How To Do Equity Research

Angel Broking Limited How to do equity research
Much Beyond Broking India Research
Foreword
How to do equity research 2

Index
MACRO Page No.
Executive Summary 4
Markets and Investing, Choosing between ST losses vs LT Gains, Greed & Fear 5
Intelligent Investing: Invest in businesses and not only in price and assets 9
Growth Versus Value 11
Market and its determinants, Sensex PER Band Chart 14
- Interest rates, Inflation, FII
Trading Systems in India vs US/UK 16
SECTORS - (Characteristics and what to look out for within the sector i.e working capital or Fixed assets,
monthly auto and cement nos, Manufacturing flow chart, Business cycle, Forecasting techniques)
Automobile 23
Banking Industries 28
Cement Industries 31
Construction 36
Consumer Durables 38
Couriers 41
Fertilizer 42
FMCG 45
Gems & Jewellery 49
Hotels 50
Information Technology 52
Media 53
Metals 56
- Aluminium 56
- Steel 62
Oil & Gas 64
Packaging 66
Paints 67
Paper 70
Petrochemicals 73
Pharma 78
Power 81
Shipping 84
Sugar 86
Tea 87
Telecom 90
Textiles 93

Page No.
VALUATIONS 97
Valuation Tools 98
Formulas 105
TRACKING 107
Raw material and Product usages
Which sector tracks which other sectors
Globally impacted sectors 110
WHAT HAPPENS 111
A M&A, Consolidation 112
B Adjustment in equities (Fully diluted and Weighted Avg Basis) 114
- for Bonus, Rights, Warrants, CD, Stk options
WHAT IMPACTS THE SHARE PRICES 116
BACK PAGES OF THE REPORT 120
Checklist when starting to research a company 121

Executive Summary • Researching equities as an asset class has been active since the time this
country started on economic liberalization. Lots of theories have evolved to
give investors an insight of what equities, as an asset class can do to their
investments.
• Investors, who had been thinking of stock market as a gambling place where
you can win or lose it all, have been beaten time and again. Particularly the
retail investors, who had been taken over by greed and fear, have been
dependent on brokers for tips rather than working on the logic.
• With some experience, we can predict the rise and fall of the stock market. In
the past 12 years since the economic liberalization in 1992, we have seen
huge scale up in the Sensex. However, we also saw massive corrections
following the various scams. We saw an unprecedented bull run in Dec 1991
followed with a scam in April 2002. Technology shares boomed in 1999 only
to be seen the bubble bursting in April 2000. Despite, all even and the odds,
we have never seen the Sensex going back to the levels when the economic
linearization started in 1992. The power of compounding works wonders and
investors need to benefit out of this theory rather than time the markets.
• Investors who had invested in companies like Colgate even before the
economic linearization and continue to hold them, have made more money
than keeping the same amount in a bank earning interest. Hence, because
of the Stock Market, we will never have to worry about money again. We
believe that everyone can also do the same, with a little patient and
determination, the skill-sets required to become rich... Before you invest,
you should tell yourself 2 things: don't be too greedy, be patient and investing
in businesses is more useful rather than just investing only in price and assets.
• In this report, we endeavor to put things together in perspective and look at

equities as an asset class for investors to park their investments and tell you
some of the tricks that have been learned over the last 15 years.

Markets and Investing – Equities as an asset class!
The Stock Market is often portrayed as a gambling place where you can win or lose it all. We completely disagree. With some
experience, we can predict the rise and fall of the stock market. In this report, we will tell you some of the tricks that have been
learned over the last 15 years by the person writing this report.
In the past 12 years since the economic liberalization in 1992, we have seen huge scale up in the sensex. However, we also
saw massive corrections following the various scams. We saw an unprecedented bull run in Dec 1991 followed with a scam in
April 2002. Technology shares boomed in 1999 only to be seen the bubble bursting in April 2000. Despite, all even and the
odds, we have never seen the sensex going back to the levels when the economic liberisation started in 1992.
Investors who had invested in companies like Colgate even before the economic liberisation and continue to hold them, have
made more money than keeping the same amount in a bank earning interest. Hence, because of the Stock Market, we will
never have to worry about money again. We believe that everyone can also do the same, with a little patient and determination,
the skill-sets required to become rich... Before you invest, you should tell yourself 2 things: don’t be too greedy and be patient.
Choosing Between short term losses and long term gains
To understand the above acronym, let’s understand a recent phenomenon. With attacks on Iraq and recessionary US economy,
it is very tempting to try market timing. Surely now it can be certain that the stock market will go down and that FII money would
zig zag out of that country to some other place. It must be obvious too that infrastructure stocks will do well in this kind of the
Indian environment wherein the planned expenditure is going to provide the backdrop for demand growth in India. But attempting
to correctly guess the direction of markets is almost always, sooner or later, a fool’s errand. The gains one may make in even
a series of correct guesses are often more than offset by losses when one is wrong.
In this case, americans and others could rally to the cause of stocks, buying to bolster them now in a spirit of patriotism,
encouraged to buy bonds to help US. While that seems unlikely, the truth is one almost never knows ahead of time just what
“Mr. Market” will do and why. Even airline stocks are not a sure bet to fall despite the threat of shot down mid-air. Congress is
earmarking billions of dollars to assist them. Maybe they will rally on this news instead. As for the defense industry, it could still
take some time before new expenditures lead to real profits. And what happens when everyone fully realizes that there will be
no quick fix for terrorism? We cannot in one massive raid rid the world of evil.
Successful market timing requires knowing not only when to buy but also just when to sell, a dicey question. Overall, few ever
manage sustained profits in this way.
By contrast, many have seen moderate investments grow to real wealth through purchase of carefully selected shares in good
businesses, held for the long haul. If now seems a little too risky a time for investing, market volatility being what it is now, then
consider buying investing in small and mid cap stocks with sustainable earnings growth at-least for the next 5 years. This would
enable building up a decent portfolio over the long haul which would beat the real interest rates. One thus buys more shares
when the market is low, fewer when it is high, with an almost automatic benefit: lower average cost per share.
The first step in determining the right mix of investments for your portfolio is to assess your risk tolerance. One risk is the
possibility that your investment may lose some, or all, of its value.
In investing, it is impossible to avoid risk altogether. Even holding cash has a risk—the risk that inflation will reduce the purchasing
power of cash over time. Generally speaking, the higher the risk, the higher the reward you should expect. Historically, stocks
have had more attractive returns than bonds, but have also had more volatile swings in value. The younger you are, the more
time you have to ride out the ups and downs of the market. An aggressive allocation, seen in the graphic below, focuses on
equities and may present more risk, especially in the short term. However, this type of allocation has a high reward potential,
and the risk is lessened if you stay invested over the course of several years. The aggressive allocation is the common choice
of investors who have many years until retirement and are comfortable with the possibility of losing value in the short term.

A moderate allocation is a more balanced approach, with consideration paid to stability as well as growth. This type of allocation
is well-diversified and withstands volatility better than the aggressive allocation described earlier. Investors who choose moderate
allocations may have fewer years until retirement than aggressive investors, and are looking to balance growth with preservation
of assets.
You should evaluate your portfolio regularly and make changes based on your comfort with risk, rather than short term market
conditions. The investor who is nearing or in retirement is most likely to employ a conservative allocation consisting primarily of
bonds and cash. A portfolio of this type is focused on preserving value and minimizing volatility and risk.
These examples are but a few of the many different ways you can choose to direct your retirement investments. The most
important thing to remember is that you should evaluate your portfolio regularly and make changes based on your comfort with
risk, rather than short term market conditions. History has shown that if you keep a long-term perspective and stay invested
through market ups and downs, you will eventually be rewarded.
Retiring Rich!
As we’ve seen time and again, a successful campaign to retire rich is not for the faint of heart or weak of will. The normal
gyrations of the market will constantly test your devotion to these strategies.
Knowledge is power. People who jump into the market without an underlying investment plan will run to the “safety” of cash or
bonds long before those who understand history. But as any bear market grinds on, every instinct will tell you to sell. Your
stocks will be down. All your friends who never owned stocks in the first place (who will never retire rich) will be amazed at how
foolish and reckless you are to be invested in the market. Relatives will try to talk you into more prudent, guaranteed investments.
Worse yet, you may be drawn to the idea of market timing.
If there were a simple market-timing method with a batting average as successful as that of these strategies, it would be a
dream come true. But there isn’t one. Many investors believe that they can time their purchases and miss those wrenching
bear markets, but no one has effectively demonstrated the ability to do so. Market-timing newsletters scream about all the
times you’d be better off on the sidelines, but their actual track records are dismal. Most of them fail to beat even T-bills, and
you wind up paying a fortune in commissions as you move in and out of the market. Since no effective market-timing tool has
yet been invented, you simply have to gut out those down markets.
Most important, you shouldn’t care about the short term. In the grand scheme of saving and investing for a rich retirement, five
years is a short period of time. When a bear market gets you down, revisit the performance of the Sensex from the time of
economic librealisation of 1993 and onwards. An index level of 1400 was never seen again.
The financial industry is littered with famous money managers who did extraordinarily well for a short time but then crashed and
burned. Don’t let success go to your head and make you think you’re smarter than the strategies that made you successful.
But as we’ve seen over and over, this is the worst thing an investors can do: compare your carefully picked stocks in your
portfolio with someone else doing better. When things are going particularly well, we tend to think they could be even better.
But the odds are that others will soon join the vast majority of investors who get burned when trying to outsmart the market.
The market will probably soon teach the genius otherwise since there’s always someone with a portfolio that’s up 30-40
percent, who almost always thinks it’s due to his or her brilliant stock picking. More often than not it’s just dumb luck. The
minute you think that you can outsmart the market, remember the sobering fact that 80 percent of the brilliant, well-connected,
and super-informed money managers across the world can’t beat their main market indices over the long term—primarily
because they believe that they can outsmart the market in the short term.

Power of compounding
The whole point of strategic investing is to put your long-term investment strategy on automatic pilot and let the time-tested
techniques do their stuff. When the market starts moving against you, you’ll probably panic even more than other investors do
and want to abandon your strategy even faster.
Second, and on a more positive note, remember that when these strategies outperform, it’s the rule, not the exception. The
reason you put your money in Leaders in their industry or the ones who are product price setters, the first place is that they do
much better than the main indices. This is quite normal, not something you deserve to jump up and down about. You’re using
simple models that have nothing to do with your brilliance and everything to do with empirical research and great batting
averages over long periods of time spilling out the sheer power of compounding.
Greed and Fear
Stock chart pattern analysis unveils a world driven by lust and pain. The financial markets are about money. No other controlled
substance awakens the best and worst of our humanity with quite so much intensity. When we risk our capital, the markets
become our lovers, our bosses and the bullies who beat us up when we were kids. As assets shrink and swell, emotions flood
in to cloud our reason, planning and self-discipline. Fight/flight impulses emerge and trigger unconscious (and inappropriate)
buying and selling behavior.
Rising prices attract greed. Paper profits distort self-image and foster inappropriate use of margin. The addictive thrill of a stock
rally draws in many participants looking for a quick buck. More jump on board just to take a joyride in the market’s amusement
park. But greed-driven rallies will continue only as long as the greater fool mechanism holds. Eventually, growing excitement
closes the mind to negative news as the crowd recognizes only positive reinforcement. Momentum fades and the uptrend
finally ends.
Falling prices awaken fear. The rational mind sets artificial limits as profits evaporate or losses deepen. Corrections repeatedly
pierce these boundaries, forcing animal instinct to replace reason. Destructive traits in the non-market personality invade the
psyche of the wounded long. Short covering rallies raise false hopes and increase pain. The subsequent drop becomes
unbearable and the long finally sells, just as the market reverses.
The impulse-driven crowd generates constant price imbalances that traders can exploit. But successful execution requires
accuracy in both time and direction. Chart pattern analysis allows measurement of the emotional crowd’s impact on these key
elements. Within the charting landscape, exact price triggers can be located where these unstable forces should erupt.
You can only capitalize on the emotions of others when you are able to control your own. Pattern analysis cautions the trader
to stand apart from the crowd at all times. In simplest terms, they represent the attractive prey from which your livelihood is
made. And just as a wild cat stalks the herd’s edge looking for a vulnerable meal, the trader must recognize opportunity by
watching the daily grind of pattern swings and volume spikes.

Intelligent Investing: Invest in Businesses and not just in price and assets!
One imminent question keeps coming to Investors mind on How to beat the market consistently and are there enough investors
on this planet who would have beaten the markets for last couple of years if not decades?
Even market ignoramuses have heard of the Sage of Omaha and chief executive officer of Berkshire Hathaway, the one and
only Warren Buffett, the man who has beaten the market for 50 years. One who walks patiently down the ‘Buffett way’ will learn
much that is of relevance to Indian investors. Those who can’t be bothered with studying his methods or reading his transparent
annual letters to Berkshire shareholders often regard Buffett as an all-knowing oracle. He isn’t blessed with prescience; he is
merely a man with immense self-discipline and humility who has translated common sense into an investment strategy.
Invest in brands. The cornerstone of Buffett’s strategy is to only buy businesses where he can figure out future prospects five
years — or further — down the line. This automatically shuts out hi-tech sectors. He has never owned a technology stock — no
IBM, no Microsoft, no Intel, no molecular biology wonders and no Internet stocks. It also shuts out cyclicals — businesses with
unstable ebbs and flows such as automobiles, paper and chemicals.
Buffett’s universe of stocks is packed with strong brands with direct consumer contact. He wants the likes of Coke, Pepsi,
Gillette, McDonalds and Wal-Mart. He has also owned many banking, credit card, brokerage and insurance stocks, but finance
is a sector where he has specialised knowledge.
He misses out on the high fliers and the cyclicals in good times, but his portfolio sees little erosion in bear markets. In the Indian
context, Buffett’s universe would comprise companies such as Hindustan Lever, Indian Shaving, Nirma, Dabur, Britannia and
Nestle. These consumer-oriented stocks have better growth prospects in a developing economy than in the US. Hence, a focus
on such companies could be even more rewarding than it has been for Buffett.
Proven payers: Buffett likes companies with an established track record. He doesn’t play the primary market; he invests only
in companies that have been around for three to five years. By then, it’s fairly evident whether the management can build
brands that will last. His companies are usually also dividend payers before he gets interested.
Buy and hold: In fact, Buffett lives off his dividend income and re-invests surpluses. He does not sell stocks for quick capital
gains. His tax-saving strategy is to avoid booking a profit! He will disinvest only if he sees the company’s fundamentals weakening.
This too is of immense relevance in the Indian context, as dividend income is tax-free.
Get in cheap: Moreover, Buffett will never buy a stock unless it is cheap. His valuation model is simple: if the company has high
debt, avoid it. The implication is that the business does not generate enough cash to grow out of its own revenues.
After filtering out the high-debt companies, he looks at cash earnings (net profit plus depreciation) and cash return on networth
(cash earnings divided by equity plus accumulated reserves). If these numbers show consistent growth over several years,
he’s interested.
Buffett will compare returns with the prevailing interest rates. As far as he’s concerned, cash earnings can be treated like the
yield of a debt instrument. There’s an underlying assumption here: the company management is honest enough not to fudge
accounts. This is crucial in the Indian context, since Indian accounting practices are far more lax.
Buffett inverts the cash earnings to price (cash PE) ratio of a stock to calculate his yield. He looks at the historic cash PE ratio
range, and increases his holdings in a stock only when it’s trading near the lower end. A simple mechanistic strategy that works.
But only because the man has the discipline to ignore digressions.
Though the above mechanism misses out on turnaround and cyclical opportunities, investing in businesses have proved more
rewarding since it generates wealth which goes onto pay the shareholders in the long term. Investing in assets which does not
generate would be subjected to timing the event of the asset sell-off and misses out on host of other investment opportunities.

Choosing Between short term losses and long term gains
With attacks on Iraq, recessionary US economy and on top of it the Congress in a mood to spend money they do not have with
patriotic fervor, it is very tempting to try market timing. Surely now it can be certain that the stock market will go down and that
FII money would zig zag out of that country to some other place. It must be obvious too that infrastructure stocks will do well in
this kind of environment wherein the planned expenditure is going to provide the backdrop for demand growth in India. But
attempting to correctly guess the direction of markets is almost always, sooner or later, a fool's errand. The gains one may
make in even a series of correct guesses are often more than offset by losses when one is wrong.
In this case, americans and others could rally to the cause of stocks, buying to bolster them now in a spirit of patriotism,
encouraged to buy bonds to help US. While that seems unlikely, the truth is one almost never knows ahead of time just what
"Mr. Market" will do and why. Even airline stocks are not a sure bet to fall. Congress is earmarking billions of dollars to assist
them. Maybe they will rally on this news instead.
As for the defense industry, it could still take some time before new expenditures lead to real profits. And what happens when
everyone fully realizes that there will be no quick fix for terrorism? We cannot in one massive raid rid the world of evil.
Successful market timing requires knowing not only when to buy but also just when to sell, a dicey question. Overall, few ever
manage sustained profits in this way.
By contrast, many have seen moderate investments grow to real wealth through purchase of carefully selected shares in good
businesses, held for the long haul. If now seems a little too risky a time for investing, market volatility being what it is now, then
consider buying investing in small and mid cap stocks with sustainable earnings growth atleast for the next 5 years. This would
enable building up a decent portfolio over the long haul which would beat the real interest rates. One thus buys more shares
when the market is low, fewer when it is high, with an almost automatic benefit: lower average cost per share.

Growth Versus Value Investing
In the last five years or so, a tremendous amount of money has flowed through the stock market into investor’s pockets. The
volatility of the market has led many to believe that the only kind of stock to invest in is one that’s going to take off like a rocket
and explode in a shower of profit. So are the growth stocks the way to go, or should the wise investor stay with the tried and
true?
As the volatile stock market climbs to new highs, investors continue to fight for the best returns. Our investment roundtable tries
to pick the winners as the battle between growth and value rages.
WITH RISING INTEREST RATES AND INFLATION FEARS, IT’S NOT EASY TO MAKE THE right investment decisions these
days. Should you bulk up your assets with pricey growth stocks or keep your portfolio in fighting trim with cheap value equities
that may not pay off for months—or years? Whether you’re prepared to climb in the investment ring and fight for the best
returns depends, of course, on your pocketbook tolerance level and stamina.
Since the technology “bubble” burst, investors are searching for value in the stock market. The growth investing strategy was
intimately associated with the “future” of dot.coms, technology, and telecommunication companies that had virtually no earnings
but the promise of high appreciation. After a two-year love affair with investors, value-oriented mutual funds continue to outperform
and outsell growth funds. But has value investment performance peaked? Is it now time to ease back into investing in growth?
Some indicators point towards a growth resurgence. Of course, no one really knows but that never stopped advisors from
forecasting a change. The dream of getting in at the beginning of the resurgence of growth investment may prompt many
investors to see investments through “rose colored glasses.”
Investment Styles in Equities
There are four major investment styles for investors in equities: value, growth, momentum and indexing. Value investors seek
to purchase a portion of a business for a price below its intrinsic value. The intrinsic value of a company may be based on either
(or both) the value of its net assets or the ability of the company to generate future earnings.
Growth investors attempt to purchase stocks that have high expected future growth rates. Some growth investors are more
disciplined with regard to the price they are willing to pay for future growth. They seek growth at a reasonable price while their
emphasis may be different, these investors are essentially equivalent to value investors who seek future earnings growth.
Momentum investors seek stocks that have experienced recent acceleration in earnings or upward price movement. The
theory behind momentum investing is that stocks that have done well in the recent past will continue to do well.
Indexing has become more popular in recent years as some investors choose to accept modest under-performance relative to
a chosen index in return for low management fees and transaction costs. An index fund is designed to track the performance
of a specific bond or stock market index. An index fund will have a tendency to under-perform its targeted index because there
will be management fees and transaction costs for the fund which are not reflected in the targeted index. Indexing is a passive
strategy which makes no attempt to identify undervalued or overvalued stocks.
Is Style a Key Determinant of Investment Returns?
There have been numerous empirical studies that indicate that investment style does make a difference in investment returns.
As a result, some financial academics are beginning to abandon the prior acceptance of efficient market theory and are offering
alternative theories.
The efficient market hypothesis states that prices of securities fully reflect available information. The implication is that one
cannot beat the market except by chance and that investors should strive only to develop a broadly diversified portfolio weighted
on the basis of current market values. The only relevant measure of risk under efficient market theory is beta - a measure of the
tendency of a security’s price to respond to price changes of a broad-based market index. Accounting based measurements of

risk are not relevant because all information about a company is already reflected in the price of their securities.
Advocates of the new finance offer evidence that the financial markets are inefficient and that investors can take advantage of
these systematic inefficiencies to generate superior returns.
Differences in approaches – Growth Vs value
Individual investors (now on the value band wagon) have a poor record of timing their purchases. So to “run from the maddening
crowd” strategy should be employed. Are value stocks still cheaper than growth stocks? But how do you measure the gap when
growth investments are measured by comparing the price-to-sales multiple while value investments are usually measured by
the price to earning ratio? Since growth companies usually have no earnings, their value cannot be measured by its price-to-
earning ratio.
In this current investment climate of questionable corporate accounting practices, corporate fraud and lack of corporate earnings,
growth stocks can decline further. Individual investors have a tendency of chasing performance thus leaving them vulnerable to
joining an up-surge too late. Because investors chase performance, mutual fund cash-flow typically lags behind reality in the
market by a year or so. However, even that tendency alone cannot be a clear indication that value investments have or soon will
pass.
Portfolio managers and stock pickers who subscribe to the value investment theory do not always agree in their approach.
Some are classified as “pure value” managers who look for substantial discount prices, while some accept stocks with relatively
high price-to-earning ratios and at smaller discount prices than others. Value-oriented managers usually look for companies
with 5 good dividend history because in determining the total-return performance of a stock, both the stock appreciation and
dividends are considered. When the stock valuation declines because of market conditions, dividends help to provide a buffer
to the investor.
The investors’ time horizon, risk tolerance and goals should determine their ultimate investment strategy. Investing in growth or
value becomes a secondary issue. If the investor has a short-term time horizon, investing in growth companies that promise
long-term superior appreciation is questionable. But if you have a high risk tolerance level, it may make sense. Many portfolio
managers believe that large cap growth valuations are still too high and prefer to retain large cash positions until conditions
improve.
Looking Ahead: Growth versus value — where do you put your money?
So finally, what’s the difference between growth and value? Or are they one and the same?
Last question first — they are not the same, although a stock may be one and the same at a different time. Growth companies
are expected to increase sales and profits, return on equity and other measures of growth. They typically have a high price-to-
earnings (PE) ratio. Some of the tech stocks have PEs of 25 or more, which is generally considered much too high, in an
environment when 16 used to be considered the acceptable range.
Value-oriented companies are ones which forms part of a slow moving industry, or have internal troubles, and typically, a lower-
than-market-average price to earnings ratio.
Seldom do the two forces run parallel, vis-a-vis the market. The economy plays a large role in which sector is in and which is
out, of style.
However, if you take the long term into consideration, you see a narrower margin in actual performance. Hence, to clear the
cobwebs, as the year begins, you and your professional should sit down and see if your portfolio is performing as they should
given your objectives, notwithstanding the horrendous market conditions we currently are experiencing, and whether some
rebalancing is in order.

