To meet working capital requirements
3. Prepayment/ repayment of loans and advances of the Company
4. General corporate purposes

51

Table 9: Use of Issue Proceeds

Sr. No.

1.

Particulars

Schedule of Utilization (in Rs. million)

April 1, 2010 to

April 1, 2009 to

March 31, 2011

March 31, 2010

100

400

500.00

300

600

900.00

50

50

100.00

[]

[]

[]

[]

[]

[]

[]

[]

Investment in capital

Total

equipment
2.

To meet working capital

requirements

3.

Prepayment/ repayment
of loans and advances of
the Company

4.

General Corporate
Purposes

5.

Issue Expenses
Total

Financial Performance:

Revenues for PNC increased from Rs 255 Cr in FY06-07 to Rs. 753 Cr in FY09-10, the sales are
expected to be approximately Rs 910 Cr for FY10-11.
The OPM & NPM for FY08 was 13.43% & 5.72% respectively and for FY09 was 12.32% and
4.77% respectively. The estimated OPM and NPM is estimated to increase to 13% and 6% in FY
10 respectively.
The average return on capital employed (ROCE) for last 5 years is at 23%, while average return
on net worth (RONW) for same period is at 25%.

52

Companys revenues are growing with a CAGR of around 43% over the last 4 years which is one
of the fastest growth in the industry. PAT have grown from Rs.13.21cr to Rs. 45 during the
period from 2007 to 2010, a CAGR of over 50%
Order book as on 31.03.2010 stood at Rs. 2800 cr. which is 3.71 times the FY 09-10 revenue.

Table 10: Consolidated Profit and Loss Statements:

For the Half

For the Year

For the Year

For the Year

For the Year

Year Ended

Ended

Ended

Ended

Ended

30.09.2009

31.03.2009

31.03.2008

31.03.2007

31.03.2006

3,244.91

4,831.86

3,864.27

2438.17

1424.51

Stone

137.2

183.49

139.07

112.2

82.49

Other income

13.22

21.18

16.7

13.83

14.41

Total Income (A)

3,395.33

5,036.53

4,020.04

2,564.20

1,521.41

Operating expenses

2,726.28

4,069.08

3,186.56

1984.13

1173.42

Employee Cost

97.66

153.52

120.03

95.5

61.68

Expenses

127.1

197.03

171.98

123.47

98.96

Financial Charges

73.5

97.37

77.58

61.81

27.61

Depreciation

77.26

152.81

115.07

98.79

53.3

Preliminary exp.w/o

0.02

0.04

0.04

0.04

0.04

(B)

3,101.82

4,669.85

3,671.26

2,363.74

1,415.01

PBT (A-B)

293.51

366.68

348.78

200.46

106.40

Particulars

INCOME
Contract Revenue
Sale of Crushed

EXPENDITURE

Sales and
Administrative

Total Expenditure

53

Provision for taxes

Current tax

101.99

118.02

120.93

66.92

11.34

Deferred tax

-1.99

6.18

-0.92

0.83

18.18

FBT

0.77

0.69

0.54

0.61

193.51

241.71

228.08

132.17

76.27

-0.96

-1.52

14.14

-0.96

-1.52

14.14

193.51

240.75

226.56

132.17

90.41

656.94

416.19

189.63

107.46

47.05

850.45

656.94

416.19

239.63

137.46

Reserve

50

30

TOTAL

50

30

850.45

656.94

416.19

189.63

107.46

PROFIT AFTER TAX

AND BEFORE
ADJUSTMENT
ADJUSTMENTS
Current tax impact of
Adjustments
Deferred tax impact
of Adjustments
Total of adjustments
after tax impact
NET PROFIT FOR THE
YEAR AS RESTATED
Profit and loss
account
(at the beginning of
the year)
Balance available for
appropriation
APPROPRIATION
Transfer to General

Balance carried
forward

54

Table 11: Key Financial Indicators:

IN Millions
For the Half

For the

For the

For the

For the

For the

Year Ended

Year Ended

Year Ended

Year Ended

Year Ended

Year Ended

Particulars

30.09.2009

31.03.2009

31.03.2008

31.03.2007

31.03.2006

31.03.2005

Net Sales

3,382.11

5,015.35

4,003.34

2,550.37

1,507.00

1,120.87

Other Income

13.22

21.18

16.7

13.83

14.41

9.41

Total Income

3,395.33

5,036.53

4,020.04

2,564.20

1,521.41

1,130.28

EBIDTA

444.27

616.86

541.43

361.06

187.31

94.37

Depreciation

77.26

152.81

115.07

98.79

53.3

21.55

EBIT

367.01

464.05

426.36

262.27

134.01

72.82

Interest

73.5

97.37

77.58

61.81

27.61

8.75

EBT

293.51

366.68

348.78

200.46

106.40

64.07

Taxation

100

124.97

120.7

68.29

30.13

14.75

Adjustment

193.51

241.71

228.08

132.17

76.27

49.32

Adjustments

-0.96

-1.52

14.14

-3.12

PAT Restated

193.51

240.75

226.56

132.17

90.41

46.20

Book Value

1,612.56

1,228.13

887.33

674.07

541.87

380.34

5.83

7.37

6.93

4.04

2.83

1.52

12.00%

19.60%

25.53%

19.61%

16.68%

12.15%

13.08%

12.25%

13.47%

14.08%

12.31%

8.35%

10.81%

9.21%

10.61%

10.23%

8.81%

6.44%

PAT Before

Diluted
EPS(Annualize
d)
Return on Net
worth (%)
EBIDTA Margin
(%)
EBIT Margin
(%)

55

PAT Margin
(%)

5.70%

4.78%

5.64%

5.15%

5.94%

4.09%

Ratio

1.86

4.65

2.65

5.88

4.31

1.58

Debt

634.56

1028

573.37

635.72

465.89

159.12

341.21

221.14

216.14

108.07

108.07

100.96

Surplus

1,281.65

1,017.31

681.55

566.12

433.96

279.57

Networth

1,612.56

1,228.13

887.33

674.07

541.87

380.34

Debt-Equity

Equity Shares
Capital
Reserves &

Peer Group Selection

The peers selected are as follows:
1. Nagarjuna Construction Ltd.
2. Gayatri Projects Ltd.
3. KNR Construction
4. Valecha Engineering
5. PBA Infra

Peer Group Analysis and Choosing Pricing Multiple

The Multiple used to relatively valuate PNC Infratech was P/E Ratio

Table 12: Peer Group Analysis

Peer Company

Particulars

TTM (Trailing 12 months)

(in Crores)

56

Nagarjuna Construction Co.

Ltd.

Net Profit

286.068

Wt. Avg. O/S Shares

24.76779221

EPS

11.55

MPS

189
as on 11/06/2010

Gayatri Projects Ltd.

P/E

16.36363636

Net Profit

55.336

Wt. Avg. O/S Shares

1.517301892

EPS

36.47

MPS

425
as on 11/06/2010

KNR Construction

P/E

11.65341376

Net Profit

65.95

Wt. Avg. O/S Shares

2.812366738

EPS

23.45

MPS

180
as on 11/06/2010

Valecha Engineering

P/E

7.675906183

Net Profit

17.13

Wt. Avg. O/S Shares

1.874179431

EPS

9.14

MPS

174
as on 11/06/2010

PBA Infra

P/E

19.03719912

Net Profit

14.1

Wt. Avg. O/S Shares

1.350574713

EPS

10.44

MPS

73.75
as on 11/06/2010

P/E

57

7.064176245

Table 13: P/E Multiple

Company Name

P/E

Nagarjuna Construction Co. Ltd.

16.36363636

Gayatri Projects Ltd.

11.65341376

KNR Construction

7.675906183

Valecha Engineering

19.03719912

PBA Infra

7.064176245

P/E Multiple
Using Mean

12.35886634

Using Mean(Adjusted)

11.8976521

Using Median

11.65341376

D. The Conclusion 2: Calculation of Price

Table 14: Price Calculation
Particulars

Mean

Mean(Adjusted)

Median

Diluted EPS(March 2010) = 13.56*

P/E Multiple

9.469

9.293

Market Price Per Share

Price (using mean P/E Multiple)~
Price (using adjusted mean P/E Multiple)~
Price (using median P/E Multiple)~

167.6146529
161.3595271
158.0470935

* Net Profit = Rs430 Million obtained from company by A.K Capital

~ Price Calculated using formula (Market Price per Share = P/E Multiple*Diluted EPS)