Your portfolio may have become top-heavy with growth issues. And if growth and value rotate in and out of favor, you may have
taken a position that one style at a time is enough for your portfolio. That would work if you stick with it. But few investors have
the patience to do that. And those who have tried to time the cycles have been beaten back.
Returns seen using both methods
The most common variables which were tested were price/book value (P/BV), price/earnings (P/E), and price/cash flow (P/CF).
Other variables that were tested included price/sales (P/S), price/depreciation, earnings growth rates, sales growth rates, and
dividend yield. Stocks with a low price relative to book value, earnings, cash flow, or sales were considered to be value stocks
while those with high ratios were considered to be growth stocks. Stocks with high dividend yields are also considered to be
value stocks.
When value portfolios (stocks with the lowest P/E, P/BV, etc.) were compared to growth portfolios (stocks with the highest P/E,
P/BV, etc.), the value portfolios outperformed the growth portfolios but narrows down to marginal difference over a longer
period.
Higher Returns with Less Risk?
Several of the studies considered risk as measured by beta and standard deviation. Beta is a measure of systematic risk - the
tendency of the price of a security to respond to price changes in the broad market. Standard deviation is a measure of
dispersion from the mean return of the security. There was little, if any, evidence to support the view that value strategies
involve more risk. In fact, past evidence show to the contrary - stocks with low price/book value ratios actually had lower betas.
Reversion to the Mean
Attempts to explain the persistent advantage of value stocks over growth stocks focus on reversion to the mean. In pricing a
security, investors and analysts naturally take into consideration the expected future growth rates of the company. As future
growth rates are difficult to predict, investors and analysts often extrapolate from past growth rates. This process of estimating
growth tends to ignore the tendency of corporate profit growth to revert to the mean.
While growth stocks initially experience higher growth rates than value stocks, the higher growth rates do not last long enough
to justify the higher price/earnings multiples which growth investors have been willing to pay.
Earnings growth rates tend to revert to the mean quickly because of the nature of the capital markets. Industries which are
experiencing high growth rates tend to attract competition and capital investment by other firms. This competitive process
eventually results in lower returns on equity and lower earnings growth rates. Conversely, industries with low growth rates do
not attract much new capital investment and management may attempt to achieve higher earnings by operating more efficiently.
Thus, the earnings growth rates of both high and low growth companies tend to revert to the mean.
Summary
Although growth stocks initially experience higher growth rates than value stocks, the growth rates of both quickly revert toward
the mean. When investing in stocks, investors demonstrate over-optimism for growth stocks and over-pessimism for value
stocks. Several researchers expect the value investing advantage to continue, based upon the persistent nature of human
behavior. The best ways to take advantage of both styles is a balanced approach or go the analyst way of choosing 60% value
investing and 40% investing in growth stocks.

Market determinants
FII vs Sensex
350000 7000
300000 6000
250000
5000
FII Invt (Rs mn)
200000
4000
Sensex
150000
3000
100000
2000
50000
0 1000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Aug-04
-50000 0
FII invt Sensex
GDP vs Sensex
25000 6000
5000
20000
4000
GDP (Rs bn)
15000
Sensex
3000
10000
2000
5000
1000
0 0
93-94
94-95
95-96
96-97
97-98
98-99
99-00
00-01
.01-02
.02-03
GDP (in bn) Sensex

Interest vs Sensex
0.16 6500
6000
0.14
5500
10 year paper rate
0.12
5000
Sensex
0.1 4500
4000
0.08
3500
0.06
3000
0.04 2500
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Aug-04
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
10 yr yield Sensex
Inflation vs Sensex
7000 9.0%
8.0%
6000
7.0%
5000
6.0%
Inflation
4000
Sensex
5.0%
3000 4.0%
3.0%
2000
2.0%
1000
1.0%
0 0.0%
95-96 96-97 97-98 98-99 99-00 2000-01 2001-02 2002-03 2003-04
Sensex Inflation

Trading System in India

The Exchange, had an outcry trading system till March 1995, where the members - brokers used to assemble in trading ring for
doing transactions in securities. It had switched over a fully automated computerized mode of trading know as BOLT (BSE on
Line Trading) system w.e.f from March 14, 1995. The trading in securities at the Exchange is conducted in an anonymous
environment and the counterparty identity is not revealed. The buyers and sellers of securities do not know the names of each
other. This system was initially both order and quote driven, is currently only order driven. The facility of placing of quotes has
been discontinued w.e.f., August 13, 2001 in view of lack of market interest and to improve system-matching efficiency.
Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.m. and 3:30 p.m. The scrip’s traded on the
Exchange have been classified into ‘A’, ‘B1’, ‘B2’, ‘F’,’G’ and ‘Z’ groups. The Exchange has for the guidance and benefit of
investors classified the scrip’s in the Equity Segment in A’, ‘B1’, & ‘B2’ based on certain qualitative and quantitative parameters
which include number of trades, value traded, etc. for the guidance and benefit of investors. The ‘F’ group represents the fixed
income securities. The Exchange has commenced trading in Govt. Securities for retail investors under “G” group. The Exchange
also provides a facility to the market participants for on-line trading in “C” group which covers the odd lot securities in physical
form in ‘A’, ‘B1’, ‘B2’ and ‘Z’ groups and Rights renunciations in all the groups of scrip’s in the Equity Segment.
The scrip’s of the companies which are in demat can be traded in market lot of one but the securities of companies which are
still in the physical form are traded on the Exchange in the market lot of generally either 50 or 100. However, the investors
having quantities of securities less than the market lot are required to sell them as “Odd Lots”. The ‘C’ group facility can also be
used by small investors for selling up to 500 shares in physical form in respect of scrip’s of companies where trades are
required to be compulsorily settled by all investors in demat mode. This facility of selling physical shares in compulsory demat
scrip’s is called an Exit Route Scheme. With effect from December 31, 2001, trading in all securities listed in equity segment of
the Exchange takes place in one market segment, viz., Compulsory Rolling Settlement Segment.
Tick size:
Tick size is the minimum difference in rates between two orders entered on the system for particular scrip. Trading in scrip’s
listed on the Exchange is done with the tick size of 5 paisa. However, in order to increase the liquidity and enable the market
participants to put orders at finer rates, the Exchange has reduced the tick size from 5 paisa to 1 paisa in case of units of mutual
funds, securities traded in “F” group and equity shares having closing price up to Rs. 15/- on the last trading day of the calendar
month.
Computation of closing price of scrip’s in the Cash Segment.

The closing price of scrip’s is computed by the Exchange on the basis of weighted average price of all trades executed during
the last 15 minutes of the continuous trading session. However, if there is no trade recorded during the last 15 minutes, then the
last traded price of scrip in the continuous trading session is taken as the official closing price.
Compulsory Rolling Settlement (CRS) Segment:

In order to bring about settlement efficiency and reduce settlement risk, it was recommended in 1989 that all secondary market
across the globe should adopt a rolling Settlement cycle on T+3 bases by 1992. As per the mandate received from SEBI, the
Exchange has since introduced the settlements for all groups of securities in the Equity Segment, “F” & “G” groups on T+2 basis
w.e.f. from April 1, 2003. A T+2 settlement cycle means that the final settlement of transactions done on T, i.e., trade day by
exchange of monies and securities between the buyers and sellers respectively takes place on second business day (excluding
Saturdays, Sundays, bank and Exchange trading holidays) after the trade day. The transactions in securities of companies
which have made arrangements for dematerialization of their securities are settled only in demat mode on T+2 on net basis,
i.e., buy and sell positions of a member-broker in the same scrip are netted and the net quantity and value is required to be
settled. However, transactions in securities of companies, which are in “Z” group or have been placed under “trade to trade” by
the Exchange as a surveillance measure, are settled only on a gross basis and the facility of netting of buy and sell transactions
in such scrip’s is not available.

Settlement
All deliveries of securities are required to be routed through the Clearing House (called BOI Shareholding Ltd. (BOISL). For the
purpose of settlement of the trades done on the Exchange, the Clearing & Settlement Dept. of the Exchange liaises with the
Clearing House on a day to day basis. The Information Systems Department of the Exchange generates Delivery and Receive
Orders for transactions done by the member-brokers in A, B1, B2, F and G group scrip’s after netting purchase and sale
transactions in each scrip whereas Delivery and Receive Orders for “C” & “Z” group scrip’s and scrip’s which are traded on the
Exchange on “trade to trade” basis are generated on gross basis, i.e., without netting of purchase and sell transactions in a
scrip. The securities, as per the Delivery Orders issued by the Exchange, are required to be delivered by the member-brokers
in the Clearing House on the day designated pay-in, i.e. T+2 day.
Demat pay - in:

The member-brokers can effect pay-in of demat securities to the Clearing House either through the National Securities Depository
Ltd. (NSDL) or Central Depository Services (I) Ltd. (CDSL). In case of NSDL, the member-brokers are required to give instructions
to their respective Depository Participants (DPs) specifying settlement no., settlement type, effective pay-in date, quantity, etc.
As regards CDSL; the member-brokers give pay-in instructions to their respective DPs. The securities are transferred by the
DPs to the Clearing Member (CM) Principal Account. The member-brokers are required to give confirmation to their DPs, so
that securities are processed towards pay-in obligations.
Funds Pay-in:
Once the reconciliation of securities is completed by the Clearing House, the bank accounts of member-brokers maintained
with the nine clearing banks, viz., Bank of India, HDFC Bank Ltd., Global Trust Bank Ltd., Standard Chartered Bank, Centurion
Bank Ltd., UTI Bank Ltd., ICICI Bank, Indusind Bank Ltd., and Hong Kong Shanghai Banking Corporation Ltd. are directly
debited through computerized posting for their funds settlement obligations. Once the pay-in of securities and funds is complete,
the Clearing House arranges for the pay-out of securities and funds.
Securities Pay-out:
In case of demat securities; the same are credited by the Clearing House in the Pool/Principal Accounts of the member-
brokers. The Exchange has also provided a facility to the member-brokers for transfer of pay-out securities directly to the
clients’ beneficiary owner accounts without routing the same through their Pool/Principal accounts in NSDL/ CDSL. In case
delivery of securities received from one depository is to be credited to an account in the other depository, the Clearing House
does an inter depository transfer to give effect to such transfers.
In case of physical securities, the Receiving Members are required to collect the same from the Clearing House on the pay-out
day. This process of passing on delivery of securities purchased by the member-brokers to them by the Clearing House is
called pay-out of securities.
Funds Pay-out
The bank accounts of the member-brokers having pay-out of funds are credited by the Clearing House with the Clearing Banks
on the same day. This process is referred to as Pay-out of Funds.
In case of Rolling Settlements, pay-in and pay-out of both funds and securities, as stated earlier, is completed on the same day.
The member-brokers are required to make payment for securities sold and/ or deliver securities purchased to their clients
within one working day (excluding Saturday, Sunday, bank & Exchange trading holidays) after the pay-out of the funds and
securities for the concerned settlement is completed by the Exchange. This is the timeframe permitted to the member-brokers
of the Exchange to settle their funds/ securities obligations with their clients as per the Byelaws of the Exchange.
UK Trading System
The London Stock Exchange is one of the world’s oldest stock exchanges and can trace its history back more than 300 years.
There are more than 2600 companies listed, worth over £3,300bn. In 2003/4 there were 117 IPO’s raising £5,300m new

capitals. It caters for companies large and small, from start-ups to global brands. They supervise the markets rigorously to
ensure their integrity and fairness for all market participants.
There are more than 15,000 companies are traded on the London Stock Exchange’s primary and secondary market. LSE had
handled more than 59mn trades, an average of 2, 34,000 trades everyday. LSE has made this possible by providing a range of
trading systems for professional investors around the world.
Domestic Trading System

SETS: SETS is the London Stock Exchange’s blue chip trading service for UK FTSE Eurotop 300 equities. SETS is an electronic
order book that can execute hundreds of trades a minute. Securities traded on SETS include all the FTSE 100 constituents, the
most liquid FTSE 250 securities; those with a LIFFE traded equity option and some euro-denominated Irish stocks.
The automatic order-driven trading service is flexible and transparent; ensuring that every buy or sell order receives maximum
exposure, resulting in a seamless and cost-effective execution. Order book trades in all UK securities are covered by a central
counterparty operated by the London Clearing House.
Closing price: The Exchange has decided to revise the closing auction process for SETS securities, relating to Price Monitoring
Extensions parameters and the length of the potential extension periods. The revised timings and details how the closing price
will be determined where there is no auction match because of a potential excessive price movement with inadequate volume
or no matching orders.
• If auction matching occurs in the closing auction, then closing prices will be based on the closing auction price. If no
execution occurs, the Volume Weighted Average Price (“VWAP”) of the last ten minutes of continuous trading will be used.
If no automatic trades occurred in the VWAP period, the last automatically executed trade price will be used.
• Currently the exact time that closing prices are disseminated depends on whether auction execution occurs immediately (at
approximately 16.35), or after a Market Order and/or Price Monitoring Extension.
• Price Monitoring Extensions are triggered by movements away from the Reference Price. (VWAP or if no VWAP period
trades, last AT).
SEAQ: SEAQ is the London Stock Exchange’s service for mid-cap securities and the most liquid AIM securities. The service is
based on two-way continuous quotes, offered by competing market makers. Prices are displayed on more than 100,000
terminals around the world, enabling investors to buy and sell at a fair and transparent price.
SETSmm: SETSmm is the London Stock Exchange’s trading service for FTSE 250 and other leading non order book securities.
By combining the best features of the existing SETS and SEAQ trading services, SETSmm appeals to market users who want
to trade electronically, as well as those customers who use the market making system. The Exchange is currently consulting
with the market the proposals to extend SETSmm for Small Caps, dual listed securities and for the most liquid AIM securities.
SEATS Plus: SEATS Plus is the electronic trading service for the less liquid Main Market and AIM securities. This service offers
basic order driven execution capabilities with guaranteed liquidity provided by market makers.
International Trading System

SEAQ International: The Exchange is constantly developing the platforms to offer investors the most efficient and liquid
markets possible. In order to facilitate this, all depository receipts on SEAQ-I are migrating to the order-driven International
Order Book (IOB), and all equities are migrating to the order-driven International Bulletin Board (ITBB) The migration will also
result in a daily auction model for less liquid international securities, which will attempt to concentrate sparse liquidity into a
single daily auction to take place daily for IOB and ITBB.
International Order Book – Depositary Receipts: IOB – Depositary market is the market for trading liquid overseas securities.
The market is based on an electronic order book similar to SETS but with the added option for member firms to display their

identity pre-trade by using Named Orders, offering investor a greater visibility in the market. The IOB offers easy and cost
efficient access for traders looking to invest in fast growing economies. IOB offers investors direct access to large companies
in these markets by means of depositary receipts. IOB traders have been revised to prefer more auctions per day, to reduce the
waiting time to the next auction match, to maximize turnover in illiquid securities.
Trading services prices List with effect from 1st January 2005.
Order Charges.
Exchange Charge (per trade)

US Trading System
The New York Stock Exchange traces its origins to 1792. The NYSE offers a variety of investment vehicles to help investors
broaden and diversify their portfolios. Whether interested in traditional equities, bonds, or funds, investors can find the right
product(s) that meet their particular wealth-building strategies. The NYSE also lists a variety of structured products, which are
designed to offer investors unique risk/return characteristics.
Order Execution
Overview
Today, 100 percent of investor orders are delivered electronically to the NYSE’s central point of sale.
NYSE Direct+
NYSE Direct+, an automatic-execution service for limit orders of up to 1,099 shares, enables users to opt for an immediate
execution at the best bid or offer, without a fee and with anonymity and speed. The average execution time is 0.8 seconds.
Almost 10 percent of total NYSE volume is executed automatically via Direct+ - more than the volume of all electronic
communications networks (ECNs) combined. Only the NYSE provides investors with a blend of market models, from completely
automated to the value-added auction market.
The NYSE posts the best price of any market for NYSE-listed equities 93 percent of the time. The Exchange also has the
highest fill rate - the percentage of received orders executed - of any market for NYSE-listed equities.
Since 2002, the number of NYSE Direct+ orders has increased 140 percent, the number of trades 151 percent and share
volume 111 percent.
Expansion of NYSE Direct+.

To offer investors the most compelling array of order-execution choices, The Exchange has filed a proposal with the SEC to
expand NYSE Direct+. The expansion will remove previous restrictions on Direct+, enabling more types of orders to be executed,
larger share sizes to be traded and faster consecutive order execution.
Cross Session
For member firms, the Exchange currently offers four crossing sessions in its Off-Hours Trading Facility (OFHT).
Time of Operations Functionality

Crossing Session I 4:15 - 5 p.m. Match orders at closing price
Crossing Session II 4 - 6:15 p.m. Trade baskets of 15 stocks valued at least $1 million
Crossing Session III 4 - 6:30 p.m. Execute unfilled guaranteed price orders of at least 10,000 shares
Crossing Session IV 4- 6:30 p.m. Execute unfilled balance of a VWAP order of at least 10,000 shares
Crossing Session I (Single Stocks)

Enables members to enter one-sided, two-sided, or good-till-executed (GTX) orders for a particular stock into the Super Dot
system for execution at 5 p.m. Matched orders are executed at the NYSE closing price determined during the Exchange's 9:30
a.m. to 4 p.m. trading session and are printed on the Consolidated Tape. Member Firms receive reports at 5 p.m.
Crossing Session II (Program Trades)

Accommodates late-arriving program trades- the trading of baskets of at least 15 NYSE securities valued at $1 million or more.
Members that have either facilitated a basket trade or have paired two customers' baskets can submit aggregate information to
the Exchange for execution.

Reports of execution are available via the web-based electronic filing platform (EFP) shortly after the trade is entered. At 6:15
p.m., the NYSE prints the aggregate information of all baskets to the consolidated tape. On the third day, after the trade date
(T+3), individual component stocks executed as part of a basket trade are printed in aggregate form in the NYSE Daily Sales
Report.
Crossing Session III (Guaranteed Price Orders)

Executes the unfilled portions of "guaranteed price" orders (also know as "upstairs stops") for member firms' institutional
customers. The member firm must record all details of the order, including the price at which it has guaranteed, or "stopped," its
customer.
Trades must be for a minimum of 10,000 shares and may take place at prices outside the 9:30 a.m. to 4 p.m. trading range of
the recorded security. Member firms receive an immediate report of execution upon entering an order for this session. At 6:30
p.m., the Exchange will print trades reported through Crossing Session III as guaranteed-price coupled orders. Crossing
session III debuted on June 15, 2004.
Crossing Session IV (VWAP Orders)

Executes the unfilled balance of an order at a price that is not pre-determined, but is calculated to ensure that the entire order
is filled at a price no worse than the volume weighted average price (VWAP). Member firms may use this session for trades that
are full-day VWAP orders or for trades that are designated VWAP for a specific period of time.
Trades must be for a minimum of 10,000 shares (program trades for less than 10,000 shares can be completed in Crossing
Session II) and can be priced up to four places to the right of the decimal. Member firms receive an immediate report of
execution upon entering an order for this session. At 6:30 p.m., the Exchange will print trades reported through Crossing
Session IV as VWAP executions. Crossing Session IV debuted on June 15, 2004.
SuperDot
SuperDot is an electronic order-routing system used by NYSE member firms to send market and limit orders directly to the
trading post where the security is traded. After the orders have been executed, SuperDot uses the same electronic circuit to
send post-trade reports back to the firms.
Ninety-nine percent of all orders pass through SuperDot. It reliably meets ever-increasing demand, which currently stands at 6
million quotes, 13 million orders and 5 million reports daily.
Anonymous Super Dot

Anonymous Super Dot (ADot) enables institutional investors sponsored by a member firm to submit orders directly to the NYSE
without the Exchange, member firm, specialist or floor brokers knowing their identity.
The institution and its sponsoring member firm must establish parameters within which trading can occur, including a trading
limit expressed in dollar value and a maximum order size.
With ADot, the institution will receive transaction reports as they occur, and the member firm will receive a copy only at the end
of the day or after an agreed-upon time has elapsed, for clearing purposes.

Sectors

Characteristics
Automobile Industry
• Compared to other modes of transport like railways and waterways, road transport plays a vital role in India accounting for
about 60% of goods traffic and 80% of passenger traffic.
• With over 70% of the Indian population still living on agricultural income, this sector takes central place as it is transportation
that adds value to their produce and products. Similarly, in a country so wide and diverse, it is this sector that provides
transportation to goods and materials, a service that is a prerequisite for growth and development to happen.
• The infrastructure development, planning and outlay directly contribute to the sales and the nature of technology used in
the majority of commercial vehicles. The sales volumes are also dependent on several other factors like government
policies, fuel prices, better monsoons, rural incomes and replacement demand.
• The commercial vehicle sector can be broadly classified as Light Commercial Vehicles (LCV) and Medium & Heavy
Commercial vehicles (M&HCV) based on the Gross Vehicle Weight (GVW) of the vehicle. The HCV segment can be
further classified into three segments based on the gross vehicle weight of the respective vehicle. These are Intermediate
Commercial Vehicle (ICVs) with GVW of 8 to 10 ton, Medium Commercial Vehicles (MCVs) with GVW of 10 to 15 ton and
HCVs of GVW of 16 ton and above. Vehicles with GVW ranging between 3 to 7 tonnes are classified as light commercial
vehicles (LCVs). Depending on the usage, M&HCVs can also be classified into two categories - trucks and buses. Buses
are passenger carriers. Trucks include goods carriers along with specialized vehicles like dumpers, tractor-trailers etc.
• India’s contribution to the world commercial vehicle market is a meager 1.5-2%. In the international market, USA occupies
the top slot in terms of market share, followed by Japan, Canada and China.
• India’s exports are marginal as they fail to meet international safety and pollution control norms.
• A good monsoon, followed by agricultural and the economic growth, is critical for the industry. Besides economic growth,
other major factors contributing to the success of the sector are easy availability of finance and low interest rates.
• Government policies regarding sales tax rates, higher tax shelter with depreciation norms, higher allocation for roads,
investment in heavy industries and infrastructure and greater allocations by state governments to state transport departments
also influence demand in this sector. Prices of diesel and freight rates are also vital factors affecting the industry’s fortunes.
• The newer models of vehicles with better technology and better compliance with the emission norms are also increasingly
becoming crucial factors.
• As the investment is enormous, entry barrier to the industry is very high.
• Effective distribution channel, after sales service and extensive service network are very essential for viability of the
industry.
• A discouraging factor is the long gestation period required for establishing a foothold in the sector.
• Product life cycle for commercial vehicle has become shorter as players have accelerated new product launches to retain
their market shares.
• Demand for commercial vehicle will have inverse relationship with the carrying capacity and proper functioning of railways
as it is a cheaper mode of transport.

Things To Look In The Industry

Automobile
• Progress of other modes of transport vis-à-vis road.
• The growth of agricultural production.
• The infrastructure development, planning and outlay.
• Government policies with regard to Sales Tax, Income Tax, Depreciation Norms etc.
• Fuel price trend.
• Rural Income.
• Replacement Demand.
• Freight Rates.
• Laws like emission norms.
• Better technology products entering the market.
• Distribution channels, after sales service, service network of the various players of the industry.
Auto


M&HV
160000 60
Production % Change
140000
40
120000
20
% Change
100000
No's
80000 0
60000
-20
40000
-40
20000
0 -60
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
2000-01
2001-02
2002-03
2003-04
1999-2000
Year
LCV
140000 50
Production Change 40
120000
30
100000 20
% Change
80000 10
No's
0
60000 -10
40000 -20
-30
20000
-40
0 -50
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
Year
Tractors
300000 25
Production % Change 20
250000 15
10
200000
% Change
5
Units
0
150000
-5
100000 -10
-15
50000 -20
-25
0 -30
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
Year

Forecasting Techniques
Auto & Auto Ancillary
Key Determinants of Automobile Sales Forecasting
• Demographic Distribution
• Income levels
• Interest rates
• Infrastructure
• Models availability
• Dealer network
• After Sales Service
• Capacity
• Pricing policy
• Discounts and gifts.
Net Sales is forecasted by taking into account the following
• Ex Showroom prices
• Excise Duty
• Factory Prices
• Discounts and promotions
• Volumes sold
• Capacity Utilization
• Sales mix
• Average realizations.
The components of Expenditure
• Number of Employees
• Number of Shifts
• Capacity Utilization
• Raw Material Price trend
• Advertisement and Promotions
• VRS etc.

Characteristics
Banking Industry
• The banking industry in India is in a midst of transformation, thanks to the economic liberalisation of the country, which has
changed business environment in the country.
• The sector has become very competitive with the entry of many foreign and private sector banks.
• The banking system can be broadly classified as organised and unorganised banking system. The unorganised banking
system comprises of moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc. The organised
banking system comprises of Scheduled Banks and Non-Scheduled Banks, which are permitted by RBI to undertake
banking business.
• Banking, everywhere in the world, is a highly regulated industry. The banking industry is the repository of savings of a
nation contributed by millions of people. Thus, a bank basically acts as an intermediary between savers and borrowers.
Hence, costs to a bank are the interest cost paid to savers and the establishment cost. A bank’s margin arises out of the
difference in interest paid to depositors and charged to borrowers.
• A bank’s sources of revenue are interest from loans and advances, income from government securities and dividend/
interest from private sector equity investments and debt instruments. Apart from this, a bank also earns non-fund-based
income, also called as fee-based income for the various services rendered by it as a banker or in the course of banking
activities. It includes treasury and forex operations, income from trading in shares, guarantee commission, etc.
• Asset liability management, effective monitoring of loans, recovery of NPAs, reducing cost of deposits and controlling
establishment costs are critical success factors.
• Ensuring capital adequacy, exposure norms and other prudential norms in line with RBI guidelines are also critical. Wresting
blue chip accounts, expanding depositor base and leveraging them for fee-based income are also essential for growth
and development.
• Technology has already brought about revolutionary changes. Services like Internet Banking, Mobile Banking, Anywhere
and Anytime Banking will not be added features but promise to be a standardised banking environment in the next few
years. While on one hand it has the potential to reduce the transaction costs, the initial capital requirements will be heavy.
Banking Industry
• Implications of various laws being introduced from time to time, concerning the industry.
• Interest rates.
• Economic growth.
• Asset liability management, effective monitoring of loans, recovery of NPAs, reducing cost of deposits, control of
establishment costs etc. by various players.
• Ensuring capital adequacy, exposure norms and other prudential norms by various players, in line with RBI guidelines.
• Expansion of depositor base by various players and leveraging them for fee-based income are also important.
• Introduction of new technology which can bring revolutionary changes.

Bank

Banking
Banks core business activity is borrowing and lending, thereby the core income and expenses comprise interest income and
interest expenses. Banks borrowings include deposits, funding from RBI, commercial papers, bonds, etc. However, deposits
from public constitute major composition of bank’s borrowings. Banks deploy these deposits and borrowings in the form of
advances, investments, deposits with RBI, other banks, etc.
Banks earn interest on advances and investments, which is considered as yield on interest-bearing assets. On the other hand
it pays interest on its borrowings, which is called cost of borrowings. The difference of two is the banks net income – considered
as spreads / interest margins. Interest Margins of the banks varies depending upon the composition of their deposits and
advances portfolio. Banks having high composition of savings and current deposits tends to have lower cost of funds, while
banks with higher exposure to Mid-sized corporate / SMEs / Retail, etc tends to have higher yield on advances portfolio.
Apart from these, banks also earns fee-based income from its other services like LCs, guarantees, demand drafts, forex
income, treasury operations, dividend income from investments, etc. Its operating expenses comprise predominantly of staff
costs, being a service industry and other administration expenses.
Banks need to make provisioning towards its non-performing assets (NPAs) as prescribed by the RBI and even has to provide
for any diminution in the value of their investment portfolio and other contingencies. Many of the banks even do accelerated
provisioning towards its NPAs.

Characteristics
Cement Industry
• Limestone, coal, freight, electricity and furnace oil are the major cost factors.
• As per standard input-output norms, to produce one tonne of cement, 1.5 tonne of limestone, 0.25 ton of coal, 120 kwh of
power and 0.05 tonne of gypsum are required.
• As far as lime stone is concerned, the major cost is the royalty paid to the central government and cess levies on royalties
charged by the state governments.
• Coal and oil constitutes around 35-40% of the production cost of cement. India’s coal has low calorific value and high ash
content. As the cost per calorie of imported coal compares favourably with domestic coal, the industry resorts to import
also.
• Cement is power-intensive, accounting for nearly 16% of the operating costs. As state governments usually supply power,
the tariff varies from state to state and location to location. Rising power costs and frequent power cuts have forced major
players in the sector to set up captive power plants.
• With freight costs at 15% of the total cost, plants are ideally located closer to the lime stone quarries. However, this results
in substantial differential in prices within the country. Inclusive of freight costs, the selling and administrative expenses of
the industry are relatively high at 24% of the total operating costs.
• As the cement industry is highly capital-intensive, leading players have leveraged on their balance sheets and have huge
loan exposure.
• The cement industry has capitalised on the country’s long coastline and is exporting cement to its neighbouring countries
like Sri Lanka, Bangladesh, Nepal and Middle East. Being a bulky item, the global trade in cement is quite low.
• Cement being a bulky item and predominantly being consumed in relatively smaller quantities, the actual import is quite
negligible. Further, the infrastructure bottlenecks in the ports also add to cost of imported cements.
• Better cost control, lowering debt-equity ratio caused by funding of acquisitions and Greenfield projects primarily through
borrowings and better capacity utilization are critical success factors for the industry.
• Freight and transport costs being significant in cement industry, efficient logistics management is equally critical.
• With power and fuel costs exceeding 21% of the sales, units with captive power plants have a distinct advantage. This is
particularly because of unreliable supply from SEBs that comes at a huge cost, as against reliable and relatively low cost
captive power plants.

Cement Industry
• Availability of limestone, coal, freight, electricity and furnace oil, as they are the major cost factors.
• As the industry is capital-intensive, the impact of debt on the overall performance of the company.
• Capacity utilization levels.
• Effective logistics management by the company as freight and transport costs is significant in the industry.
• Whether the player has a captive power plant, as power from SEBs is unreliable and is also available at a comparatively
higher cost.

Cement Process

Cement Manufacturing Process
Note: - Fuel includes coal, furnace oil and lignite

Cem ent
1400 18
1200
14
1000 12
Lakh Tonnes
% Change
800 10
8
600 6
400 4
2
200
0
0 -2
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
CEMENT
Cement forms the basic ingredient in any construction activity and its quantum of consumption denotes the level of infrastructure
development taking place in a region.
End Users
• Housing
• Infrastructure
• Commercial/Office Buildings
Industry Analysis
• Demand-Supply gap in different regions and export potential
• Capacity additions planned
Demand Drivers
• The big infrastructure push being given by the central and state governments towards building/modernizing of highways,
roads, airports, ports, power plants, rural housing
• Liberal government norms to allow private participation in development of infrastructure
• Low interest rates and easy availability of finance
Price Determinants
• Regional dynamics (demand-supply balance and number of players)
• Cost efficiency (production process)
• Capacity utilization levels
• Quality of end product
• Location of plants (geographical spread)

Salient Features of the industry

• Basic raw material (gypsum), power& fuel and freight costs form a significant portion of the raw material cost; Captive
sources of coal and power ensures better margins
• The industry is subject to a high tax rate (excise duty)
• Construction activity slows down during the monsoon period and starts picking up from Q3 onwards.
• Capex for setting up a plant and the lead time involved is big, therefore choice between brownfield, greenfield expansion
and acquisition needs to be considered
• Consolidation is the ‘mantra’ to grow rapidly; it is expected to continue in the coming years as well (Recent Case- L&T’s
cement division bought over by Grasim Industries)
Efficiency parameters
Capacity utilization levels, Realization per bag, EBITDA per tonne
Valuation parameters
EV per tonne, EV/Sales, EV/EBITDA, P/E, RoNW, RoCE

Characteristics
Construction
• In India, construction is the second largest economic activity after agriculture. Construction investment accounts for nearly
11 per cent of the GDP.
• The Indian construction industry is divided into the following three segments:
Real estate (residential and commercial construction).
Infrastructure (roads, ports, power, railways, urban infrastructure).
Industrial construction (cement plants, fertiliser plants, and refining, oil, and gas plants).
• The sector is highly monopolistic, as the government is the major customer. This poses problems in two ways:
One, companies bagging project orders are highly dependent on the Budgetary allocation for the infrastructure
segment. This subjects their earnings stream to a high degree of volatility. And two, government projects are usually a
long-drawn process. In other words, there is a high probability of the project overstepping the scheduled period for
completion. This exposes companies to a downside due to swings in construction material prices.
• Infrastructure financing is risky since lenders are repaid only from the cash flows generated by the project. Not only
does this mean that the cash flows ought to be correctly forecast but also that there should be no significant time
delays in the implementation of the project.
• Rising competition (domestic and foreign) drives down bidding prices. As competition intensifies, especially in road
projects, bids have become increasingly competitive, resulting in lower profit margins.
• Surging raw material prices: Raw material (cement and steel) costs vary according to the project mix. Moreover,
when input costs go up, margins come down. But companies executing projects with an in-built escalation clause
will be insulated from any sharp swing in the prices of key inputs.
• Volume growth in housing is largely driven by population growth and urbanisation. Further, it has been observed
that the housing boom is not localised in the organised urban housing segment and extends to the relatively prosperous
rural belts. This growth in housing is being mainly driven by two factors:
Faster growth in the income levels of the middle and higher income classes.
Decline in EMIs owing to the fall in housing finance rates.

Construction
• The GDP growth, along with the population growth and urbanization, as the construction activity largely depends on these
factors.
• The prevalent housing interest rates.
• The budgeted allocation for the infrastructure sector, as the new orders are largely determined by it.
• In case of government projects, swings in raw material prices are to be kept in mind in case of project over-stepping the
scheduled period for completion.

Construction
The construction sector is largely dependent on the government spending on the infrastructure projects. It is also dependent on
housing and industrial sector. The major raw materials are cement and steel. The price determinants for steel and cement are
given in other sections of this chapter.
The revenue booked in the sector also depends on the accounting policy used for recognizing revenue. The revenue can be
booked on completed contract method or percentage completion method. In case of completed contract method, the revenue
is booked when the contract is completed. The inventory levels are high when the contract is in progress. In case of percentage
completion method, the revenue is booked at various stages of completion of the contract.

Characteristics
Consumer Durables
• The industry can be broadly classified as consumer electronics and consumer appliances.
• Colour TVs dominate the industry with a 40% market share, followed by refrigerators with 25%, washing machines 10%,
B & W TVs 8%, and the rest contributed by ACs, audio systems, microwave ovens, etc.
• Raw materials accounts for nearly 70% of the total cost of sales of major consumer durables.
• The picture tube accounts for about 55% of the cost of colour TV (CTV). Other major cost heads in a CTV include
populated printed circuit boards (20-25%), plastic moulded parts (10%).
• For refrigerators and ACs, compressors constitute the major cost while for washing machines, the electric motor is the key
cost. In addition, copper tubes, sheets of cold rolled steel and plastic are the other raw materials used in consumer
durables.
• The obsolescence rate is higher in consumer durables as newer models with latest technologies catch market fancy,
adversely affecting the demand for the earlier models. The drive for latest technology calls for frequent upgradations and
new product introductions, leading to fluctuations in cost structure.
• The industry is also facing hectic competition from both domestic and international players, which have resulted in thin
margins. It is more a game of numbers, wherein pushing up sales volumes brings in profits. As a result, the selling and
distribution costs ranges between 10-15% of the sale value.
• Increasing disposable income, availability of institutional finance, fall in prices and urbanisation are the demand drivers of
the industry.
• Constant product innovation, brand building, superior technologies are critical for the domestic industry’s survival.
• The global consumer durables market has switched over to digital products.
• With low penetration levels of most of the consumer durables, the long-term prospects are bright.

Consumer Durables
• The availability and the price trend of the raw materials as they account for nearly 70% of the total cost of sales of major
consumer durables.
• The fluctuation in cost structure as the obsolescence rate is higher in consumer durables because newer models with
latest technologies catch market fancy, adversely affecting the demand for the earlier models. The drive for latest technology
calls for frequent upgradations and new product introductions.
• The selling & distribution costs, as it is more a game of numbers in this industry, wherein pushing up sales volumes brings
in profits.
• The other points to be looked into are: disposable income, availability of institutional finance and urbanization as they are
the main demand drivers of the industry.
• Constant innovations in products, brand building exercises undertaken and level of technologies employed should be
looked into.
• The penetration levels of various products compared to international standards, indicating the potential of the same.

Consumer Durables

CTV
8 50
7 Production % Change 45
40
6
35
% Change
5
mn Units
30
4 25
3 20
15
2
10
1 5
0 0
1994
1995
1996
1997
1998-99
1999-2000
2000-01
2001-02
2002-03
Year

Characteristics
Couriers
• For a long time, delivery of packages were done by, what are locally known as, angadias. Many small firms and even
individuals have traditionally run such services for small businesses and they continue to do so even now.
• The beginning of the courier sector in India was marked in 1979 with the entry of DHL.
• Initially, the focus of these courier firms was on delivery of small-sized packages. But soon the picture changed with
the introduction of breakthrough products, such as Jumbo Box and Jumbo Junior, wherein it became possible to
send packages of up to 25 kg anywhere in the world. Pick-up services such as 60-minute guarantee pick-up service
were also introduced.
• Like many other sectors, technology also played a major part in revolutionizing the industry. Bar code technology
was introduced into pick- up and delivery systems. Wireless communications and computer-based industrial engineering
marked a new era of the hi-tech courier industry. And, today the Internet has made it possible to track and trace the
packages sent with the help of e-tracking systems.
• Now, courier companies have also started providing complete logistics solutions to their customers.
• There are more than 2,300 courier companies in India, which includes 20 in the organized sector, about 2,000 in the
semi-organized sector and the rest in the unorganized sector.
• The entry barriers, especially in the package segment of the business, are high because courier companies have to build
a strong distribution network, they have to use latest technology and should have well-trained staff.
• A strong brand image also acts as a major barrier. Economies of scale also play a very important role, given that fixed
costs of the industry are very high.
• The demand is dictated by the extent of the business activity, which depends on the general economic scenario.
Therefore, it would be fair to expect that with improvement in the general economic scenario, the industry would
grow faster. Exports also are a major determinant of demand.
• In the international market, the organized sector is well-placed because of their affiliations with major international players.
As far as the domestic market is concerned, the organized sector still faces competition from the semi-organized
sector.
• For reducing their costs and sticking to core competency, now-a-days, many companies are outsourcing the entire
logistics and supply chain management. Courier companies, which already have established distribution networks in
place, have plunged into this market segment. These courier companies see it as a big opportunity for growth in the
future and are aggressively marketing themselves.

Couriers
• The size of operations as economies of scale play a very important role, given that fixed costs of the industry are very
high.
• The economic scenario, as the demand for couriers is dictated by the extent of the business activity, which depends on
the economy.
• The trend of export growth as exports also are a major determinant of demand for couriers.