Hence Price selected is Rs 161. With Price Band = Rs 160 - 192

58

10.606

Part 3:
Trend Analysis of Government Securities Yields and
its Determinants

A.The Objectives
A Study Focussed on
1. Determining the trends in the 10 yr G-sec Yields in India
2. Analyzing the factors affecting the 10 yr G-sec yields in India
Objectives Of the analysis:
1. Understanding the the debt market in India.
2. Composition of the government securities in India in various periods (pre & post 1991)
3. Study the yield patterns of the G-sec.
4. Determine the factors & the news responsible for G-sec movement.
5. Obtaining the historic data of the variables affecting G-sec (domestic & international
statistics)
6. Determine Co-relation between these factors & G-sec yields.
7. Develop a Linear Regression model to estimate Yields.
8. Provide an analysis on the news (domestic & international) causing movements in yields.

59

B. The Process
About G-SECs market
The Government Securities (G-Secs) market is the oldest and the largest component of the
Indian debt market in terms of market capitalization, outstanding securities and trading
volumes.
A Government security is a tradable instrument issued by the Central Government or the State
Governments. It acknowledges the Governments debt obligation. Such securities are short
term (usually called treasury bills, with original maturities of less than one year) or long term
(usually called Government bonds or dated securities with original maturity of one year or
more).
The G-Secs market plays a vital role in the Indian economy as it provides the benchmark for
determining the level of interest rates in the country through the yields on the government
securities which are referred to as the risk-free rate of return in any economy.
Features of Government Securities
1. Issued at face value,
2. Dated securities of both, Government of India and State Governments, are issued by the
Reserve Bank through auctions.
3. The settlement system for trading in Government securities is based on Delivery versus
Payment (DvP)
4. No default risk as the securities carry sovereign guarantee.
5. Ample liquidity as the investor can sell the security in the secondary market
6. Interest payment (fixed or floating) is on a half yearly basis on face value. (most dated
securities are fixed coupon securities), the day count used in valuation is 30/360 days.
7. No tax deducted at source
8. Can be held only in Dematerialized form from May, 2002 by way of SGL* account (with RBI)
or Gilt Account (with PD or a Bank).

60

9. Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to
change (unless intrinsic to the security like FRBs).
10.

Redeemed at face value on maturity

11.

Maturity ranges from of 2-30 years.

12.

Securities qualify as SLR investments (unless otherwise stated).

13.

Public Debt Office (PDO) of the Reserve Bank acts as the registry / depository of

Government securities and deals with the issue, interest payment and repayment of
principal at maturity.
*Securities General Ledger
Table 15: Participants & Products in Debt Market
Issuer

Instrument

Maturity

Major investors

Central Government

Dated Securities

2-30 yrs

Treasury Bills

91/364 days

5-10 yrs

PSUs (Center & States)

Dated Securities/ State

Development Loans
(SDLs)*
Bonds

RBI, Commercial Banks,

RRBs, Insurance
Companies, PFs, MFs,
PDs, FIIs (cannot invest
in T-Bills), Individuals
Commercial Banks,
Insurance Co.s, PFs

Corporate

Bonds, Debentures
Commercial Paper

1-12yrs
15 days 1yr

Bonds issued for TIER II

capital
Certificate of Deposits

Min. 5yrs

Banks

State Government

5-10 yrs

Banks, Insurance
Companies, Corporate,
PFs, MFs, Individuals
Banks, Corporate, MFs,
Individuals
Banks, Corporate

3 months - 1yr

*SDLs issued by the State Government are similar to bonds issued by the Central Government
with respect to the interest payments, and their status as SLR securities. They are also eligible
as collaterals for borrowing through market repo as well as borrowing by eligible entities from
the RBI under the Liquidity Adjustment Facility (LAF).

61

Table 16: Types of Instruments Traded

Market Segment
Government Securities

Issuer

Instruments

Central Government

Zero Coupon Bonds, Coupon Bearing Bonds,

Treasury Bills, STRIPS

State Governments
Public Sector Bonds

Coupon Bearing Bonds.

Govt. Guaranteed Bonds, Debentures

Government Agencies / Statutory

Bodies
PSU Bonds, Debentures, Commercial Paper
Public Sector Units

Banks

Debentures, Bonds, Commercial Paper, Floating

Rate Bonds, Zero Coupon Bonds, Inter-Corporate
Deposits
Certificates of Deposits, Debentures, Bonds

Financial Institutions

Certificates of Deposits, Bonds

Corporate
Private Sector Bonds

The G-secs are referred to as SLR securities in the Indian markets as they are eligible securities
for the maintenance of the SLR ratio by the Banks. The other non-Govt securities are called
Non-SLR securities (Savings bonds, Oil Bonds, NSCs, and Power Bonds etc.).