Characteristics
Fertilisers
• Fertilisers play a vital role in the Indian economy as Agriculture accounts for 25% of the country’s GDP.
• The Indian fertiliser industry is the third largest producer and consumer of fertilisers, next only to China and United States.
• Raw materials constitute more then 50% of the fertilizer manufacturing cost, followed by power & fuel cost and other
manufacturing costs.
• The industry is highly capital intensive and non-availability of quality feed stock in required quantities at affordable prices
also adds to the cost. As a result, the cost of fertilisers production in India is grossly on a higher side and invariably higher
than the international prices of finished product.
• Demand for fertilisers grows with better monsoons.
• With the demand for food on the rise due to population growth, yield has to be increased. This will naturally call for
balanced application of fertilisers, thereby acting as a demand driver for fertilisers.
• As the fixed costs are high, maintaining a high capacity utilisation is a key to achieving profitability.

Fertiliser Industry
• Agricultural production trend.
• Prices of raw materials, as they constitute around 50% of the manufacturing cost.
• The monsoon factor, as demand for fertilisers grows with better monsoons.
• The level of capacity utilization, as because the fixed costs are high, maintaining a high capacity utilisation is a key to
achieving profitability.

Fertilisers

Fertiliser
35,000 60
Production % Change
30,000 50
25,000 40
'000 tonnes
% Change
20,000 30
15,000 20
10,000 10
5,000 0
- -10
1981-82
1985-86
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
Year
Fertilisers
The growth in the fertiliser industry is directly related to the agriculture. The growth in the agricultural sector leads to a growth
in the fertiliser industry. The fortune of the agricultural sector is directly dependant on the monsoons. Hence the demand for
fertilisers depends on the monsoons. Different kinds of fertilisers manufactured are di-ammonium Phosphate (DAP), complex
fertilisers, urea, etc.
Raw materials are a major cost component in the manufacture of fertilisers. The major raw materials used in the manufacture
of fertilisers are natural gas, naphtha, sulphur, MEK, etc. Gas based plants are more cost competitive in comparison to other
feedstock. The other major cost component is power & fuel.

Characteristics
FMCG
• The fast moving consumer goods (FMCG) industry has been moving slow of late, due to saturation of demand in urban
areas and due to its difficulty in expanding to rural markets.
• One of the largest direct and indirect employment providers, the sector has strong backward linkages to spur growth of
other industries, and in turn, the economy.
• FMCG are consumer non-durables that are required frequently, if not daily. It can be broadly classified into personal care,
oral care and household products.
• The industry is marked by high ad spend, brand building, brand extensions and quite a low capital to sales ratio on
account of outsourcing and very low investment in fixed assets.
• Production costs are estimated to be about 47% of sales, selling and distribution expenses about 12% and employee
cost, around 5%.
• The employee cost is quite low because outsourcing is widely prevalent in the industry. The players are more of brand
managers with supply chain management, than pure manufacturers. Also, the interest cost for the industry is very low, as
it is a cash and carry business.
• Advertisement costs ranges from 5 to 12% of the revenue, depending upon the life cycle of the product, brand value,
competition in the segment and the marketing strategy of the players.
• Brand building, positioning and brand extensions play key roles in the success of a product. Slowdown in demand and
fierce competition has made the players to sharpen their focus on key products and brands, cost reduction and focus on
rural marketing.
• The industry incurs heavy cost on launching the product. It includes advertisement, free samples, shelf display, trade
discounts etc. The typical launch cost of the industry ranges from 50 to 100% of the revenue from the product in the first
year. The launch costs recede over the period, with growing acceptability from target segment, brand positioning and
increase in turnover.
• Increase in disposable income, advertisements, product innovations and brand extensions are demand drivers. The huge
and growing middle class population, increasing consumerism and urbanisation, health and hygiene awareness leading
to preference for packaged foods, are also the demand drivers.
• Rationalisation of costs, brand portfolio and distribution structures are critical to eliminate cost inefficiencies and to protect
bottom line.
• New product introductions and brand extensions are also critical for extracting optimum value and to stay ahead of
competition.

FMCG
• The level of rural incomes, as the demand for the products depends a lot on it.
• In the case of individual companies, any abnormal increase in marketing cost should be studied, as generally, the industry
incurs heavy cost in the first year of launching of a new product.

FMCG Soap

Cigarette
90000 25
80000
70000 15
10
60000
million nos
% Change
5
50000
0
40000
-5
30000
-10
20000 -15
10000 -20
0 -25
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Coffee
350000 40
Production % Change
300000 30
20
250000
% Change
10
Tonnes
200000
0
150000
-10
100000
-20
50000 -30
0 -40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Detergents
800000 30
Production % Change
700000 20
600000 10
500000 0
% Change
Tonnes
400000 -10
300000 -20
200000 -30
100000 -40
0 -50
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year

Soap
4500000 60
Production % Change
4000000 50
3500000 40
3000000 30
% Change
Tonnes
2500000 20
2000000 10
1500000 0
1000000 -10
500000 -20
0 -30
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
FMCG
FMCG (Fast Moving Consumer Goods) as the name suggest comprises of the entire range of fast selling products which are
consumed in daily life. This largely comprise of products like fabric wash, soaps, hair care products like shampoos hairs oils,
oral care products like toothpaste, toothpowder, skin care products, eatables like biscuits, confectionaries, ice-creams beverages
like tea, coffee, soft drinks etc. Thus as these products are directly related to people and their standard of living, the industry
demand and sales is highly influenced by population of the area where these products are sold and by factors determining
standard of living of the people living their . Thus following factors have to be considered to forecast the demand and sales in
the FMCG industry
Growth in population
In the first place, growth in population of an area is an important determinant of demand for FMCG products as higher population
will mean more consumers for FMCG products.
Income levels
Standard of living of people in an area can be gauged mainly by taking account of their income levels and literacy rates. The
growth in income levels indicates the potential for growth of better quality, higher value and larger gamut of products. The
higher the disposable income, the higher would be the chances for consumption of better quality and higher value products.
The initial indication of growth in income levels is the growth in gross domestic product of a country. The GDP growth of a
country should be considered in estimating the expected sales of FMCG products in that country.
Literacy rates
Literacy rate in an economy plays an important role in determining demand for FMCG products as the same facilitates awareness
of their utility in an individual’s life. Thus growth in literacy increases to increase sales through higher advertisement and
promotions.
Penetration levels
Growth in income and literacy rates should be studied in conjunction with the corresponding penetration levels of the respective
FMCG products. Penetration levels indicate the present growth in an industry and when the same is studied with reference to
income levels and literacy rates, it shows the correlation between them and the potential growth that lies in the industry.

Characteristics
Gems & Jewellery
• The gems and jewellery industry is one of India’s largest foreign exchange earners.
• It is classified into five main segments: cut and polished diamonds, gemstones, gold and jewellery, pearl and synthetic
stones, and others, including precious metal jewellery (other than gold), synthetic stones and costume fashion
jewellery.
• Of the total revenue of the industry, 80% comes from exports.
• The Indian diamond industry has carved a niche for itself in the international arena. Currently, it has a 55% share
by value, and an 85% share by carratage.
• Nine out of every ten diamonds set in jewellery worldwide are processed in India.
• Exports of gems and jewellery are concentrated mainly in 12 countries. USA, Hong Kong, Belgium, Japan and Israel are
the major markets for diamond, in that order. UAE, USA, UK (in that order) are the major markets for exports of
jewellery.
• Globally, De Beers, which account for about 50% of the value of world’s gem supplies from its own mines, will continue
its role as a market regulator, through its Central Selling Organisation (CSO).
• Indian jewellery industry manufactures 22 and 24 carat gold jewellery but there is a major demand for nine, 14 and 18
carat studded or plain jewellery, which needs to be focussed upon by the industry.
• China is picking up fast, and, with its advantages of cheap labour, it could pose a significant threat to India in the long
run.

Gems & Jewellery
• The international demand as, of the total revenue of the industry, 80% comes from exports.
• The UAE market, as it is the major importer of jewellery.
• The Chinese market as China is picking up fast, and, with its advantages of cheap labour, it could pose a significant
threat to India in the long run.

Characteristics
Hotels
• It is estimated that tourism accounts for more than 8% of world exports and 30% of international trade in services.
• With its beginning in the early 90’s, the hotel industry is relatively young in India. Its potential for growth is quite substantial
as the country has a rich heritage, apart from the enormous business potential, which can attract a huge number of foreign
business and leisure travelers.
• Globalisation and liberalisation have given the industry a new impetus. Besides, developments like the boom in IT sector,
entry of MNCs and growing FII interest in the Indian stock market have put the industry in the limelight.
• The hotel industry in India can be classified on the basis of the service to the target clientele as premium segment (5 star
deluxe and 5 star), mid-market segment (3 and 4 star hotels) and budget segment (2 star and below). The premium
segment caters services mainly to the business and up-market leisure clientele, mid-market segment to a mix of leisure
and business travelers and the budget segment to the low budget leisure travelers. The hotel industry is metro dependent
as around 75% of their incomes are now coming from the metros only.
• Normally, the hotels in this segment are mainly concentrated in four metros in addition to Bangalore and Hyderabad.
Around 70 to 75% of the revenues of this segment are derived mostly from international business travelers.
• Facilities in the mid-size segment hotels are fewer than that of premium segment at comparatively lower tariffs. Though
this segment’s income is derived mostly from domestic travelers, it comes equally from business and leisure customers.
• The Budget (Economy) segment has its major presence in most towns, cities and places of tourist interest. The users are
mainly price conscious, budget travelers. This segment is characterised by a high level of fragmentation. Their contribution
is negligible to the total revenue of the hotel sector.
• In addition, there are other types of hotels like heritage hotels, wherein erstwhile palaces or monuments have been
converted into hotels. Mostly, they are found in Rajastan. Prime customers in these hotels are leisure travelers. But they
are, of course, seasonal. The running costs as well as the initial set up costs are low in this segment.
• Another type of fast growing concept is holiday resort segment. Holiday resorts are located in semi-rural areas near cities,
hill stations, pilgrim centers and tourist destinations. Haryana and Punjab Tourism Development Corporations introduced
this concept in 1984.
• Normally, the performance of the hotel industry is better in the busy season, that is, the second half of the fiscal.
• In hotel industry, land cost works out to be about 50% of the total project cost while about 25-30% goes into construction
and the remainder into furniture and fittings. Since fixed costs constitute 60-65% of the total operating cost, break- even
levels are very high. As the operating leverages are high, after the break-even, the addition to the bottom line will be more.
• Administrative and other overhead costs comprise approximately 30% of the total operating cost and are the single
largest cost component. Food and beverage (15%), employee (19%), repairs and maintenance (16%), power and fuel
(12%) and selling expenses (8%) are the other components of the operating cost.
• Although the revenue structure varies form category to category, income is derived from two primary sources, viz. room
rent and F&B, which constitutes approximately 60% and 30% of the total revenue, respectively.
• Despite many tourist attractions, India has less than half a percent of the share of world tourists figure of 700 million.
• The tourism and hospitality is the largest industry in the world, contributing 10% of the global GDP and employment.
• Good occupancy rate and good ARR are very critical for the growth of the industry.


Hotels
• Trend of tourists arrivals, as the fortunes of the hotel industry depend a lot on them.
• The overall economic growth, as the functioning of the industry is also directly related to it.
• The urbanization growth, as around 75% of the hotel incomes are currently coming from the metros only.
• The current government initiatives as regards to development of tourism.
• The trend in infrastructure growth, as the hotel industry is directly related to it.
• The trend of administration & other overhead costs, as these costs comprise approximately 30% of the total operating cost
and are the single largest cost component.
• Room occupancy rates and the ARR, as they are important indicators of the operating efficiency of the hotel.
Hotels
The hotel industry is largely dependent on tourism. The various factors that boost tourism are economic growth, various
government initiatives, etc. The hotel industry is seasonal in nature with a significant share of the business coming in winter.
The business of hotels is broken into different business segments viz room rents, food & beverages (f & b), conference hall,
convention center, etc. The major component of the revenue comes from the room rents. F & B are linked to the room rents.
Room rents and F & B comprise of around 60% and 30% respectively of the total revenue. Room rent is a function of occupancy
rate and room rates. The room rent is estimated assuming a certain level of occupancy. The F & B revenue is also a derivative
of the room rent. The revenue for conferences is also another source of income for the hotels. It also adds up to the F & B
revenue.
Hotel industry is a capital intensive industry. A huge amount of money is blocked in the property. The normal payback period in
the hotel industry is 6 – 7 years. Fixed costs are a major component in the total operating cost leading to a high break even
point. Administrative and other overhead costs comprise approximately 30% of the total operating cost and are the single
largest cost component. Food and beverage (15%), employee (19%), repairs and maintenance (16%), power and fuel (12%)
and selling expenses (8%) are the other components of the operating cost.

Characteristics
Information Technology
• The latest digital phenomenon called the convergence - of media, entertainment and telecom - has added new dimensions
to the functioning of IT industry.
• The Internet revolution, which operates on a host of hardware systems, is the strategic partner of the hardware industry.
The growing PC penetration and computer education offers this sector an incredible growth opportunity.
• The hardware segment can be categorized into (a) complete systems like mainframes, workstations, personal computers,
etc. (b) peripherals like printer, modem, digitizer, etc. and (c) consumables like cables, wires, switches, etc.
• The Indian hardware market is comprised of local branded players, MNC players and assembled players.
• Globally, the Hardware segment forms 47% (US$330bn) and software products/ services, the rest.
• In India, computer penetration is just 3 per 1,000 people as against the world level of 60.This offers immense scope for the
industry in the country.
• The fast spreading Internet revolution is a major demand-driver. The spread of computer education and training will jack
up the demand for PCs and other allied products.
• Thin margins are a common feature of this segment due to competition from imported brands and the grey market. Price
wars worsen the situation further.

Information Technology
• The growth of the Internet, PC penetration and computer education levels.
• The price factors like the grey market.

Characteristics
Media
• The Indian media industry is largely fragmented with different outfits in different segments unlike the global scenario
where few top companies have a cross media presence.
• The industry has varied segments such as Television, Film Industry, Music, Radio and Print sector. The other platforms of
entertainment include video domes, theme parks, leisure sports, cineplex centers, clubs and electronic games.
• The television industry is the largest and fastest growing sub-segment of the media sector. This segment has been
growing at a compounded annual growth rate (CAGR) of 30%. The entire media industry depends on advertisement
revenues and the last decade witnessed a major shift in advertisement spend from print media to this segment.
• The share of ad spend break-up, gives print medium an approximate 51% share followed by television medium at 41%.
• The ad spent is more on private cable and satellite channels than on state-owned Doordarshan channels due to the
popularity of private channels as shown by the viewing population.
• The television industry consists sub segments such as broadcasting, production [content providers] and cable operators
and each of these segments pass across each other.
• The basic business dynamics in the Television Industry involves a broadcaster who operates through a leased satellite
transponder for beaming the channel. The transmission of channel takes two types, the first, through cable operator, who
in turn provides the links to the viewer or direct transmission like direct to home (DTH).
• The viewer, on his part, pays a monthly subscription for watching channels to the cable operator. On the other side,
television production companies sell programmes, or contents, to the broadcaster. The revenue streams for broadcasting
companies are through advertisement and subscription through pay channels. The content provider’s revenue may take
the form of advertisement or through block selling.
• The content programming basically can be fiction and non-fiction types. Soaps operas, thrillers, etc., will form part of
fiction type while game shows, talk shows, etc, will be of non-fiction type.
• There are two types of programming - commissioned and sponsored. Commissioned programming is fast becoming the
norm. In commissioned programming, a broadcaster asks a production house to make pilots, select one of the pilots and
commission the house to produce the program. In sponsored category of programming, a broadcaster charges a fixed fee
for the program and provide the production house with time slots, which it can sell to advertisers and recover the program
cost as well as make profits.
• The TV production companies have two revenue models such as Commissioned Programming and Sponsored
Programming. In Commissioned Programming Model, the TV broadcaster commissions a content provider to produce a
programme. The revenue for the content provider in this case is the total production cost and profits by margins that vary
between 16-30% of costs. The advertisement revenues and copyrights lies with the broadcaster.
• In the Sponsored Programming Model, the content provider buys specific time slot from the TV broadcaster. Here the
content provider is allowed a specific airtime for broadcasting advertisements which acts a major source of revenue. The
major cost for a content provider is the production cost of programmes and telecast fee payable to broadcasters. Apart
from the advertisement revenues, a content provider is also eligible for the copyright. By virtue of copyrights retained at
content provider level, he is entitled to broadcast the same content with different channels. Here, the negative aspects for
content providers are the huge broadcast fee charged by broadcasters, risk associated with success of programmes and
the requirement of large working capital.
• The success of a content seller depends on various factors such as the ability to give creative content, banner name or
brand equity to sell the contents, better cost management, timely delivery and ability to market the product with broadcasters.
Another factor in recent scenario is the change in viewers’ preferences.
• Film entertainment has remained the most popular form of entertainment in India, although television is slowly catching up
with films in the past five years. Hindi films form a major number in production and this segment has been mainly in the

hands of unorganized sector till late. However, IDBI started film financing a couple of years back and now, even the
corporate sector has come forward to produce films.
• In Film making, first in the value chain is conception of a story by writers / directors. The next major task lies in the
production house that takes care of pre and post production aspects such as dealing with artists’, technicians, locations
for shooting, film editing etc., Film financiers and distributors have major role in financing films. The production houses sell
theatre rights to distributors who in turn earns by ticket sales. The distributor bears the risk of film being a flop or reaps
fruits with film being success. The distributor takes theatre rights based on territory concept such as Class A, Class C etc.,
The last in the value chain is theatre owners and they may rent out for a period or enter into agreement for revenue
sharing with distributors.
• The cost of film making comprises the cost of artists, key technicians, operating production cost and equipment cost. The
revenue accrues from the sale of domestic theatricals, overseas theatricals, domestic and overseas music rights of a film,
TV channel rights and In-film advertisements. In domestic distribution rights, there are three sales models such as minimum
guarantee and is popular among Top banners in Hindi film industry which ensures the production house of minimum
upfront payment. The model of rights on commission basis is adopted by film houses when they are sure of the success
of film. The outright sale model is popular in south India in which sale is effected in full and thereafter it is left to distributors’
risk.
• The film industry, which was earlier unorganized with many players operating in the segment, is witnessing the current
scenario of growing organized players.
• The overseas revenues have become major sources of revenue with more than 18-million NRI population abroad.
• The Indian music industry is mostly driven by the Hindi movies with audio rights sold by big banners commanding a
premium.
• In India, Hindi film music contributes around 68% of the total revenues. Hindi film music can be categorized as new and
old ones with new films having a major 44% share while old films taking a 22% share. International music album constitutes
4%, devotional songs at 17% and balance comprises regional film music and classical songs.
• For a music company, to post good margins it should thrive on increased volumes either by cassette or CD sales. The
success of a film leads to increase in demand for volumes and vice versa in case of flop movies. But there exists rare
cases that even though a film gets flopped, its music sales go up with hit songs.
• The major element for music companies is the cost of acquisition of music rights.
• Indian music industry is an Rs 1,200-crore industry. When compared to global music industry, which is $ 42 billion segment,
Indian music industry is a small segment.
• Radio is a popular media that has deeper penetration levels of about 98% of country’s population. This medium poses
ability to focus on programming aspect pertaining to a region, culture and geographical requirements.
• The major cost for radio broadcasters includes license fees, infrastructure for base stations and transmitters, studios for
programming contents and operational costs. The revenues generated are through advertisement and sponsorships.
• Print sector, which is a Rs 4,500-crore segment, is popular in economic, politics and business category. This segment is
powerful in reach with an urban penetration of 43%.
• Publications of the print industry can be broadly classified as dailies, weeklies, fortnightly and monthly issues. The daily
publications occupy 55% of the share of the print media, monthly publications 20% share, weeklies occupy 14% share
and the rest is shared by other categories.
• The major cost for a newspaper is the cost of newsprint which vary between 45% to 65% of advertisement revenues.
• Ad revenues drive the print sector and higher the circulation, the larger are the ad revenues.


Media
• The trend of overall advertisement spends and also the shifts of this spend between various media.
• The change in audience preferences.
• The availability of finance to the media industry.
• The revenue model.
• In case of newspapers, the cost of newsprint should be seen, as the cost of newsprint varies between 45% to 65% of
advertisement revenues.
• The circulation numbers of the newspaper are important as, higher the circulation, the larger are the ad revenues.

Characteristics
Metals
Aluminium Industry
• The Indian aluminium industry is blessed with an abundant supply of quality bauxite, the key raw material, at a very low
cost.
• The industry has a ready domestic and overseas market for the finished product.
• India has the fifth largest bauxite deposits, accounting for 7.5% of the global deposits. But its installed capacity is only 3%
of the global capacity.
• The per capita consumption of aluminium in India is relatively poor at 0.6 kg as against 16-35 in developed countries like
UK, Japan, USA, Germany and France. Hence, there is enough scope for India to become a favourite location for building
alumina refineries and smelters.
• The aluminium industry can be classified as primary producers and secondary (down stream) producers. Primary producers
make ingots and billets (the primary forms of aluminium) using bauxite. Secondary producers add value to the ingots and
billets to manufacture downstream products like rolled products, extrusions, wire rods and foils.
• Indian producers are the lowest cost alumina producers in the world due to the availability of cheap bauxite.
• The average industry standard is six tonnes of bauxite refined to get two tonnes of alumina that can be smelted to yield
one tonne of aluminium.
• The Indian aluminium industry is mainly influenced by the growth of the user segment industries such as power, automobiles,
construction, packing and consumer durables.
• About 31% of the domestic aluminium consumption is from electrical sector, while consumer durables account for 23%
whereas transportation sector accounts for 18% while machinery segment accounts for 10%.
• The Indian aluminium industry is mainly influenced by the growth of the user segment industries such as power, automobiles,
construction, packing and consumer durables.
• Scaling up capacities to global levels, effective cost control, widening export markets to find markets for increased production
are critical.
• The aluminium market is very sensitive to the changes in the US market. Every 1 per cent reduction in demand from the
US means an addition of 65,000 tonnes to the inventory stock for that year.

Aluminium
• Per Capita consumption of aluminium in various countries and its comparison with Indian consumption.
• The growth of user industries like power, automobiles, packing, consumer durables etc.
• US aluminium market as the Indian market is largely influenced by the US market.

The Production Process
The operational stages in the production of aluminium and its fabricated items are
1. Bauxite Mining
2. Refining bauxite to obtain alumina by the Bayer process
3. Smelting alumina to obtain primary aluminium by the Hall- Heroult Process.
4. Fabricating the metal to various forms for industrial uses.
Process flow for aluminium produote
Source: Cris INFAC.

Alumina refining (Bayer process)
Notes:
1. Most of bauxite, which is mined is crushed, washed, and dried. However, if the bauxite is of low quality, it needs to go
through costly beneficiation processes.
2. Calcined alumina is amenable for transportation over long distances. Besides, the cost of drying (Calcining) is less than
the saving in freight charges.
3. Bauxite costs around $12-13 per tonne in India, as compared with $25-30 per tonne globally.

Hall-Heroult process

Alum inium
30,000 60
Production % Change
50
25,000
40
20,000
000 tonnes
% Change
30
15,000 20
10
10,000
0
5,000
-10
0 -20
1965
1970
1975
1980
1981
1982
1983
1984
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Alum ina
60,000 40
Production % Change
50,000 30
20
40,000
% Change
000 tonnes
10
30,000
0
20,000
-10
10,000 -20
0 -30
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Year
Bauxite
160000 20
Production % Change
140000 15
120000
10
000 tonnes
% Change
100000
5
80000
0
60000
-5
40000
20000 -10
0 -15
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Year

METALS
Backbone of the manufacturing and construction industry, metals prominently include steel, aluminium, copper, zinc and lead.
Typically a cyclically industry, metals is a capital intensive business.
End Users (Sector)

• Construction/Infrastructure
• Consumer durables
• Automobile
• Electric equipments, cables& wires, batteries, pigments& paints
Forms
Sheets, Coils/Strips, Wires; Bars, Tubes, Rods, Billets, Moulds, Ingots
Industry Analysis
• Demand-Supply gap in different regions/countries
• Capacity additions planned
Demand Drivers
• The growth in the economy and high level of disposable income in the hands of the people have meant that the automobile
and consumer durable sector have witnessed double digit growth in the last few quarters
• Low interest rates and easy availability of finance has been the major boost to the housing sector.
Price Determinants
• Import Duty, $ Rate
• Cost, Insurance and Freight Charges
• Demand-Supply Balance
• Quality of end product
• Target Market
• End use of the product
Salient Features of the industry

• Basic raw material (ore) and power& fuel form a significant portion of the raw material cost. Operating margins is a
function of the level of dependence on outside sources for raw material
• Higher capacity utilization ensures better margins as the quantum of capex for setting up a plant is huge
• Marketing and Sales Promotion usually is in the form of PR and branding of the product
Efficiency parameters
Cost per tonne, EBITDA per tonne (Raw material sourcing strategy: Vertically integrated or dependence on outside supply)
Valuation parameters
EV/Sales, EV/EBITDA, P/E, P/BV, RoNW, RoCE

Characteristics
Steel
• As the steel industry has tremendous forward and backward linkages in terms of material flow, income and employment
generation, the growth of an economy is very closely related to the quantity of steel used by it.
• The major costs of the industry are the costs of iron ore, limestone, coal and power. While the country is rich in iron ore and
limestone, its quality of coal is poor and power costs are high.
• The industry is power-and capital-intensive.
• The per capita annual steel consumption in India is around 26 kg for the last few years. It is 400 kg in developed countries
and 50 kg in other developing countries.
• China is the largest producer of steel in the world, followed by Japan and the United States.
• India, with 3% of the global production, ranks 10th in global steel production.
• Asia accounts for about 40% of the global demand.
• The critical success factors for the industry include: Improvements in domestic demand, firming up of global steel prices,
cost control and constant vigil by the government against dumping. Further, e-integration, more value added products,
use of latest technology, lowering of excise and other duties and government policies and guidelines for boosting private
sector participation in various infrastructure industries are also critical.
• Globally, consolidation through mergers and acquisitions has become a winning strategy, particularly when the industry is
facing an over-supply situation.

Steel
• The GDP growth, as the demand for steel is directly related to it.
• The supply of coal as it is one of the major cost of the industry.
• The global steel prices have a direct bearing on the local steel prices.
• More value added products, e-integration and use of latest technology are also important factors for the success of the
industry.

Sponge iron
50 15
45 Production % Change
40 10
35
mn tonnes
% Change
30 5
25
20 0
15
10 -5
5
0 -10
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year
Pig iron
700000 10
Production % Change
600000 8
500000
6
Production
% Change
400000
4
300000
2
200000
100000 0
0 -2
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year
Steel
920 8
880 6
860
4
840
mn tonnes
% Change
820
2
800
780
0
760
740 -2
720
700 -4
1997
1998
1999
2000
2001
2002
Years

Characteristics
Oil & Gas
• The origin of the oil industry in India can be traced back to the last part of the 19th century when petroleum was discovered
in Digboi in NorthEast. After independence, industry-which had Burmah Shell, Esso and Caltex as major players - was
nationalised.
• Post April1 2002, the oil segment has been totally freed from the shackles of the government with the dismantling of the
administered pricing mechanism and oil companies being given the right to price their products at the retail outlets.
• Oil is the most important source of energy which accounts for about 32% of India’s total energy requirements next only to
coal. Oil industry mainly comprises activities such as oil exploration, crude oil refining, distribution and marketing of
petroleum products.
• India is currently the fourth largest oil consumer in the Asia-pacific region after Japan, China and South Korea.
• The quality of crude oil is measured in terms of lightness, sweetness and is generally categorized as light, heavy, sweet
and sour. The higher the specific gravity the lighter is the crude and the richer the product mixes, whereas sweetness/
sourness depend on the sulphur content of crude oil.
• Indian oil & gas sector accounts for more than 30% of India’s oil import bill and the sector contributes over 20% to the
national exchequer through customs and excise.
• India’s share to world oil & gas production is less than 1% with petro-product consumption of less than 3%.
• Petrol, Diesel, LPG and Kerosene are the four main petroleum products whose sales account for about 70% of the total
sales in India.
• The four major products in a snapshot:
Diesel: It is the largest selling of all fuels and account for 85% of the automotive fuels. It accounts for 42% of sales volume
of oil companies. The diesel market roughly amounts to Rs 92,000 crore per annum. It is sold mainly in two ways. One is
sold at low-margin wholesale sales to bulk consumers like the railways and state transport companies. The other way,
(highest volumes sold in this way) are to retail sales to truck, heavy vehicles and agricultural segment. Diesel sales have
roughly fallen by 8% over the last one-year due to the downturn in the economy.
Petrol: It accounts for roughly 9.3 MT of fuel sales. In volume terms it is roughly around Rs 28,000 crore per year.
Kerosene: It amounts to Rs 13,000 crore in terms of sales. It is sold two ways. One, through the public distribution system
and the second, through free market operation.
LPG: Though private players are allowed to sell this product since 1994, all have made losses due to the subsidy to the
LPG sold by the oil companies.
• The major demand drivers in this sector are the growth in GDP rate, overall industrial growth and increase in transportation.
• With the opening of both the tech-intensive upstream sector and distribution and logistics-intensive downstream sector to
private participants, competition in the sector is likely to intensify.
• Need for large investment and large capacities and domestic retail network serve as important entry barriers.
• Crude oil, which is 85 -90% of total cost is most critical element in the refinery operations. The cost of crude directly
reflects in the bottom line of companies.
• The location of a refinery also has an influence on its competitiveness and profitability. The refineries which are on the
west coast of India have proximity to the Gulf countries and hence can source crude oil at lower freight cost.


Oil & Gas
• GDP growth rate, overall industrial growth and increase in transportation have a direct impact on the industry.
• The movement of Crude Oil price, as it has a direct impact on the bottom lines of the companies.
• The location of the refineries, as the refineries which are on the west coast of India have proximity to the Gulf countries
and hence can source crude oil at lower freight cost.
Crude Oil
3700 5
Crude Oil Production % Change
3600 4
3500 3
3400 2
mn tonnes
% Change
3300 1
3200 0
3100 -1
3000 -2
2900 -3
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year
Oil & Gas

Oil and Gas companies are engaged in manufacturing of petro-products and Natural Gas. These products are manufactured
through processing of Crude. Companies in the Industry are and /or involved in the exploration, refining (processing of the
crude to manufacture the end products) and marketing of the products.
The overall growth of the Industry is dependent upon the consumption (volume) levels, which can be co-related to the overall
growth of the economy; as oil and gas remains the key fuel for any economy. Thus the overall Industry growth can be judged
through the GDP growth of the said economy. Growth for the individual companies is dependent upon the consumption and
prices of the key raw material (crude) and the end petro-products. Pricing of both the raw material as well as the end- petro-
products on the other hand is dependent upon the global factors. While in the short run, a host of tangible and intangible factors
guide the international prices for the products and crude, In the long run the prices are primarily driven by the demand- supply
scenario for the said product.
For an oil exploration company the lifting cost of crude and for refining and marketing companies, the refining margins (difference
between the cost of crude and the end petro-products, which is further dependent upon the global Gross Refining margins, the
overall import duty and the exchange rate) play an important role in determining the overall gross margins. Apart from these
factors, the growth also depends upon the refinery configuration (in case of Refining and marketing companies) market-share,
and operational efficiencies. Another key factor that plays an important role, especially for a developing economy is the regulatory
framework, especially the pricing policies followed by the government.

Characteristics
Packaging
• Packaging plays a vital role in this age of consumerism. Besides preserving the product characteristics, it makes their
transportation easier and enhances shelf life of the product.
• Packaging is also an important tool of marketing and brand positioning.
• The industry, though very old, has seen its fortunes lifted with the growth of the fast moving consumer goods (FMCG)
sector.
• Plastics have transformed the low profile packaging industry into a high profile one, which is now more technologically
intensive.
• Innovation is the key to success in the packaging industry, and because of this even smaller players are giving tough fight
to dominant players on account of their new techniques and applications and innovative strategies to reach customers
and to breach barriers for market penetration.
• The industry can be broadly classified into primary and secondary. Primary packaging can be further divided into rigid
packaging and flexible packaging. Secondary packaging units are primarily converters, who convert the basic film into
package grade film by laminating, coating, printing, cutting, etc.
• Rigid packaging, which is the oldest form of packaging, still dominates the industry with about 80% market share, while
flexible and secondary packaging cornering the rest.
• Broadly, rigid packaging is conventional packaging using wood, plastics, glass, metal and paper & paperboards. Although,
plastic is increasingly replacing conventional rigid materials, rigid packaging would continue to dominate certain segments
of the industries such as pharmaceuticals and food processing on account of their excellent qualities of product preservation
and longer shelf life.
• On the other hand, flexible packaging uses polyester film, biaxially-oriented polypropylene (BOPP) films, laminate tubes,
etc. It consists of multi-layer laminated sheets that allow printability and ensure moisture resistance, aroma retention and
gloss. The qualities of durability, higher tensile strength, sturdiness and increased shelf life offered by flexible packaging
have made this segment grow faster, thereby garnering increased market share of the industry.
• Nearly, 34% of the packaging uses paper and paperboards, 24% uses glass containers, 15% uses metals like tinplate,
steel and aluminium, 22% uses plastics and the rest use composites.
• The Rs. 10,000-crore packaging industry is highly fragmented, with a large number of small players. However, as the
industry is becoming technologically intensive, few organised players have become dominant in various segments.
• While there is wide fluctuation in cost according to the base material used, overall, raw material costs constitute about
50% of sales, power costs about 4.5%, manufacturing expenses about 10% and employee costs about 5.5%.

Packaging
• The new technologies and innovations being made, as they have a direct bearing on the industry.
• The trend of raw material prices, as raw material costs constitutes about 50% of sales.

Characteristics
Paints
• Paints are used for both, surface protection as well for decoration.
• While organised players account for 60% of the market, unorganised players occupy the rest 40%. In the unorganised
segment, there are roughly 2,000 players comprising mostly small scale units.
• In global scene, the share of industrial paints is around 70% and balance is on the decorative segment whose ratio is a
total reversal for the Indian paint scenario.
• Globally, USA is the leader in world paint market followed by Europe.
• On the product level, paints can be broadly classified as decorative paints and industrial paints. The decorative paints
segment can be further classified as exterior paints, emulsions, enamels and varnishes, wood finish and distempers. The
industrial paint segment is classified as paints used for coil coatings, automobile coating, marine coating, powder coatings
and high performance coatings.
• The industry is raw material-intensive as it accounts for nearly 68% of the cost of production.
• There are more than 275 raw materials required for the industry and the major being phthalic anhydirde (PAN), a petroleum-
based material and titanium dioxide which accounts for 30% of raw material requirement.
• The demand for paint is related to economic development of the country. The demand for decorative paints in India comes
from two segments such as construction of new buildings and retail demand for refurbishment, while the demand for
industrial paints arise from industries such as automobiles, white goods, shipping, etc. The decorative paint segment is
dependent on the growth in construction sector, disposable and per capita income. It is also driven by festival seasons
when the decorative paints witness higher sales. The industrial paints, on the other hand, depend on industrial production.
The demand for paints is seasonal and it perks up during festival seasons, while it is lean during monsoon period.
• In the paint industry, the cost of branding and distribution is high.
• Organised players need to have access to a steady flow of working capital as the number of shades to be offered to the
dealers is very large and there should be sufficient stock of every shade maintained at all levels of the distribution channel.
• For the decorative paint segment, wide range of shades, effective working capital management, strong distribution network
are success factors. In the industrial paint segment, which has a major share in catering to automobiles sector, a customised
product range, strong technological skills and sustained quality are critical.
• Even though the import of paint as a finished product is almost marginal, titanium dioxide, the vital raw material required
for the industry, is largely met by imports.

Paints
• The growth in the construction industry, as it directly affects the decorative paints segment.
• The overall industrial growth, as it has a direct bearing on the industrial paints category.
• The trend of the raw materials cost (especially of PAN), as it accounts for nearly 68% of the cost of production.
• The sales during the festive seasons, because the demand for paints is driven by festival seasons, when the decorative
paints witness higher sales.
• The trend of the branding and distribution costs as the cost of branding and distribution is high.
• The working capital levels of the players as the organised players need to have access to a steady flow of working capital
as the number of shades to be offered to the dealers is very large and there should be sufficient stock of every shade
maintained at all levels of the distribution channel.

• For the decorative paints players, the distribution network should be assessed as a strong distribution network is very
essential.
• For the industrial paints player, the product range should be customized as per needs along with the high level of quality.
• The availability of titanium dioxide, the vital raw material required for the industry, as this raw material is largely met by
imports.
Paints

Paints
450000 25
20
350000
300000 15
% Change
Tonnes
250000
10
200000
150000 5
100000
0
50000
0 -5
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year

Characteristics
Paper
• Paper Industry is one of the oldest industries in India, with the first paper mill having been commissioned in 1812.
• The industry is highly power and capital intensive and is cyclical in nature.
• The industry, based on raw material consumption, can broadly be classified as wood-based units, agro residue-based
units and waste paper-based units. Similarly, on the basis of end-use, it can be classified as manufacturers of cultural
paper, industrial paper, speciality paper and newsprint. While the country is self sufficient in cultural and industrial paper,
it is overtly dependent upon imports for newsprint.
• Pulp, power, caustic soda and chlorine are the major costs of the industry. While pulp cost accounts for about 30-35% of
the production costs, power costs account for about 15-20%.
• Pulp can be produced from wood, waste paper, bamboo, agro residue like bagasse, jute, straw, etc. In order to be cost-
effective, the industry uses a blend of wood based raw materials, waste paper and agricultural residue for producing pulp.
Wood-based raw materials account for about 39%, waste paper 28% and agricultural residue 33% of the pulp costs.
• The cost of raw materials and power and fuel, together account for over 43% of the sales. Other manufacturing cost
accounted for about 18% of sales, while that of interest accounted for 8% of sales.
• Domestic manufacturers are at a disadvantage as the country is short of high quality raw material resources and as the
use of recycled paper is quite limited.
• The major demand drivers of the paper industry are the growth in literacy rate, GDP and overall industrial growth. The
demand for printing and writing paper is highly price-elastic and, hence, the softening prices are likely to boost demand.
Government's thrusts on educational sector, rising school enrolments are positive demand drivers.
• The per capita consumption of paper in India hovers around 4 kg as against the world average of 54 kg and 332 kg in the
US, thereby offering tremendous scope for increase in demand.
• Paper, in the form of duplex boxes etc is an important packaging material. Hence, the increased activity in consumer
durables and other markets wherein packaging is through corrugated boxes etc, also drive the demand.
• The international pulp and paper prices are highly volatile resulting in wide swings in the industry's operating margins.
Further, as the domestic industry is at a disadvantage in terms of raw materials, its ability to compete in the global markets
has been limited.
• With internet and e-commerce becoming part of life, the long term growth in demand for paper is likely to slowdown. Also
plastic is replacing paper in many conventional areas, including packaging.
• Cost control, supply chain management and consolidation are critical the survival of domestic players. Likewise, large-
scale modernisation of plants and bringing in new technology are also critical for attaining global competitiveness.
• The country imports over 60% of the domestic newsprint requirements.
• North America, Western Europe and Asia dominate in global paper and board consumption. Of this, the US and Western
Europe alone account for over 58% of the global consumption.
• The Indian paper industry's costs are on the higher side not only because of the non-availability of quality raw materials
but also on account of operational inefficiencies due to outdated technology.
• The long term outlook of the industry depends on various natural, government and technical factors, apart from international
prices and technological advances.


Paper
• The power availability as the industry is highly power intensive.
• The finance availability as the industry is highly capital intensive also.
• The pulp availability, as pulp cost accounts for about 30-35% of the production costs.
• Growth in literacy rate, GDP and overall industrial growth, as they are the major demand drivers of the paper industry.
• The growth rate of modernisation of plants and bringing in new technology as they are critical for attaining global
competitiveness.
• The North American, Western European and Asian economies as they dominate in global paper and board consumption.
Paper

Paper
6,000 70
Production % Change
5,000 60
50
4,000
% Change
000 tpa
40
3,000
30
2,000
20
1,000 10
0 0
1990-91
1991-92
1992-93
1993-94
1994-95
2000-01
2001-02
2002-03
1998-99
Year
Paper
The growth in the paper industry is highly related to GDP growth and also dependent on factors like industrial growth, literacy
levels and events like elections. The paper consumption is at its peak during the pre-election period. The different varieties of
paper manufactured are copier paper, business stationery, duplex board and creamwove. The growth in the duplex board
would be determined by the industrial growth while the literacy levels and certain events determine the growth for the other
kinds of paper.
Paper can be made from wood pulp as well as by using bagasse. The paper quality improves when paper is manufactured from
wood based plants in comparison to that of bagasse based plants. Other than wood pulp / bagasse, the other major cost
components in the manufacture of paper are power and chemicals. The chemicals are used for the bleaching and cleaning the
wood pulp. The wood pulp comprises of around 25% - 30% of the total cost of manufacture of paper, whereas power comprises
of around 15% - 18% of the cost of manufacture.
The paper and the wood pulp prices follow the international trend in prices. An increase in the international wood pulp prices is
followed by an increase in the raw material prices for the wood based plants. A backward integrated player manufacturing wood
pulp will be insured from such increase in prices and would reflect in its profits with healthy operating margins. The increase in
the wood pulp prices is followed by an increase in paper prices improving the realisations, thus helping the topline to increase.