Understanding various Instruments issued by the Government

1. Fixed Rate Bonds
These are bonds on which the coupon rate is fixed for the entire life of the bond. Most
government bonds are issued as fixed rate bonds.
Example 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years maturing on April
22, 2018. Coupon on this security will be paid half-yearly at 4.12% (half yearly payment being
the half of the annual coupon of 8.24%) of the face value on October 22 and April 22 of each
year.

62

2. Floating Rate Bonds

Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set
at pre-announced intervals (say, every six months or one year) by adding a spread over a base
rate. In the case of most floating rate bonds issued by the Government of India so far, the base
rate is the weighted average cut-off yield of the last three 364-day Treasury Bill auctions
preceding the coupon re-set date and the spread is decided through the auction. Floating Rate
Bonds were first issued in September 1995 in India.
Example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, thus maturing
on July 2, 2017. The base rate on the bond for the coupon payments was fixed at 6.50% being
the weighted average rate of implicit yield on 364-day Treasury Bills during the preceding six
auctions. In the bond auction, a cut-off spread (mark-up over the benchmark rate) of 34 basis
points (0.34%) was decided. Hence the coupon for the first six months was fixed at 6.84%.

3. Zero Coupon Bonds

Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at
a discount to the face value. The Government of India issued such securities in the nineties. It
has not issued zero coupon bonds after that.
4. STRIPS (Separate Trading of Registered Interest and Principal of Securities)
STRIPS are instruments wherein each cash flow of the fixed coupon security is converted into a
separate tradable Zero Coupon Bond and traded. For example, when Rs.100 of the
8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12 each half year) will become coupon
STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP. These cash
flows are traded separately as independent securities in the secondary market.
5. Capital Indexed Bonds

63

These are bonds, the principal of which is linked to an accepted index of inflation with a view to
protecting the holder from inflation. A capital indexed bond, with the principal hedged against
inflation, was issued in December 1997. These bonds matured in 2002. The government is
currently working on a fresh issuance of Inflation Indexed Bonds wherein payment of both, the
coupon and the principal on the bonds, will be linked to an Inflation Index (Wholesale Price
Index).
6. Bonds with Call/ Put Options
Bonds can also be issued with features of optionality where the issuer can have the option to
buy-back (call option) or the investor can have the option to sell the bond (put option) to the
issuer during the currency of the bond. 6.72%GS2012 was issued on July 18, 2002 for a maturity
of 10 years maturing on July 18, 2012. The optionality on the bond could be exercised after
completion of five years tenure from the date of issuance on any coupon date falling thereafter.
The Government has the right to buy-back the bond (call option) at par value (equal to the face
value) while the investor has the right to sell the bond (put option) to the Government at par
value at the time of any of the half-yearly coupon dates starting from July 18, 2007.
7. Special Securities In addition to Treasury Bills and dated securities issued by the Government of India under the
market borrowing programme, the Government of India also issues, from time to time, special
securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation
of India, etc., as compensation to these companies in lieu of cash subsidies. These securities are
usually long dated securities carrying coupon with a spread of about 20-25 basis points over the
yield of the dated securities of comparable maturity. These securities are, however, not eligible
SLR securities but are eligible as collateral for market repo transactions. The beneficiary oil
marketing companies may divest these securities in the secondary market to banks, insurance
companies / Primary Dealers, etc., for raising cash.

64

Issue of G-SECs In India

G-secs are issued by RBI in either a yield-based (participants bid for the coupon payable) or
price-based (participants bid a price for a bond with a fixed coupon) auction basis. The Auction
can be either a Multiple price (participants get allotments at their quoted prices/yields) Auction
or

Uniform

price

(all

participants

get

allotments

at

the

same

price).

RBI has recently announced a non-competitive bidding facility for retail investors in G-Secs
through which non-competitive bids will be allowed up to 5 percent of the notified amount in
the specified auctions of dated securities.

Advantages of investing in government securities to an individual investor.