Characteristics
Petrochemicals
• The petrochemical industry, which possesses tremendous forward and backward linkages, has been mainly patronised
by the public sector in India during the sector’s initial stages. The main reason for this was the huge capital cost involved
in the setting up of a petrochem complex. However, the liberalisation measures of the government have given some
encouragement to the private sector to enter this sector. And today, the sector is largely controlled by the private sector.
• Modern living is closely linked to petrochemical products as they are the key inputs for many consumer durables. The
industry’s major output, namely plastics, finds application in diverse products.
• Petrochemical products can be broadly classified as polymers, synthetic rubbers, synthetic fibres and synthetic detergents.
Of these, the plastic and synthetic fibre business alone accounts for about 85% of the total demand for petro-products.

Petrochemicals
• Trend of Consumer Durables industry, as petrochemical products are the key inputs for many consumer durables.
HPL- Perochem

Petro chemicals

IPCL Baroda-Perochem

IPCL Ghandar

IPCL Nagothane

Causticsoda
2000 25
20
1600
15
1400
000 tonnes
% Change
1200 10
1000 5
800 0
600
-5
400
200 -10
0 -15
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Soda ash
1800000 15
10
1400000
1200000 5
% Change
Tonnes
1000000
0
800000
600000 -5
400000
-10
200000
0 -15
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year

Characteristics
Pharma
• The Indian pharmaceutical industry, which was operating in a protectionist regime, is now gearing to face competition
emerging from product patents in a WTO era.
• Pharmaceuticals being essential items for humans, the industry is protected from cyclical fluctuations.
• The shift towards product patent era in 2005 has made the domestic industry conscious of the need to increase expenditure
in Research.
• Globally as well as domestically, the industry is witnessing large-scale mergers and acquisitions.
• The industry is blessed with quality human resources, low cost of research and world wide opportunities.
• The industry comprises about 18000 players, of which 250 leading players control almost 70% of the market.
• Domestic players account for over 70% marketshare and the rest is accounted for by MNCs.
• If one considers the entire healthcare scenario, allopathy accounts for 50% of the overall Indian market, ayurveda accounts
for 30% and sidha, unani, homeo and other systems share the rest.
• The industry manufactures bulk drugs and formulations of which formulations constitute about 82%. Formulations can
further be classified as essential drugs and common drugs.
• The global expenditure on Pharmaceutical R&D was estimated at around US$46 billion. Historically, US accounts for
36% of the global R & D spend. Other major countries investing heavily in pharmaceutical R & D includes 19% by Japan,
10% by Germany, 9% by France and 6% by UK.
• India is fast emerging as an international hub for contract research and manufacturing. The country has a natural advantage
of abundance of scientific talent and skilled labour.
• Investment in R & D (especially basic research), an extensive distribution network and marketing strategies, new product
introductions, penetration into global generics markets, effective anti-dumping duties, logistics management and brand
building are critical.

Pharma
• R & D expenditure incurred by the industry and the individual companies.
• The distribution network of individual companies.
• New product introductions by various companies.
• Brands of various companies.

Pharma

Pharmaceuticals
While Healthcare is a global Industry, the demographics of a country, the per-capita income, spend on healthcare, healthcare
Infrastructure of the country are couple of factors which impact the growth of the Industry in a country. Other broader factor
which has a major impact on the profitability and growth of the companies in any country is the Regulatory frame work of the
country with respect to patents, pricing etc.
Business of the Pharmaceutical companies can broadly be classified as bulk (raw-material) and formulation (end product–
medicines) manufactures. While the end user for the bulk drug manufactures is the formulators, the formulators either sell their
products to a company or to end customers through various distribution channels.
Some other classifications within the Industry would be the service providers either in the area of Healthcare or Research
(organisations which aid other companies in their R&D efforts by providing services auxiliary to their R&D activities- either in the
area of infrastructure, Research or supply of materials)
Overall cost structure and profitability of company is dependent upon the business model adopted (a pure manufacturer, a
Research lead organization, a healthcare service provider).However broadly taking the above classification the overall growth
and the gross profitability of the companies operating in either of the segments is dependent upon the therapeutic segments
(broader disease category) been catered to, competition in the product category in the respective therapeutic segments and
markets been targeted (domestic or exports).More than the therapeutic segment , the competition for the particular product
plays a very important role, especially in the exports market. Other key elements that play an important role in determining the
overall profitability of the company are the Selling & marketing and R&D expenditure.

Characteristics
Power
• Power is the backbone of the economy not only in the e-commerce era but also in the industrial era that preceded it.
• State and Central utilities in public sector currently dominate the Power Sector. However, private sector has also been co-
existing, on a low scale.
• Power costs primarily consist of the cost of generation and distribution. The cost of generation, distribution, distribution
losses, taxes and subsidies apart from the Plant Load Factor (PLF) and profit determine the ultimate cost of power to the
consumer.
• Generation costs vary with the basic inputs - thermal, hydro, nuclear, wind, etc. The cost of distribution includes the
extensive cable network from the generation site to the customer’s place, metering, cost of collections, the normal loss
due to transmission and distribution (T & D losses) and the abnormal T & D losses due to theft of power.
• The cost of setting up a power plant varies, depending upon the type of the plant.
• India has huge potential to generate power from non-conventional energy sources (NES) like wind, biomass/cogeneration,
solar photovaltic, biomass gasifiers and energy from waste.
• India is the first largest producer of Wind Power, after Germany, USA, Spain and Denmark. The country’s gross wind
energy potential is estimated at 45000 mw, while the technical potential is estimated at 13000 mw. However, only 15% of
the technical potential has so far been exploited.
• The advantage of wind power is the low capital investment, steep reduction in generation cost, and above all, environment
friendly. The capital cost is around Rs 4-4.5 crore per MW.
• Economic recovery, urbanisation, automation of irrigation, relaxation of restrictions in power consumption by industries
are the demand drivers in the sector.
• On account of inadequate generation capacity, the country is plagued by power shortages.
• The success of the Power sector in India depends upon reduction in transmission and distribution (T & D) losses, 100%
metering, eliminating /shifting power subsidies from SEBs to state governments, improving the health of SEBs by securitising
dues to Central PSUs, thereby improving the former’s liquidity and increasing capacity utilisation.

Power
• Economic recovery and urbanization, as they directly affect the fortunes of the industry.
• Automation of irrigation and relaxation of restrictions in power consumption by industries are to be looked as they are the
demand drivers of the sector.

Electricity to Grid
Coal from mines Coal Handling Steam Step-up
Boiler Alternator
Plant Turbine Transformer
Coal Steam Rotation Electricity
Rotation Electricity Electricity to Grid

Gas from Pipeline
Gas Set-up
Turbine Alternator
Transformer
Waste
Hot
Gases
Electricity to Grid
Heat Steam Set-up
Recovery Boiler Alternator
Turbine Transformer
Steam Rotation Electricity
Water
Water
Electricity to Grid
Reservoir
Hydro Set-up
Alternator
Turbine Transformer
Rotation Electricity

Power
The power sector is divided into segments like generation, distribution and transmission. The power generation is further
divided into three segments viz thermal based, hydro based and wind based. Thermal based plants use coal to generate
electricity while water and wind is used in hydro and wind based respectively. Power is a capital intensive sector. Wind based
plants take around 6-7 yrs to break even. Thermal based and hydro based plants take much lesser time to break even in
comparison to the wind based plants. The reason for wind based plants taking a longer time to break even is because of a lower
plant load factor in comparison to the other plants. The plant load factor in case of thermal plants is 110, while in case of hydro
and wind based plants it is 70 and 30 respectively.
The pricing per unit of power is regulated by the state governments. The unit price would depend on the cost per unit and the
subsidy given in each state. The major raw material required for generation of power is coal in case of thermal plants. The raw
material cost for hydro based plants is negligible and nil for wind based plants. The private players generating power have to
pay wheeling charges to the government.

Characteristics
Shipping
• The shipping industry is the lifeline of India's international trade. 90% of India's international trade in terms of volume and
77% in value terms are through sea routes. India has a coastline of 7516 kilometres studded with 12 major and 139 minor
and intermediate ports. As the mode of transportation over water uses only 10% of the fuel compared to roadways, in a
country where two-thirds of the energy requirement is met through imports, the shipping industry should be accorded
greater importance just because of its energy efficient character alone.
• Being cyclical, the industry's fortunes are closely linked to the overall international trade and merchandising scenario.
Among the cyclical industries, shipping is characterised by the shortest buoyancy period and longest recessionary period.
Indian shipping companies are mostly involved in the overseas business.
• In the Indian shipping industry, overseas trade account for 93% of the total capacity. Coastal shipping accounts for 5.7%
while offshore the rest. The average age of the Indian ships is 15 years against the world average 18 while the advanced
countries average age is 10 years.
• Age is the general indicator of operational efficiency and charter rates. Younger ships are cost effective. Ships aged more
than 15 years are normally due for scrapping. Accordingly, 30 % of Indian ships belong to this category.
• Poor demand for scrap steel and immense availability of ships for scrapping has led to lower scrap prices. Hence many
Indian companies are reluctant to scrap their ships.
• Fleets can be further classified on the basis of cargo carried by it -- dry bulk carriers, tankers and off-shore vessels. Dry-
bulk carriers can again be divided into time charter - hiring of the ship for a specific period, voyage charter - hiring for a
specific trip and spotting, which involves going anywhere without a time frame or a route. Next is tankers, which can be
bifurcated into oil and product tankers. Dry bulk carriers are used to transport bulk goods such as grain, iron ore and coal,
while tankers are used to carry crude oil, petroleum products, chemicals etc. Offshore vessels are essentially tugs, supply
vessels, drill ships etc., which transport men and materials to offshore oil installations. Some additional classifications are
like container ships, LPG carriers, chemical tankers, liner ships, passenger-cum-cargo ships etc.
• Most of the Indian tonnage is concentrated in dry bulk sector whereas the world fleet is dominated by oil tankers. The
share of dry bulk carriers, tankers and offshore vessels is 58%, 40% and 2% respectively. Of late, in line with the world
trend, container shipping is gaining importance.
• Major expenses incurred by the shipping industry are bunker or fuel expenses, crew expenses, dry-docking expenses,
canal dues, etc.
• Income earned by the industry depends on the volatility of freight rates and surplus / deficit generated on sale of ships.
The expense dynamics again depend on the types of fleets and their varied maintenance requirements.
• Shipping freight rates are typically determined by the Baltic Freight Index (Biffex). It is the barometer of dry bulk segment
(base year-1985-1000). It is a weighted average of the actual freight rates of Panamax and Capesize vessels at any point
of time on 11 specific routes, which represent important trade routes. Indian players are concentrated in the Handysize
and Handymax (classification based on tonnage size) sectors. Hence BFI may not be of great relevance to India, but it
acts as a barometer of freight rates world-wide.
• The demand is mainly driven by volatilities of global trade. A good / bad harvest in the US, a revival / recession in the
global steel market, increased / decreased refining capacity and crude oil movement, economic recovery / recession in
different countries, etc. are typical examples of demand drivers.
• Indian shipping Industry is still a victim of inadequate port facilities, delayed clearing, poor cargo handling systems and
lower labour productivity which leads to longer turnaround for ships.
• A drop in tanker movement is evident during summer season. This results in an oversupply of dry bulk carriers during
which freight rates drop. With increasing environment consciousness and with the emphasis given to maritime safety, the
rate of scrapping aged ships is expected to increase.

• Freight rates are so sensitive that a small drop in demand elsewhere will bring down the rates drastically. Being cyclical,
the risks attached to business cycles are to be accounted. Withdrawal of tax concessions, reduced cargo support by the
government, etc. are the associated risks of the industry. As the industry is heavily capital intensive, the entry barriers are
very high. But if someone has a large financial prowess, he can enter the sector in no time, as the acquisition of ships does
not take much time.
• Another issue is that the industry requires huge working capital and large cash flows to survive efficiently.

Sugar
Sugar
25000 60
20000 40
30
000 tonnes
% Change
15000 20
10
10000 0
-10
5000 -20
-30
0 -40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year

Characteristics
Tea
• The Tea Industry is one of the major traditional industries in the Indian history, ageing almost 185 years. The first tea plant
was discovered in 1815.
• India is the largest consumer and producer of tea. In terms of employment, it is the second largest industry, employing
more than a million people directly and 2 million people indirectly.
• The main tea producers are India, Sri Lanka, Kenya, Indonesia and China while the major consumers are China, Russia
and Pakistan.
• The global market consists 44% of trading and 56% of own consumption by tea producing countries.
• The Tea Industry is also the one of the country’s major forex earner.
• Basically, there are three types of tea, which are Black, Green and Oolong tea. Black tea is the most popular type of tea.
It is produced from the top two leaves and the bud of the tea plant. Black tea is popular in India and is manufactured in two
different ways, namely CTC (Crush, Tear and Curl) and orthodox methods. CTC method requires a CTC machine to crush
and break the leaves. The orthodox method requires the tea leaves to be rolled in a roller to break and release the
chemicals. Black tea manufactured by the orthodox method is preferred in West Asia, North Africa and CIS countries for
its strong colour and taste. Oolong is a semi-oxidized whole-leaf tea. This type of tea is not produced in India. Green tea
is non-fermented and it produces a clear, aromatic, delicately flavoured tea, traditionally popular in China and Japan. This
is considered to be the healthiest among all varieties of tea. Based on the region, they are classified as Darjeeling, Assam
and Nilgiri, each having its own colour, strength and flavour.
• In India, there are about 1,120 tea estates, out of that, 700 belong to big companies and about 300 belong to small
companies. Big plantations have in-campus tea processing facilities, where the tea grown in the plantations are processed
immediately.
• The cost structure of the industry is as follows. The labour cost works out to be higher at 46%. Within the domestic market,
labour cost in South India is much more than in North India. The selling expenses are 12 %, power and fuel 7%, stores and
spares 9%, repair and maintenance 5% and others 21%.
• India’s per capita consumption of 600 gms of tea is far below the global standards and this offers immense potential for
growth of the industry.

Tea
• Plantations with in-campus tea processing facilities, as the tea grown in the plantations is processed immediately.
• Labour cost should be carefully seen as this cost is more in units in South India than in North India.

Tea

Tea
1000 50
40
800
Production mn kg
700
30
% Change
600
500 20
400
10
300
200
0
100
0 -10
1905
1915
1925
1935
1945
1955
1965
1975
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Year

Characteristics
Telecom
• Telecommunication has now become the backbone of any modern economy due to its all-pervasive nature of running
through almost every human transaction - commercial, digital or even personal.
• For the second populous country in the world and the fifth one in terms of purchasing power parity, an average total tele-
density of 4.4 basic telephones, rural tele-density of just 1 basic telephone and around 0.5 cellular telephones per 100
people points towards its potential for growth. Against this backdrop, in advanced countries the tele-density is averaging
in 50-60 (basic telephones) range.
• Monopolised by the government, the sector was a big victim of huge operational inefficiency and customer apathy till
recently. However, the opening up of economy per se has improved remarkably the service conditions. The scenario is
undergoing dramatic changes day by day. Private players are now flocking to this sector with unexpected enthusiasm and
the scenario is set to witness fierce competition, both in basic telephony, cellular, international, national long distance and
other value-added services.
• The telecom sector can be broadly divided into Service providers and Equipment manufacturers. Service providers consist
two, namely basic (fixed line) and value-added. The value-added services include cellular, radio paging, public mobile
radio paging, trunking, global mobile positioning communication services, VSAT services, electronic mail, voice mail,
internet services etc. In all these areas, the policy of the government has undergone a sea change over the period of the
years and especially after the New Telecom Policy '99.
• The sector being capital intensive, government was the only player so far. Though private players are now permitted, only
large players with deep pockets can enter and operate successfully in this field. Smaller players are likely to sell out or
merge with larger players. Again, the industry is very technology-intensive and hence the chances of obsolescence are
immense for different modes of communication. In advanced countries, this has already changed the dynamics and the
structure of the industry.

Telecom Cables OFC Fibre Drawing.

Secondary Coating Line
Stranding Line.

Characteristics
Textiles
• With India being the world’s third largest cotton crop producer, India is largely self-sufficient with regard to raw material for
the industry. More importantly, the variety of cotton spreads available in the country allows spinning of different counts of
yarn possible.
• India has a large pool of highly skilled labor with skills that have been ingrained since generations. They have been
exposed to different technologies, right from the earlier hand technology to the new power technologies.
• The industry contributes about 14% to the country’s industrial production and 4% to the Gross Domestic Product (GDP).
• The contribution of this industry to the gross export earnings of the country is over 30% while it adds only 7% to 8% to the
gross import bill of the country.
• The industry has a highly complicated structure and encompasses many segments. Broadly, it can be classified into the
natural fiber segment comprising cotton textiles, woolen textiles, etc., and the synthetic fiber segment comprising polyester
filament yarn, blended yarns, etc. The industry predominantly uses cotton and converts staple fiber into finished textile
products through the various manufacturing stages such as spinning, weaving and knitting, wet processing and garment
making.
• The textile mills can be classified according to the nature of work, like only spinning activity or composite mill which
undertakes spinning, weaving and processing all under one roof.
• The spinning industry is dominated by a large number of organised players with medium and large units due to its capital-
intensive nature of the business. On the other hand, spinning without the use of power also exists as cottage industry in
Khadi sector.
• In weaving sector, using a loom with power is known as powerloom sector or weaving mills and without use of power
exists as handloom sector.
• The only spinning activity is concentrated in places like Coimbatore, Tirupur, Salem in Tamil Nadu, Gujarat, Punjab, while
composite mills are concentrated in places like Surat, Ahmedabad, Mumbai and Coimbatore.
• Over past decades, there was a major shift and spread in the industry from the western to southern parts of India due to
the availability of raw materials.
• Cotton yarn is valued in terms of its linear density, which is measured in count. The higher the count, the better is the yarn.
Count types, catering to various uses, can be in the ranges of 1 to 20 in lower end and above 40 in higher end.
• Cotton is the principal raw material in yarn manufacturing and accounts for almost 60 % of the production cost. The
production of cotton and its prices are major issues affecting the profitability of players. Cotton being a seasonal crop that
is cultivated during July to September, it forces players to pile up inventories for their requirements for the full year. Any
adverse condition could lead to large-scale variation in prices of cotton, which, in turn, affects the margins.
• Labour and power are the other major costs. Another specific factor is the yield of cotton. The average cotton yield per
hectare in the country is lower compared to that of other top cotton producing countries around the world even though
India is the largest producer of cotton.
• Cotton yarn has a market all over the country with powerloom sector being the biggest consumer of cotton with around
37% share, followed by handloom sector which consumes about 31%, mill sector 6% and the balance being used by
unorganised hosiery and other buyers.
• The demand for cotton is facing increasing competition from man-made fibres with its properties like wrinkle-free, price
advantage and easier processes.
• The major demand drivers of the industry include rise in population, disposable income, changes in fashion and styles
which fuel demand for fabrics and in turn for yarn, international trend towards natural fibres and suitability of cotton fabrics
for tropical climate.

• The success factors for the industry start from choosing the right plant at the right location, commercial acumen in stocking
raw cotton and hedging against speculative price rise. Easy availability of power at affordable rates and non-aggressive
labour are crucial for a successful venture. 95

Textiles
• The availability of raw materials, as there was a change in the trend in the past decade.
• The latest trend for a particular variety of textile material.
• Population growth rate and disposable income levels affect the industry fortunes.
• Stocking of raw cotton and hedging against speculative price rise should be given importance.
Textiles Cotton Yarn

Cotton
25000 30
Production % Change
25
20000
20
% Change
15000 15
mn kgs
10
10000 5
0
5000
-5
0 -10
2002-03 E
1980-81
1985-86
1990-91
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Year
Fabrics
45000 14
40000 Production % Change 12
35000 10
30000 8
mn sq.metres
% Change
25000 6
20000 4
15000 2
10000 0
5000 -2
0 -4
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year
Spunyarn
3500 15
Production % Change
3000 10
2500
5
000 tonnes
% Change
2000
0
1500
-5
1000
500 -10
0 -15
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Year

Textiles
The textile industry has various stages in the value chain like spinning, weaving, processing and garments. The end products
in the industry are apparels and various forms of home textiles like bed linen, table linen, etc. The industry can again be
segregated based on the raw material used for eg. cotton textiles, polyester textiles or blended textiles.
The major cost in the industry is the raw material cost. Cotton cost is a major raw material for the spinning companies having
yarn as their end product. The cost would depend on the cotton crop during the year. Falling cotton prices would follow a
bumper cotton crop and vice versa. Other expenses would include power & fuel, dyes & chemicals and the employee cost.
The demand in the textile sector follows the fashion trend. The latest fashion and the quality of cloth play a very important role
in the export market. Majority of the population in the domestic market consists of middle class, so the demand is more
dependent on the capacity to per capita income and the personal disposable income. The quality and the fashion trends would
play a vital role for determining the demand in the upper class of the population.

Valuations

How to value a stock
In the short run the stock market is a voting machine, but in the long run it is a weighing machine. In other words, short-term
stock price fluctuations occur based on any number of popular concerns, often having little to do with the true worth of the
underlying businesses whose shares are being traded, but, sooner or later, almost inevitably the actual intrinsic value of the
company becomes reflected in its share price.
The investor can take advantage of this by purchasing stock when the shares have been bid below what they reasonably
should fetch in a fair trade and selling them only once they are at or above a rational price.
What is the true value of a stock? Is there even such a thing as value? And if there is, can we calculate it? These are questions
that we know we should try to answer but frequently we just dump them into the "too hard" basket.
A simple response to all three questions is that the worth of a stock is precisely what someone else will pay for it. From this
perspective, the notion of true value is that is a waste of time and energy to pursue. This view is related to the "greater-fool"
theory that argues that the value of stock is irrelevant so long as there is an unsuspecting patsy who is willing to pay more.
Various theories are being used to value a stock. We are taking up some of the frequently used ones along-with the ones which
we think are the good candidates for discussion:
A) Traditional Methods:
a. PER
b. PBV
B) Newer Methods
a. DCF
b. EVA
c. EV/Tonne: Is nothing but Mkt cap + Net Debt (Total debt minus Cash) and is very evident in the case of cement
companies since it assigns a price paid by an investor for a single tonne of cement produced.
C) New Companies (IPO's) Mkt Cap/Sales: Companies who are raising fresh money by diluting the equity may not be
profitable for an investor to use PER as a ratio for defining a value to a stock, its share price multiplied by the shares
outstanding is more appropriate. Since these companies are doing good business and is reflected in the turnover numbers,
mkt cap divided by sales is the best option for defining a value for newer companies.
Traditional Methods:
A) Price to Earnings - PER: A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as: Market Price / EPS
Most analyst take year end EPS to calculate PER. But it could be done in various ways. EPS is usually from the last four
quarters (trailing P/E), but sometimes can be taken from the estimates of earnings expected in the next four quarters (projected
or forward P/E). A third variation is the sum of the last two actual quarters and the estimates of the next two quarters.
P/E is referred to as the "multiple," because it shows how much investors are willing to pay per rupee of earnings. In general,
a high P/E means high projected earnings in the future. However, the P/E ratio actually doesn't tell us a whole lot by itself. It's
usually only useful to compare the P/E ratios of companies in the same industry, or to the market in general, or against the
company's own historical P/E. A PER band chart is very useful in seeing the past PER the stock has been able to command. If
the future EPS growth is strong and the current valuation is good enough, then the share price would appreciate equivalent to
the EPS growth.

PEG Ratio: The relationship between the price/earnings ratio and earnings growth tells a much more complete story than the
P/E on its own. This relationship is called the PEG ratio and is formulated as follows:
PEG Ratio= (Price/Earnings Ratio) / (Annual EPS Growth)
It's important to realize that the number used for the annual growth rate can vary. It can be forward looking (predicting growth)
or trailing, and cover a one- to five-year time span. Taking a longer period into consideration is better because it is less likely to
give an outcome skewed by an anomaly. Reading a company's PEG is just like reading the P/E ratio: a lower PEG means the
stock is more undervalued.
B) Price to Book: One way to do this, for many companies, is to buy and sell based on the corporations' price to book value
ratio. Book value means: The value of the company if all liabilities were subtracted from assets and common stock equity.
By dividing a company's total book value by its number of shares, the per share book value is obtained. This figure is readily
available online for thousands of companies through any number of services. Over the long-term, the average per share price
to book value averages around 2. (Currently it is about 3, indicating the market is overvalued.)
But there are companies available whose stock is selling for significantly less than a P/BK of 2. Everything else being equal,
when one purchases stocks with lower than average (below 2) price to book value, he or she increases the odds of profitable
equity returns for the resulting portfolio.
An easy P/BK strategy would be to buy a dozen (or so) stocks with a combined price to book value ratio of 1 or below and sell
them once their P/BK averaged 2 (the long-term market average P/BK). One would thus have a relatively safe investment and
obtain a 100% or greater profit (not counting dividends or commissions). For good companies, the book value will go up while
one holds the stock, so the total profit of a later sale would involve dividends, improving book value, and a more rational price
in relation to book value.
Why the P/BK method of quickly valuing shares of stock: It is much less subject to manipulation than the more popular price to
earnings ratio. And it does not suffer the too common fate of stock dividend methods of evaluating a share's worth, that the
dividend can be cut or eliminated just a little after its relative generosity has made the stock seem so tempting a buy.
Even if one does not restrict more than a portion of one's overall stock holdings (25%, for instance) to low price to book assets,
a reduction in the average portfolio price to book value will tend to decrease the risk of nest egg loss and to increase the
potential for superior total returns.
Since some investment strategies definitely do not lend themselves to a low price to book value approach, one might balance
other methods with this technique for a significant fraction of the total assets and so gain some benefit.
Another simple P/BK strategy with this kind of long-term performance in the past (no guarantee for the future) is to:
Buy stocks with price to book value of .66 or below that also have a low level of debt (i.e. debt to equity [or D/E] .33 or below);
and
Sell them when

P/BK is 1 or above; or
The dividend (if any) has been cut or suspended; or
The share price has gone up 50% or more; or
After two years from purchase (whichever first).

Newer Methods:
Let's run with this idea and see how we might be able to arrive at the intrinsic value of a stock. In situations like this I often find
that a good place to start is with a simpler situation that has enough of the features of the original problem to throw light on a
solution.
Ratios like the P/E ratio give you a quick idea but it doesn't go into depth very well. The intrinsic value makes up for some of
what the P/E ratio lacks by accounting for its growth rate and the discount rate. The growth rate allows the intrinsic value (IV) to
value the stock not only on their current earnings per share but also on their future earnings per share. The term "discount rate"
refers to the rate that you would have to earn to make an investment worth the risk. By accounting for this, it helps weed out
some stocks that may be less lucrative investments.
A) DCF: Bonds and discount rates
Instead of valuing a stock, suppose we are trying to value a bond. Even simpler, suppose we are trying to value a contract that
says that we will receive Rs.100 in one year's time. Start with the assumption that we can be completely certain that we will
receive the payment. The first step would be to find out the rate for comparable investments. We could, for example, check the
treasury rate and find that it is 5% for a one-year note. The rate of 5% is also called the risk-free rate.
An investment of Rs.95.24 at 5% would pay Rs.100 in a year. Since we could invest this Rs.95.24 in a treasury note and receive
Rs.100 in twelve months, the rational price for the original contract is Rs.95.24. This is because investing more than this does
not make sense for us since we could achieve the same outcome by investing Rs.95.24 in a treasury note. On the other hand,
the person issuing the contact would not be happy with less than this amount.
The basic idea here is that to figure out how much to invest today for a guaranteed return in the future, we discount the return
amount by the treasury rate. In this case it means dividing by 1.05 for each year of the investment.
The next step is to allow for the fact that the return payment is not completely guaranteed. Suppose that all we know is that the
best estimate of the payment is Rs.100, but that it could be higher or lower. Now we would expect to pay less than Rs.95.24
because we are taking on some risk. In other words, we would use a higher discount rate.
The difference between this higher rate and the treasury or risk-free rate is called the risk premium.
This is how bonds are valued. Each of the payments, whether they are quarterly, semi-annual or annual, are discounted back
to the present time using a discount rate that is appropriate for the riskiness of the payments. If the bond is one that returns the
face value at the end, then this amount is also discounted in the same way. The sum of all these amounts is the "intrinsic" value
of the bond.
This is why riskier bonds are cheaper. Or, putting it around the other way, for the same cash outlay, you expect the coupon
payments for riskier bonds to be higher than those for bonds with less risk.
Valuing Stocks
How can we transfer our technique for valuing bonds to valuing stocks? The intrinsic value of a stock is "the discounted value
of the cash that can be taken out of a business during its remaining life."
There is an immediate parallel with bonds. The differences are that instead of discounting coupon payments, we discount
"cash" and instead of the coupons running over a set period we have to allow for it to run over the "remaining" life of the
business.

This leads to three questions.
Question 1. What do we mean by the cash that can be taken out of a business?
Question 2. How fast is this cash growing and for how long?
Question 3. What discount rate should we use?
The simplest answer to Question 1 is that cash refers to dividends. Obviously this does not work for companies that are
expected to pay low or no dividends.
A better interpretation of cash is earnings, or earnings per share if we are working at the level of individual shares. But even this
has drawbacks since earnings are the result of much accountancy processing such as making adjustments for depreciation.
The usual meaning of cash is free cash flow. This is defined as earnings plus depreciation and amortization less capital
expenses. If necessary further adjustments are made for increases in working capital and tax allowances.
Note that we do not assume that the free cash flow actually gets paid directly to the investors. Rather, it is assumed that the free
cash flow eventually ends up in the pockets of the investors through dividends and capital gains.
Estimating the rate and duration of growth of the free cash flow is the heart of successfully determining the intrinsic value of a
stock. The three main approaches are the stable growth model, the two-stage model and the three-stage model.
The stable model assumes that the free cash flow grows at a constant rate. For how long? The standard answer is for the long
term which, when inserted into the formulas, means running out to infinity. A little weird, but the formulas are simpler this way.
The two-stage model assumes that the company grows at a fast rate in an initial period and then at a stable rate after that. The
three-stage model adds a transition period where the growth rate tapers from the initial rate to the long-term stable rate.
Estimating the size and duration of these growth rates uses past earnings, analyst forecasts and fundamental data. A touch of
gypsy blood and necromancy is also a big help.
The third question concerns the discount rate. Investing only when there is no risk so the discounting using the risk-free rate.
The more standard approach is to use the Capital Asset Pricing Model.
How to value a stock according to RISK - Go the CAPM way!
Finance departments in business schools teach several different theories to explain the price of common stock. None of these
theories can actually predict the market price of a stock, since they're all based upon historical data on the assumption that the
past is an indicator of the future. But these theories are interesting in the same way as classical Greek theories about the
composition of matter; they do at least provide some indication of the creativity of human imagination.
So, one of these theories for calculating the value of common stock seeks to predict the total rate of return of a stock based
upon the average rate of return in the stock market, the rate of return on risk free securities (i.e. Treasury Bills) and the relative
risk of the individual stock in relation to the average level of risk in the market as a whole. This theory is called the Capital Asset
Pricing Model (CAPM).
What the theory attempts to predict is the total rate of return that results from investment in a particular stock. The total rate of
return is calculated as
total rate of return = (dividends + capital gain) / price paid for the stock
where "capital gain" is any increase (or decrease) in the price of the stock over the period of ownership. An increase in the price
of the stock would be a positive capital gain, a decrease in the price of the stock would be a negative capital gain (also called
a capital loss).

Assessing the risk of a stock
The people who write textbooks for courses in finance say that investors must receive a premium for investing in risky stocks,
and that the level of this premium is proportional to the relative risk associated with the particular stock. To measure the relative
riskiness of an individual stock, finance professors use a number that they call ß (beta), which is an expression of the correlation
between changes in the price of the individual stock and changes in the overall market index. The value of Beta for any
particular stock is used by these people to predict the percentage change in the value of a stock that will occur in conjunction
with a one percent rise in the market index. In other words, if a particular stock has a beta value of 2, then the price of that stock
will be expected to rise two percentage points when the price of the composite market index rises one percent.
Beta is calculated by comparing the price of the individual stock to the price of the index (e.g. the BSE-30 Index) over a period
of time. The finance textbooks provide a complicated formula for calculating Beta, but what it comes to is that, if you develop a
trend line (by linear reqression using the least squares method, for example) to approximate the historical prices of both the
index and the subject stock over the same time period, Beta is the ratio of the slope of the subject stock's trend line to the slope
of the index's trend line.
The risk premium
The Capital Asset Pricing Model uses three numbers to predict the total rate of return of an investment. We already know about
ß. The other two numbers are the risk free rate of return, and the market risk premium. The risk free rate of return is the interest
rate paid on Treasury Bills. The market risk premium is the difference between the risk free rate of return and the rate of return
that is gained by investment in a fully diversified portfolio of common stocks.
market risk premium = market return - risk free rate of return
The rate of return on the BSe-30 Index is commonly used as an estimate of the market rate of return just as the Treasury Bill
interest rate is used as an estimate of the rate of return on risk-free investments.
How ß can be used to predict the rate of return

The predicted total rate of return is calculated as
total rate of return = risk free rate + (market risk premium * ß)An example
Suppose that Treasury Bills are currently paying 6% interest, and the historical rate of return for investment in the BSE-30 is
11.5%. Then
risk free rate of return = 6% and

market risk premium = 11.5% - 6% = 5.5%
How well does it work?
Business schools teach future managers to use the CAPM to calculate their business's cost of capital. They are told to use this
figure as a basis for calculating net present value of prospective projects and to reject all projects that will not yield a rate of
return in excess of the company's cost of capital. So, if managers are successful, investors should receive a rate of return that
is equal to or greater than the rate of return predicted by the CAPM.
Taking a cue from US markets: From the mid 30s to the mid 80s, the CAPM worked fairly well to predict the rate of return on
common stocks. Actually, the predictions tended to be a little low for stocks with low beta, and a little high for stocks with high
beta, but most of this error was probably the result of overstating the market risk premium due to use of market indexes as a
measure of the market rate of return. After the mid 80s, CAPM seemed to break down, and hasn't been a good predictor of rate
of return after that point.

Why this theory doesn't work
Every textbook that teaches the Capital Asset Pricing Model also teaches that "History is no predictor of the future." Yet, this
theory is based upon a calculation of risk that is derived from historical price quotes of individual stocks. The theory assumes
that the historical correlation between the price of an individual stock and a market composite will continue into the future. The
theory also carries an assumption that managers of a firm will manage a firm to achieve the rate of return that is predicted by
the model, and that managers can successfully accomplish this feat.
The assumptions about the behaviour of managers are actually a circular proposition. Business schools teach future corporate
managers to use the ß statistic to calculate their firm's cost of capital and that the cost of capital should be treated as the
minimum acceptable rate of return for each of the firm's projects. Given that the same theory is used to teach to investors the
rate of return that should be expected and to managers the rate of return that should be achieved, it is really remarkable that it
doesn't work any better than it does.
B) EVA:
Is your company's stock your single biggest personal asset? If so, the million dollar question is: Is the value of your company
growing at least as fast as inflation? How do you know? Your company's book value may bear little relationship to its real value.
Even consistent, growing profits are no guarantee that inflation is not quietly eroding your wealth. Growing your company's
value depends on both profits and on how many assets are being tied up to generate those profits.
Fortunately, there is a financial management tool, known as Economic Value Added (EVA), that can help you measure whether
your efforts are REALLY building business value. To make the good news even better, you can also use EVA to identify those
operational improvements that will have the highest impact on increasing business value, and implement an incentive plan that
encourages all employees to behave like owners.
EVA is simply a formula that allows you to calculate the real, true profitability of your company. A positive EVA value generally
indicates that business value is being created, while a negative EVA value suggests wealth erosion.
The EVA formula is: EVA = (Aftertax Operating Profits) - [(Cost of Capital %) * (Total Capital)]
Aftertax operating profits is a common profitability measure. Total capital basically represents a company's assets, adjusted to
approximate their market value. The cost of capital is what makes EVA a truly unique financial measure and a gauge of
business value. The cost of capital is a weighted average of two rates of return: the rate your company would have to pay for
additional long-term fixed rate debt, and the cost of equity. The latter rate represents the rate of return potential buyers would
require for taking on the risk of owning a company; in other words, the return you as an owner should expect to compensate you
for the risk of ownership.
A close look at the EVA formula reveals a straightforward logic. A business owner uses his/her own equity and borrowed money
to buy assets. Both the owner and the lender require a rate of return on their money (together the cost of capital). The assets
purchased (total capital) generate aftertax operating profits. No "real" money is made or value created until the operating profits
exceed the return required by the owner and the lenders.
A negative EVA suggests that significant change may be required. EVA can be used to focus and drive those changes for
maximum impact on profits and value creation.
Using EVA to drive value creating change usually includes three steps. First, sensitivity analysis is conducted to determine
which factors have the greatest effect on EVA. Second, EVA is linked to key departments and processes within the business.
Third, value-based incentive compensation plans may be implemented using EVA.
Sensitivity analysis often serves to redirect management initiatives. For example, many companies look to enhance cash flow
by reducing labor costs. In many instances, the opportunity for improving cash flow by concentrating on material cost (i.e.

procurement, pricing, scrap) and asset utilization (i.e. payback analysis, preventive maintenance, inventory management) is
far greater than the potential savings available in labor cost.
Once sensitivity analysis identifies the key revenue, cost and asset investment factors driving EVA, the departments and
interdepartmental interactions most affecting each factor can be identified. This provides a basis for setting departmental
objectives and prioritizing improvement projects. Similarly, the major components of lead time can be identified and streamlined
to shorten customer response time, resulting in increased sales.
When EVA is being utilized to set departmental objectives and prioritize improvement efforts, an incentive plan may be
implemented. Bonus plans for management can be directly tied to EVA targets. For hourly employees, the link to EVA is often
implicit. For example, a profit sharing pool may be created, with payout contingent on hitting target levels of performance
measures (on-time delivery, scrap rate, lead time, etc.) that have been selected based on their connection to key factors driving
EVA. The result is employees motivated to behave like owners - maximizing cash flow and value creation.
EVA allows an owner to use the same tool for managing the business and measuring the effectiveness of changes. Most
important, the measurement and management tool drives wealth creation for the business owner.
EVA enhances shareholder value
Economic value-added (EVA) is the after-tax cash flow generated by a business minus the cost of the capital it has deployed to
generate that cash flow. Representing real profit versus paper profit, EVA underlies shareholder value, increasingly the main
target of leading companies' strategies. Shareholders are the players who provide the firm with its capital; they invest to gain a
return on that capital.
The concept of EVA is well established in financial. theory, but only recently has the term moved into the mainstream of
corporate finance, as more and more firms adopt it as the base for business planning and performance monitoring. There is
growing evidence that EVA, not earnings, determines the value of a firm.
The main differences between EVA, earnings per share, return on assets, and discounted cash flow, the most common
calculations, as a measure of performance are as follows:
• Earnings per share tells nothing about the cost of generating those profits. If the cost of capital (loans, bonds, equity) is,
say, 15 percent, then a 14 percent earning is actually a reduction, not a gain, in economic value. Profits also increase
taxes, thereby reducing cash flow, so that engineering profits through accounting tricks can drain economic value. As
Bennett Stewart, the leading authority on EVA, comments, the real earnings are the equivalent of the money that owners
of a well-run mom-and-pop business stash away in the cigar box.
• Return on assets is a more realistic measure of economic performance, but it ignores the cost of capital. In its most
profitable year, for instance, IBM's return on assets was over 11 percent, but its cost of capital was almost 13 percent.
Leading firms can obtain capital at low costs, via favorable interest rates and high stock prices, which they can then invest
in their operations at decent rates of return on assets. That tempts them to expand without paying attention to the real
return, economic value-added.
• Discounted cash flow is very close to economic value-added, with the discount rate being the cost of capital.