1. Zero-Default Risk due to their Sovereign guarantee, ensures safety of investments.
2. Lower average volatility in bond prices in comparison to other financial instruments
3. Greater returns as compared to conventional safe investment avenues like bank deposits &
fixed deposits, which also contain credit risk.
4. Tax exemption for interest earned on G-Secs. up to Rs.3000/- over and above the limit of
Rs.12000/- under Section 80L (as amended in the latest Budget).
5. Higher leverage, greater borrowing capacity against G-SECs due to their zero riskiness.
6. Wider range of innovations in the form of T-bills, Index Linked Bonds & others like STRIPS,
bonds with call/put options are also likely to be introduced.

Factors Affecting G-sec Yields:

On conducting research, a list of macroeconomic factors that can broadly be defined as
determinants of G-sec Yields was prepared. Theoretically, all the below given factors should
have some effect on G-sec Yields. The list and rationale for selecting the factors is given below:

65

1. Inflation Rates - Inflation is defined as an increase in the price of a bunch of Goods and
services that projects the Indian economy. If Inflation goes up then it means that there is too
much money chasing too few goods, and monetary tightening will take place which should
cause the G-sec Yields to go up.
2. M3 (Broad Money) When increase in money supply is more than usual then that will cause
increase in inflation which in turn should increase the G-sec Yields
3. Crude Oil Prices Crude oil Prices affect economy indirectly , which is reflected through
inflation.
4. Cash Reserve Ratio - Cash reserve Ratio (CRR) is the amount of funds that the banks have to
keep with RBI. If RBI decides to increase the percent of this, the available amount with the
banks comes down. Hence less money will be available in the market, and therefore price of
dated G-securities should come down and yields should thus increase.
5. Domestic Borrowing When domestic borrowing of the government increases it should
decrease the prices of G-sec which should increase the G-sec Yields as the government is
willing to pay a higher coupon rate for the money it is going to borrow.
6. Fiscal Deficit Fiscal Deficit is that deficit caused due to excessive expenditure by the
government over its revenues. Generally the government will borrow to cover up this deficit;
hence G-sec yields should go up.
7. US Govt. 10 yr Bond Yield Dollar being the world currency, influences all the markets and
generally India 10 Yr G-sec rates will follow in line with its US counterpart. News affecting
the highly developed and linked economy would certainly bring about changes in the Indian
G-sec yields as well.
8. India ECB - When external commercial borrowing of the government increases it should
decrease the prices of G-sec which should increase the G-sec Yields as the government is
willing to pay a higher coupon rate for the money
9. Reverse Repo Rates Reverse Repo rates are rates that RBI gives to banks to deposit money
with it. In general whenever Reverse Repo Rate increases, banks will deposit more money
with RBI hence reducing money supply which will

66

10. Repo Rates Repo Rates are rates charged by RBI to banks which borrow money from it,
hence when there is a hike in repo rates, the G-sec Yields should theoretically go up, as cost
of borrowing for banks will increase.
11. Current Account Balance The Current Account Balance is related to the domestic and
external borrowing of the country hence it should also have a bearing on the G-sec market.
12. Foreign Institutional Investment in Equity - FII in equity determines the funds available in
the country by way of foreign investment , which leads to growth and a hike in the Indian
stock market.

Data Gathering and Database Creation:

To find historical data of all the above factors for the past 10 years, I used a Bloomberg
Terminal.
Fig. 6: Bloomberg Grab Example

67

The Database created was as follows:

Fig. 7: Screenshot of G-sec database

The Database consisted of monthly data of each of the above mentioned factors for a period of
10 years.
It also contains percentage monthly change and bi-annual changes in order for better analysis
of trends.

68

In the above case every change in G-sec that was more than 10% monthly or bi-annually has
been highlighted in red. This makes analysis less cumbersome as data of other factors
corresponding to only that data need to be observed.
The table above explains the G-Sec movements
The data takes into consideration the Bi-annual % change in G-SEC, above 10% percentage
points.
The data referred to ranges from 31st March, 2000 to 31st March 2010 a monthly observation,
i.e. Period under consideration is 120(months).

Co-Relation

Theoretically, all the above factors seem to affect the G-sec Yields. Yet in order to find out
which factors seem to, most affect the change in G-sec Yields, we perform a correlation analysis
on the above given database.
I have used co-relation as a means to build a relationship with the factors stongly affecting
movement of Yields.
With more integration I found that transmitting price signals would be more efficient, and a
direct effect could be monitored in the event of changes in the monetary policy in the
economy.