Ratio Formula Implication
Current Ratio Current Assets (CA) / It implies the ability of a company to pay its short term liabilities
Current Liabilities (CL)
Debt Equity Ratio Debt / Equity This ratio indicates the proportion of the debt funds in relation to equity.
It is also an indicator of leverage
Interest Coverage ratio PBIT / Interest This ratio indicates the firm’s ability to meet the interest cost
Pref dividend coverage ratio PAT / Pref dividend liability This ratio indicates the firm’s ability to meet the pref dividend carrying a
(incl dividend tax) fixed rate of dividend
Capital Gearing ratio (Pref cap + Debentures + Long term loans) / It shows the proportion of the fixed interest / dividend carrying funds to the
(Eq cap + Reserves & Surplus – Losses) funds belonging to the equity shareholders
Capital turnover ratio Sales / Capital employed This ratio indicates the firm’s ability of generating sales per rupee of
long term investment
Fixed asset turnover ratio Sales / Fixed assets This ratio indicates the firm’s ability of generating sales per rupee
invested in the fixed assets
Inventory turnover ratio Cost of Sales / Average inventory This ratio indicates the number of times the inventory is utilised
in the total cost of sales
Debtors turnover ratio Credit Sales / Average debtors This ratio indicates the velocity of debtors realization by the company.
This ratio throws light on the collection and credit policies of the firm.
Creditors turnover ratio Credit Purchases / Average creditors This ratio shows the velocity of the debt payment by the company.
Return on Equity PAT / Networth ROE measures the profitability of the equity funds invested in the company.
Retun on Capital Employed PAT / Capital Employed ROCE measures the profitability of the total funds invested in the company.
Return on Assets PAT / Average total assets ROA measures the profitability of a company in terms of the
assets employed in the company.
Earnings per share Profit available for equity shareholders / EPS indicates the total earnings of the company per equity share
No. of eq. shares
Free Cash per share (Operating cash – Capital exp) / The ratio indicates the cash available per share after incurring
No. of eq. shares the capital expenditure.
Dividend per share Dividend distributed / No. of eq. shares DPS indicates the total amount of dividend received per share
Price - Earning ratio Market Price / EPS P/E ratio indicates the expectations of the equity shareholder about
the earnings of the company
Price – Cash earning ratio Market Price / Cash EPS P/CEPS ratio indicates the expectations of the equity shareholder about
the cash earnings of the company
Price – Free Cash ratio Market Price / Free cash per share P/FCF ratio indicates the expectations of the equity shareholder about
the free cash available with the company
Book Value Net Assets / No. of eq. shares BV indicates the net assets owned per equity share of the company
Price – Book value Market Price / Book value P/Bv indicates the expectations of the equity shareholder about
the book value of the company
Operating profit margins PBIDTA / Sales This ratio can indicate management’s ability to control costs and
expenses relative to the company’s business operations.
Net profit margins PAT / Sales NPM indicates the amount of net profit earned over the sales of the company
Dividend Yield DPS / Market price This ratio indicates the return earned by the dividend over the amount invested
(Market price)
Dividend Payout DPS / EPS The payout ratio provides an idea of how well earnings support
the dividend payments.
Enterprise Value (EV) Market Cap + Net debt
EV / EBIDTA EV / EBIDTA
EV / Sales EV / Sales

For Banks
Ratio Formula Implication
Net Interest Margin Net Interest Income / Average The ratio indicates the interest income after deducting the interest expense
interest bearing assets as a % to the average assets.
Credit Deposit Ratio Total advances / Total deposits The ratio shows the % of amount advanced from the total deposits received.
Investment Deposit Ratio Total investments / Total deposits The ratio shows the % of amount blocked in the investments from
the total deposits received.
Adjusted Book Value (Net Assets - Net NPA's) / No. of eq. shares Adj BV indicates the net assets excluding NPA's owned per equity share
of the company
Price / Adj BV Market price / Adj BV P/Bv indicates the expectations of the equity shareholder about the adjusted
book value of the company

Tracking


Which sector tracks which othere sectors

Globally Impacted Sectors

Sector Remarks
Paper Paper and pulp prices follow an international trend. Also some international events like the US
elections spur the demand in the paper industry.
Oil & Gas Oil refining and marketing companies are affected by the global crude oil prices. An upward movement
in the prices will improve the margins for the marketing companies and worsen for the refining companies.
Shipping Increase or decrease in international trade affects the shipping revenues. Also the global oil prices
affect the fuel prices for the shipping companies.
Tea The tea auction prices follow the international trend. Also the export demand is impacted by the
supply and prices from countries like Kenya and Srilanka.
Textiles Textiles is predominantly a domestic industry. With the multi-fibre agreement in place, the export
revenue was restricted to the quotas available for the respective countries. With the dismantling
of quotas, the contribution of exports to total revenue will substantially increase. The dismantling
of quotas plays an important role in determining the growth in the textile sector. The raw materials
i.e. PTA and MEG required for the manufacture of polyester yarn are also dependent on the
global crude oil prices. An increase in the crude oil prices would increase the prices of PTA and
MEG and hence the raw material cost for the polyester manufacturing companies.
Pharma With the implementation of product patents in 2005, global Pharma companies are expected to
become more active in India. The product patent regime would help these global companies to
increase its share in the total formulations in India. With the new contract manufacturing services,
the Indian companies would see a good time ahead.
Metals Metal prices follow an international trend in prices. LME prices are a major determinant for the
metal prices. LME prices are a product of the global demand supply gap of metals.
Petrochemicals Crude oil is one of the major raw materials required for manufacturing the petrochemicals. Any
increase or decrease in the global crude oil prices will affect the margins of companies in the industry.
IT The revenue of the IT sector is dependent on the global IT spending
Hotels Hotel industry is dependent on the tourism industry. Tourism is affected by the events occuring globally.
Eg After ‘Tsunami’, there has been a reduction in the number of tourist arrivals in India.

What to do during

MERGERS AND ACQUISITIONS

Merger and acquisition implies taking over the business and the management of a company. This could be done in different
forms, viz.
• Amalgamation – taking over / purchasing the business of the company and discharging the dues of the shareholders of
the amalgamating company by issuing shares of the amalgamated company or by paying cash or some other consideration.
• Holding / Subsidiary relationship – acquiring the shares of the target company in order to takeover the control and
management of a company.
Amalgamations
In amalgamation the identity of the amalgamating company is lost and gets merged with the amalgamated company.
Amalgamation can be effected in two ways –
• Amalgamation in the nature of Merger
• Amalgamation in the nature of Purchase
Amalgamation in the nature of Merger – Amalgamation is in the nature of merger if the following conditions are satisfied: -
• All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the
transferee company.
• Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become equity
shareholders of the transferee company by virtue of the amalgamation.
• The consideration is discharged in the form of equity shares of the transferee company, except for the fractional shares
which can be paid in cash.
• No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they
are incorporated in the financial statements of the transferee company except to ensure uniformity of the accounting
policies.
• The business of the transferor company is intended to be carried on, after the amalgamation by the transferee company.
Amalgamations which do not satisfy any one or more of the above conditions are known as Amalgamation in the nature of
Purchase.
Method of Accounting
In Amalgamation in the nature of merger, while preparing the financial statements of the transferee company the assets,
liabilities and reserves (whether capital or revenue or arising on revaluation of assets) of the transferor company should be
recorded at their existing carrying amounts and in the same form as at the date of the amalgamation. The balance of the Profit
and Loss Account of the transferor company should be aggregated with the corresponding balance of the transferee company
or transferred to the General Reserve, if any. The difference between the amount recorded as share capital issued (plus any
additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company should
be adjusted in reserves.
In Amalgamation in the nature of purchase, while preparing the financial statements of the transferee company the assets and
liabilities of the transferor company should be incorporated at their existing carrying amounts or, alternatively, the consideration
should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation.
The reserves (whether capital or revenue or arising on revaluation) of the transferor company should not be included in the
financial statements of the transferee company, except for the statutory reserves. Any excess of consideration paid by the
transferee company over the net value of assets should be recognized in the financial statements as goodwill arising on

amalgamation, to be amortised to income on a systematic basis over its useful life. If the amount of the consideration is lower
than the value of the net assets acquired, the difference should be treated as Capital Reserve.
Holding-Subsidiary Relationship
Definitions
Control is defined as:
• the ownership, directly or indirectly through subsidiary(ies), of more than one half of the voting power of an enterprise; or
• control of the composition of the board of directors in the case of a company or of the composition of the corresponding
governing body in case of any other enterprise so as to obtain economic benefits from its activities.
A subsidiary is an enterprise that is controlled by another enterprise (known as the parent).

A parent is an enterprise that has one or more subsidiaries.
Consolidated financial statements are the financial statements of a group.
Minority interest is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which
are not owned, directly or indirectly through subsidiary(ies), by the parent.
Consolidation procedure
In preparing consolidated financial statements, the financial statements of the parent and its subsidiaries should be combined
on a line-by-line basis by adding together like items of assets, liabilities, income and expenses. In order that the consolidated
financial statements present financial information about the group as that of a single enterprise, the following steps should be
taken:
• the cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each subsidiary, at the date
on which investment in each subsidiary is made, should be eliminated;
• any excess of the cost to the parent of its investment in a subsidiary over the parent’s portion of equity of the subsidiary,
at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset
in the consolidated financial statements;
• when the cost to the parent of its investment in a subsidiary is less than the parent’s portion of equity of the subsidiary, at
the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the
consolidated financial statements;
• minority interests in the net income of consolidated subsidiaries for the reporting period should be identified and adjusted
against the income of the group in order to arrive at the net income attributable to the owners of the parent; and
• minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated
balance sheet separately from liabilities and the equity of the parent’s shareholders. Minority interest in the net assets
consist of:
9 the amount of equity attributable to minorities at the date on which investment in a subsidiary is made; and
9 the minorities’ share of movements in equity since the date the parent-subsidiary relationship came into existence.
Where the carrying amount of the investment in the subsidiary is different from its cost, the carrying amount is considered for
the purpose of above computations. Intra-group balances and intra-group transactions and resulting unrealised profits should
be eliminated in full. Unrealised losses resulting from intra-group transactions should also be eliminated unless cost cannot be
recovered. Consolidated financial statements should be prepared using uniform accounting policies for like transactions and
other events in similar circumstances. If it is not practicable to use uniform accounting policies in preparing the consolidated
financial statements, that fact should be disclosed together with the proportions of the items in the consolidated financial
statements to which the different accounting policies have been applied. Minority interests should be presented in the consolidated
balance sheet separately from liabilities and the equity of the parent’s shareholders. Minority interests in the income of the
group should also be separately presented.

Effects on EPS on dilution of equity
Earnings per share (EPS) reflect the amount earned by a shareholder by holding a share of the company. It is calculated as
follows:
Profit after Tax (PAT) / Weighted No. of equity shares
Weighted number of equity shares is the number of equity shares outstanding at the beginning of the period, adjusted by the
number of equity shares bought back or issued during the period multiplied by the time-weighting factor. The time-weighting
factor is the number of days for which the specific shares are outstanding as a proportion of the total number of days in the
period
EPS of a company is affected by 2 factors:
• Profits of the company and

• The equity capital base
As the equity capital base is widened the EPS of a company gets diluted. The equity capital base can be widened by the
following means:
• Bonus issue
• Rights issue
• Convertible debentures
• Warrants and
• Stock options
The effects of the above on the EPS are stated below:
Bonus issue: Bonus shares are issued to the shareholders of the company without any consideration. The shares are assumed
to have been issued on the first day of the year while calculating the weighted number of equity shares.
Rights issue: Rights issue is the additional shares offered to the existing shareholders at a discount to the market value of the
existing shares. There is some element of bonus given to the existing shareholders in the rights issue. The number of equity
shares to be used in calculating basic earnings per share for all periods prior to the rights issue is the number of equity shares
outstanding prior to the issue, multiplied by the following factor:
Fair value per share immediately prior to the exercise of rights
Theoretical ex-rights fair value per share
The theoretical ex-rights fair value per share is calculated by adding the aggregate fair value of the shares immediately prior to
the exercise of the rights to the proceeds from the exercise of the rights, and dividing by the number of shares outstanding after
the exercise of the rights.
Convertible debentures: While calculating the diluted EPS, where convertible debentures exist, the amount of interest paid or
payable on the debentures are added back to the profits in order to arrive at the profits while calculating the EPS. While
calculating the weighted number of equity shares, it is assumed that all convertible debentures are converted into equity
shares. The debentures shall be deemed to have been converted on the first day of the year or on date of issue of debentures,
if they have been issued during the year.
Stock options: Options and other share purchase arrangements are dilutive when they would result in the issue of equity
shares for less than fair value. The amount of the dilution is fair value less the issue price. Therefore, in order to calculate
diluted EPS, each such arrangement is treated as consisting of:

• a contract to issue a certain number of equity shares at their average fair value during the period. The shares to be so
issued are fairly priced and are assumed to be neither dilutive nor anti-dilutive. They are ignored in the computation of
diluted earning per share; and
• a contract to issue the remaining equity shares for no consideration. Such equity shares generate no proceeds and have
no effect on the net profit attributable to equity shares outstanding. Therefore, such shares are dilutive and are added to
the number of equity shares outstanding in the computation of diluted EPS.
Warrants: In case of share warrants issued, the weighted number of equity shares is to be calculated after converting the
warrants into equity shares. It is assumed that all the warrants are converted into equity shares. The warrants shall be deemed
to have been converted on the first day of the year or on date of issue of warrants, if they have been issued during the year.

What Impacts the

share price

High Promoters holding
One of the factors that may the affect the share prices is High promoter’s holding. A high promoter holding has its own advantages
and disadvantages. A company having a high promoter holding sees a less liquidity (volumes) as compared to a low promoter
holding company. For e.g. Godrej Consumer Products Ltd. has a promoter holding of 68%, the average volumes (Half Yearly)
are 30025, while TISCO has a promoter holding of 26.3%, the average volumes (Half Yearly) are 3243649. Promoters having
high stake in the company can manipulate the stock prices, as they have a substantial base to play with it. Considering the
better side, high promoters holding shows, that the Promoters have good faith in performance of the company and are retaining
the stake. A company with high promoters holding and a good cash balance, an investor can expect a buy back at a decent
price.
35 180
GCPL TISCO
160
30
140
25
GCPL Vol (Lacs)
120
TISCO Vol (mn)

20 100
15 80
60
10
40
5
20
0 0
Jun-01
Aug-01
Oct-01
Dec-01
Feb-02
Apr-02
Jun-02
Aug-02
Oct-02
Dec-02
Feb-03
Apr-03
Jun-03
Aug-03
Oct-03
Dec-03
Feb-04
Apr-04
Jun-04
Aug-04
Oct-04
Dec-04
Month

Movement in Product and Raw Material Prices
The product and raw materials prices have a great impact on the operating as well as net levels. Product prices, directly impact
the top-line, while the raw material (major component of total expenditure) makes an impact on the operating levels.
Raw material prices impact
While doing the financials of the company, the operating margins play a very vital role. The operating margins determine the
efficiency of the company. The chart below shows the effect raw material as a component on the OPBIDT margins. During
March'95 the percentage of raw material to sales was at 54.31% and the margins were at around 16%. Going forward as the
percentage of raw material started rising the margins went in the opposite direction. During the period March'02 and March'03
as the percentage started declining the operating margins started rising.
61 17
Raw material, stores OPBDIT 16
59
15
RM (as %of sales)
57
14
55
OPBDIT
13
53
12
51
11
49 10
47 9
45 8
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Year
Product prices impact.
The rise in the product prices gives the boost to the top-line of the company. As the product price rises, the company is able to
get better realization. The following chart shows the effect of product prices (Aluminium prices at LME) and the share prices of
NALCO. (Main Product is Aluminium). From the period of Feb'03 the NALCO prices are almost following the Aluminium price.
1,900 260
Aluminium Prices Rs(LME)
1,800 Aluminium Prices (LME) Nalco

210
1,700
NALCO PriceRs
1,600 160
1,500
1,400 110
1,300
60
1,200
1,100 10
Jan-01
Jul-01
Oct-01
Jan-02
Jul-02
Oct-02
Jan-03
Jul-03
Oct-03
Jan-04
Jul-04
Oct-04
Jan-05
Apr-01
Apr-02
Apr-03
Apr-04
Year& Month

WHAT IMPACTS THE SHARE PRICES
The stock prices of the companies are triggered by some events during the year. The events that trigger the stock prices are:
• Budget
• 2 Credit policies
• Monsoons
• 4 Quarterly results
Budget: The annual budget for the year is announced by

the end February every year. The budget spells out different
policies which impacts various sectors and the companies
in it. A favourable policy would see a positive impact on the
stock prices and vice versa. The Finance Act 2004,
announced in July has spelt out favourable policies for the
banking sector like amendments to the Securitisation Act,
various infrastructure projects, etc. which has seen the
banking sector touching the sky.
Credit Policies: The credit policies are announced twice

during the year i.e. in April and in October. Again the nature
of policies would determine its impact on the stock prices. A
favourable policy would see a positive impact on the stock
prices and vice versa. Eg. Credit policy 2004-05 declared
that banks may waive margin/security requirements for agricultural loans up to Rs 50,000 and in case of agri-business and
agri-clinics for loans up to Rs 5 lakh. This acts as a positive trigger for the banks and is reflected in the share prices.
Monsoons: The monsoons play a very important role in the

stock markets. The performance of quite a few sectors like
fertilizers, tractors, etc is dependent on the monsoons. A
monsoon failure brings along with it a bad performance of
the sectors directly related to it and also affects the economic
growth of the country.
4 Quarterly Results: SEBI requires all the listed companies

to conduct a limited review of its quarterly accounts and report
the results to Stock Exchange. This requirement is spelled
out in clause 49 of the listing agreement with the stock
exchange. The performance of the company during the
quarter lays the path for the movement in stock price. The
company showing good results sees an uptrend in its price
and a bad result sees a downward movement in its price. The following chart shows the price movements of Jammu & Kashmir
Bank after its half yearly results were declared.
The downfall in the price from November 18, 2004 to November 22, 2004 was due to the bad half yearly results declared by the
bank.

Back page of the report

Checklist for doing Equity Research

Yes No
1. Industry Dynamics
Demand Scenario
Supply Scenario
Product Price Movements
Raw Material Price Movements
2. International Scenario
Demand for the product
Supply for the product
International price movements
International events affecting the domestic industry
3. Regulatory Environment
Regulation of product prices
Regulation of raw material prices
Reservation for a specific sector
Levy sales for a specific industry
Export Incentives
Export and import restrictions
Various policies affecting the sector
4. Tax Structure
Excise Duty on FG and Raw Materials
Custom Duty on FG and Raw Materials
Tax rates on Corporate income
Deferred Tax
Dividend Tax
5. Company Dynamics
Capacity Utilisation
Capacity Expansion
Product Lines
Market share
Sales potential for the product
Product price movement
Raw Material availability
Raw Material price movements
Forward Integration of the company
Backward Integration of the company
Tie ups / Joint Ventures with other companies for Technical collaboration
Exposure to foreign currency and the impact of foreign currency fluctuation
Other cost like employee cost, power & fuel, other exp and depreciation
Other Income
Capital Structure
Equity dilution through
• Public offering
• Bonus Issue
• Conversion of Bonds
Debt Restructuring
Dividend track record

Yes No
6. Ratios
Per share Data
• EPS
• CEPS
• Book Value
• Dividend per share
• Free cash per share
Profitability ratios
• Operating margins
• Net Profit margins
Returns
• Return on equity
• Return on Capital Employed
• Return on Assets
• Dividend Yield
• Dividend Payout
Turnover ratios
• Inventory T/o
• Debtors T/o
• Creditors T/o
• Fixed asset T/o
• Capital T/o
Valuation ratios
• P/E
• P/Bv
• P/CEPS
• P/FCF
• EV/EBIDTA
• EV/Sales
Capital Structure ratios
• Debt Equity ratio
• Capital Gearing ratio
• Preference dividend Coverage ratio
• Interest coverage ratio
Banking ratios
• Net Interest margin
• Credit Deposit ratio
• Investment Deposit ratio
• Price / Adjusted Book Value
7. Other Factors
Mergers
Takeovers
Quarterly results
Events affecting the share price

How To Do Equity Research

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Angel Broking Limited How to do equity research

Much Beyond Broking India Research

How to do equity research 2

How to do equity research 3

How to do equity research 4

• In this report, we endeavor to put things together in perspective and look at

How to do equity research 5

Markets and Investing – Equities as an asset class!

Choosing Between short term losses and long term gains

How to do equity research 6

How to do equity research 7

Greed and Fear

How to do equity research 8

How to do equity research 9

Choosing Between short term losses and long term gains

How to do equity research 10

Growth Versus Value Investing

Investment Styles in Equities

Is Style a Key Determinant of Investment Returns?

How to do equity research 11

Differences in approaches – Growth Vs value

How to do equity research 12

Returns seen using both methods

Higher Returns with Less Risk?

Reversion to the Mean

How to do equity research 13

GDP (in bn) Sensex

How to do equity research 14

How to do equity research 15

Trading System in India

Computation of closing price of scrip’s in the Cash Segment.

Compulsory Rolling Settlement (CRS) Segment:

How to do equity research 16

Demat pay - in:

How to do equity research 17

Domestic Trading System

International Trading System

How to do equity research 18

Exchange Charge (per trade)

How to do equity research 19

Expansion of NYSE Direct+.

Time of Operations Functionality

Crossing Session I (Single Stocks)

Crossing Session II (Program Trades)

How to do equity research 20

Crossing Session III (Guaranteed Price Orders)

Crossing Session IV (VWAP Orders)

Anonymous Super Dot

How to do equity research 21

How to do equity research 22

How to do equity research 23

Things To Look In The Industry

How to do equity research 24

How to do equity research 25

How to do equity research 26

Auto & Auto Ancillary

Key Determinants of Automobile Sales Forecasting

Net Sales is forecasted by taking into account the following

The components of Expenditure

How to do equity research 27

Things To Look In The Industry

How to do equity research 28