69

Table 15: Correlation Matrix

G-SEC
Yields

US 10YR
Yields

Inflation
WPI

Reverse
Repo

Repo

M3

CRR

Domestic
Borrowing

Fiscal
Deficit

FII
Investment
in Equity

.660
(**)

.266
(**)

.737
(**)

.768
(**)

-.242
(**)

.838
(**)

-0.117
(**)

-0.130

-0.056

0.000

0.003

0.000

0.000

0.007

0.000

0.09

0.155

0.544

.266
(**)

0.032

0.165

.214
(*)

0.099

.377
(**)

-.266
(**)

-0.079

-0.009

Significanc
e
REVERSE
REPO

0.003

0.727

0.071

0.019

0.281

0.000

0.003

0.390

0.921

.737
(**)

.698
(**)

0.165

.933
(**)

-.540
(**)

.684
(**)

-.301
(**)

-.312
(**)

-0.114

Significanc
e
REPO

0.000

0.000

0.071

0.000

0.000

0.000

0.001

0.001

0.211

.768
(**)

.683
(**)

.214
(*)

.933
(**)

-.523
(**)

.769
(**)

-.285
(**)

-.286
(**)

-0.117

Significanc
e
M3

0.000

0.000

0.019

0.000

0.000

0.000

0.002

0.001

0.203

-.242
(**)

-.660
(**)

0.099

-.540
(**)

-.523
(**)

-0.084

.501
(**)

.423
(**)

0.150

Significanc
e
CRR

0.007

0.000

0.281

0.000

0.000

0.359

0.000

0.000

0.101

.838
(**)

.422
(**)

.377
(**)

.684
(**)

.769
(**)

-0.084

-0.136

-0.134

-0.059

Significanc
e

0.000

0.000

0.000

0.000

0.000

0.359

0.137

0.144

0.521

G-SEC
YIELDS
Significanc
e
INFLATIONWPI

The Data under consideration is from March 2000 to March 2010.

**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
As can be observed by the above correlation matrix,

The factors that are highly correlated with significance < 0.05 are as follows:
1. US 10 Year Bonds
2. CRR Rates
3. Reverse Repo Rates
4. Repo Rates

70

5. Money Supply (M3)

6. Inflation Rates
7. Government Borrowings

Linear Regression

Multiple R: 0.9432433330

Table 16: Linear Regression Analysis

Coefficients

P-value

Intercept

-5.1564597

0.00432577

US 10 yr

0.8648106

0.00000000

CPI

0.2064714

0.00023910

WPI

-0.0093689

0.70295270

Oil

0.0002026

0.08730233

M3

-0.0000567

0.00921181

CRR

0.9312122

0.00000000

Domestic Borrowing

0.0000086

0.04446425

FX Rate

0.0866992

0.00522074

Fiscal Deficit

0.0000045

0.25105213

FII Investments in Equity

0.0000207

0.74815061

Reverse-Repo

0.3403795

0.00139648

Repo

-0.3778231

0.00107372

G-sec Yields = -5.1564 + 0.864*US 10 yr G-sec Yields 0.2064*Inflation + 0.931*CRR

+0.34*Reverse Repo Rates 0.3778*Repo Rates - 0.0000567*Money Supply.

71

Fig. 8 : G-sec Yields Graph

G-Sec Yield
10.17

Sept-2008
11.9
10.66

7.94

The % change Bi-annually.

-3.18

G-SEC yields

% change M-O-M

The above figure shows a graphical representation of G-sec Yields over the last 10 years.
The graph highlights and labels all values which show change of more than 10% either monthly,
bi-annually or annually.

72

Mar/10

-10.0

Dec/09

Jun/09

Jun/08

Sep/08

Dec/07

Mar/08

Jun/07

Dec/06

Jun/06

Sep/06

Mar/06

Sep/05

Dec/05

Jun/05

Dec/04

4.825

Mar/05

Dec/03

Mar/04

Jun/03

Sep/03

Dec/02

Mar/03

Jun/02

Sep/02

Dec/01

Mar/02

Jun/01

Sep/01

Mar/01

Dec/00

Jun/00

Sep/00

Mar/00

Mar-2009
-23.36

Sept-2003
-14.77 5.202

-7.20

0.0

Sept-2004
21.07

Mar-2002
-18.5

10.0

7.1675

Dec/08

Sept-2001
-10.32

Sept-2009
11.68

8.325

7.11

6.655

Mar-2003
-14.06

Jun/04

8.5

Mar-2005
10.07

Mar/09

Mar-2001
-12.60

20.0

18.40

Mar-2007
10.37

9.12

Mar/07

Sept-2000
7.88

27.52

Sep/07

10.786

Sep/04

11

30.0

% Change M-O-M

Sep/09

11.636

-20.0

Fig 9: Movement of various Macro-Variables in the economy (period 2000-2005)

16
14
12
10
8
6
4
2
0
-2

Indian G-Sec Yield (%)

US G-Sec Yield (%)

WPI (%)

CRR (%)

Reverse Repo (%)

Repo (%)

Figure 10: Movement of various Macro-Variables in the economy (period 2005-2010)

400,000
14
300,000
10
200,000
6

100,000

-2

73

-100,000

Indian G-Sec Yield (%)

US G-Sec Yield (%)

WPI (%)

CRR (%)

Reverse Repo (%)

Repo (%)

India ECB (INR in crores)

Net Govt Borrowing (INR in crores)

Table 17: Comparative Analysis of G-sec vs Correlated Determinants

Period
(Biannu
al)

%
Change

Change
s
in
Determ
inants

Changes in
Determina
nts

Changes in
Determinant
s

Change in
Determina
nts

Changes in
Determina
nts

Change
s
in
Determ
inants

Major News or Event

Announcements

Sept00
March
01

CRR
decrea
sed
-3.03%

REPO
decreased
-10%

REVERSEREPO
decreased
-30%

M3
increas
ed

Global
slowdown
which
continued
until
November

CRR
decrea
sed
-6.25%

REPO
decreased
-5.56%

REVERSEREPO
decreased
-7.14%

Sept01
March
02

-18.5%
Major in
Nov.01
-10.67%

CRR
decrea
sed
26.67%

REPO
decreased
-5.88%

REVERSEREPO
decreased
-7.69%

US-GOVT.
10YR
Yields
decreased
-15.25%
US-GOVT.
10YR
Yields
decreased
-6.69%
US-GOVT.
10YR
Yields
increased
17.61%

InflationWPI
decreased
-0.77%

March
01Sept01

-12.60%
Gradual,
but
7.2% in
Feb 01
-10.32%
Gradual
Chg.

Sept
02March
03

-14.06%
Gradual
Chg.

CRR
decrea
sed
-5.00%

REPO
decreased
-6.67%

REVERSEREPO
decreased
-13.04%

Mar
03Sept03

-14.77%
Gradual,
but
6.4% in
Aug 03
21.07%
Gradual,
but 16%
in Jun July04

CRR
decrea
sed
-5.26%

REPO
decreased
-14.29%

REVERSEREPO
decreased
-10%

CRR
increas
ed
5.56%

No
change in
REPO

No change
in ReverseREPO

Mar04
Sept.0
4

74

InflationWPI
decreased
-29.66%

10.57%
M3
increas
ed
4.41%

InflationWPI
decreased
-61.06%

M3
increas
ed
5.53%

9/11
attacks.

FII
investments
were
negative
major
portion of the yr.

US-GOVT.
10YR
Yields
increased
5.61%

InflationWPI
decreased
-69.69%

M3
increas
ed
4.66%

http://www.financial
express.com/news/g
sec-mart-volatile10yr-yieldseesaws/73865/0

State Govt
to borrow 14,151
cr.&
over
subscription allowed
upto25% of FV.

Nervousness
about Union Budget

News about
Iraq War, Central
Govt. Buying dollars

US-GOVT.
10YR
Yields
Increased
3.73%
US-GOVT.
10YR
Yields
increased
7.42%

InflationWPI
decreased
-18.2%

M3
increas
ed
6.98%

InflationWPI
increased
64.44%

M3
increas
ed
4.33%

FII
investments in equity
increased at a higher
rate
from
2003
levels.

Inflation was

high thus CRR was

incr.

Oil Prices in
from 04 to march05
rose by 60%.
Sept.0
4March
05

10.07%
Lot
of
Moveme
nt (11%
in
Oct04)

CRR
increas
ed
5.26%

No change
in REPO

REVERSEREPO
increased
5.56%

US-GOVT.
10YR
Yields
increased
8.79%

InflationWPI
decreased
-32.06%

M3
increas
ed
7.60%

Sept06
March
07

10.37%
(Around
3
%
gradual
M-O-M)
11.90%
(up
by
34% in
jun08,
decrease
d by 22%
julsept08.)

CRR
increas
ed
20%

REPO
increased
7.14%

No change
in ReverseREPO

InflationWPI
increased
22.86%

M3
increas
ed

CRR
increas
ed
20%

REPO
increased
-16.63%

No change
in ReverseREPO

US-GOVT.
10YR
Yields
increased
0.36%
US-GOVT.
10YR
Yields
increased
12.14%

-23.36%
(Major
fluctuati
ons
seenfalling up
to Dec &
then
Increasin
g.)

CRR
decrea
sed
44.44%

REPO
decreased
-44.44%

REVERSEREPO
decreased
-41.67%

US-GOVT.
10YR
Yields
decreased
-30.35%

InflationWPI
decreased
-90.24%

11.68%

No

REPO

US-GOVT.

Inflation-

March
08Sept.0
8

Sept08
March
09

March

75

REVERSE-

InflationWPI
increased
64%

12.28%
M3
increas
ed
6.61%

M3
increas
ed
11.22%

M3

Pretty much
reduction in Fiscal
deficit was witnessed
due to FRBM Act
enactment.

Major
changes happened in
Oct04

Dollar was
weak against most
ocurrencies

Jan 2008-FII
investments negative
to a great extent.

Global
economy meltdown
(08-09),
contributing
to
slower growth.

A 13-Yr. high
Inflation(WPI)
in
July-Aug of 12.83%,
more of it was
imported cause of
crude
oil
prices
(Rs.6000/-)-high

FII
investments in Equity
were negative most
part of the quarter.

Oil
Prices
fell drastically

Global
Meltdown (Inflation
ve in June coz of
base year effect)
The Finance Minister

09Sept.0
9

Major
around
18% in
MayJun09

change
in CRR

decreased
-5%

REPO
decreased
-7.14%

10YR
Yields
increased
24.12%

WPI
decreased
-58.33%

increas
ed
6.93%

also
unveiled
a
Rs457,000
crore
gross
borrowing
programme in the
fiscal year 2010-11 to
fund the widening
fiscal deficit

C. Conclusion/ Findings
1. G-sec Yields and all its determinants change in a cyclical order. Whenever one factor changes
it affects the change in another factor and so on to ultimately affect the G-sec Yield. Now, a
change in G-sec Yields again will cause a cyclical change in other factors.
2. Most changes made to any of the factors are generally in order to suck or add liquidity to the
market and G-sec yields generally firm up or down generally on expectations of change in
monetary policies
3. G-SEC rates generally firm up when reverse-repo rates are likely to be raised
4. Though there is not a strong correlation between the historical yields of g-sec and
government borrowings. There are clear indicators that whenever the government has had
plans to borrow, G-sec yields have gone up.
5. Similarly whenever the government announces a widening of its fiscal deficit, G-sec Yields
will increase on the expectations that government will want to increase its borrowings in
order to reduce its fiscal imbalances.
6. 3G is likely to improve Government revenue, which would improve the fiscal deficit and thus
the requirement for further borrowing by government would reduce, hence putting less
pressure on the yields.
7. 3-G effect- Obviously their borrowings will reduce, and the Reserve Bank of India's task [of
setting the monetary policy] will become easier, because they'll have to manage a lower
level of [government] borrowing," said Joshi. "The yields [on government bonds] should fall,
but that's temporary because investors don't just look at one-year when they look at a 10year bond. They look at the long-term picture. If there is a one-time gain, the market will
read it, so it's not going to be an enduring gain" on bond prices.

76

77

Bibliography:
1. A.K Capital website: www.akcapindia.com
2. A.K Capital Annual Report
3. Reserve Bank of India Website: www.rbi.org
4. Reserve Bank of India Database: www.dbie.rbi.org.in
5. Securities and Exchange Board of India Website: www.sebi.gov.in
6. National Stock Exchange Website: www.nse-india.com
7. Bombay Stock Exchange Website: www.bseindia.com
8. Money Controls Website: www.moneycontrol.com
9. Financial Interpretation of variables (formulaes) :http://mospi.gov.in/financial_and_bank.pdf
10. Bloomberg Terminal
11. Googles Website: www.google.com
12. FII Investment Patterns Website:
http://www.ibef.org/artdispview.aspx?in=24&art_id=26015&cat_id=457&page=2

78