Karvy Project

EXECUTIVE SUMMERY

The stock market in India before 1991 was controlled by the

Government with very little free play of demand and supply of

securities in the stock market. With the opening up of the economy

and financial de-regulation, the market has become volatile and the

behaviour pattern of the investors is also changing. Investments

scenario has changed over a period of time especially after the

liberalisation of finance sector in 1991.Government has introduced

several reforms in the capital market like screen based training, online

trading, demat trading, rolling settlements, de-mutualisation,

corporatisation of stock exchanges, book building mechanism. Etc.

In the year 2004 many changes have taken place in the stock

market. SEBI has been regulating the market but inspite of that their

have been scams of an uncontrollable dimension. In particular, in this

year due to elections and the out come results of election favouring

the opposition party (Congress) made many foreign investors to take

back there investments from the stock exchange has led to the

downswing of the stock market.

Although new developments have taken place in listing of

companies through debt securities and to protect the interests of the

investors, they are demanding more security and more services from

stock exchanges. To meet the requirement of investor services the

stock exchanges are arranging investors meet, training programmes

for investors, awareness campaigns and educating investors in

fundamental and technical analysis.

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The researcher has undertaken to study the services provided by

Karvy Consultancy. The present report focuses its attention on

fundamental analysis technical analysis and portfolio management

process for automobile sector.

In order to study the above information the researcher has

organized the present report as per the following:

Chapter 1: Focuses attention on introduction, industry profile and

company Profile of Karvy Consultancy, Shimoga.

Chapter 2: Focuses on design of study, scope and objectives of the

Study, methodology and limitations.

Chapter 3: concentrates on the methods and sources of data collection,

Sample design and tools and techniques of data

collection.

Chapter 4: Is concerned with the analysis and interpretation of data.

Chapter 5: Provides the summary of findings.

Chapter 6: Deals with the suggestions and conclusions for the benefits

of prospective Investors and market analysers.

Lastly, it includes the annexures containing the

questionnaire, appendix and bibliography.

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Introduction to Capital Market

Meaning and Scope of Capital Market

Capital is an important factor of production, necessary for

economic development. A market for raising funds for capital

formation and investment, which is referred to as capital Market, is

thus very vital for economic development of any Country. Investment

comes from savings and mobilization of savings is a major function of

the Capital Market.

Capital Market is a wide term used to comprise all operations in

the new issues and stock market. New issues made by the companies

constitute the primary market, while trading in the existing securities

relates to the secondary market. While we can only buy in the primary

market, we can buy and sell securities in the secondary market.

Capital Market thus provides funds from public who are savers

to investors. The surpluses of the household sector and foreign sector

are used to meet the deficits of the Government and business sectors,

who invest more than they save/ spend more than their income.

Besides the allocation of funds and the flow of funds from less

profitable to more profitable avenues and intermediation between

savers and investors are the functions of the capital market.

Lending and borrowing of these surpluses and deficits and bank

credit and the credit from financial institutions are all channelised

through the capital market. Banks, commercial and cooperative as

also all financial institutions intermediaries operating in the Capital

Market. This facilitates the project financing and growth of the

corporate sector on the one hand and there working in day-to-day

operations on the other.

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Hence the capital market is the market for financial assets that

have long or indefinite maturity. When a company wishes to raise

capital by issuing securities or other entity intends to raise funds

through units, debt instruments, bonds etc. it goes to the primary

market which is the segment of the capital market where issuers

exchange financial securities for long term funds. The primary market

facilitates the formation of capital.

There are 3 ways in which a company may raise capital in the

Primary market: public issue, rights issue and private placement.

Public issue, which involves sale of securities to members of the

public, is the most important mode of raising long term funds. Rights

issue is the method of raising further capital from existing share

holders by offering additional securities to them on a pre-emptive

basis. Private placements are a way of selling securities privately to a

small group of investors.

The secondary market in India, where outstanding securities are

traded, consists of the stock exchanges which are self-regulatory

bodies under the over all regulatory purview of the government /

SEBI. Recently, SEBI has proposed the trading in futures and options

[capital market derivatives].

The government has accorded powers to the SECURITIES

AND EXCHANGE BOARD OF INDIA [SEBI], as an autonomous

body, to oversee the functioning of the securities market and the

operations of intermediaries like mutual funds and merchant bankers,

underwriters, portfolio managers, debenture trustee, bankers to an

issue, registrars to an issue and share transfer agents, stock brokers,

sub-brokers, FIIs [FOREIGN INSTITUTIONAL INVESTORS]

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plantation companies schemes including rating agencies and also to

prohibit insider trading.

STRUCTURE OF THE MARKET

There are various sub-markets in the capital market in India.

The structure has undergone vast changes in recent years. New

instruments and new institutions have emerged on the scene.

The sub-markets are as follows:

1. Market for corporate securities-for new issues and old

securities.

2. Market for government securities.

3. Market for debt instruments-debentures and bonds of private

sector, bonds of public sector undertakings, public financial

institutions, etc.

4. Mutual fund schemes and UTI schemes, etc.

All these markets and sub-markets have both primary markets and

secondary markets. The first one is for raising funds directly from

the public and secondary market is for trading and imparting

liquidity to existing securities.

GENISIS OF THE INDIAN STOCK EXCHANGES

The origin of stock markets goes back to the time when

securities represented the property and promise to pay where first

issue had been transferable from one person to another.

The earliest recorded stock exchange market dealings in India

were transactions in loan stock exchanges of the East India

Company towards the end of 18th century. Wide range of bank and

cotton mills securities were being traded in Bombay and Calcutta

by 1830. The companies act 1850 introduced a new concept of

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limited liability with sole motive to stimulating activities in the

securities market.

The share mania of 1860-65 leads to great and sudden wealth in

Bombay. This was as a result of American civil war, which

stopped the supply of cotton to Europe and thus gave an

opportunity to India to supply cotton. Everyone became crazy with

the spirit of speculation. Man and women, master and servant,

employer and employee, rich and poor of all caste and creed,

officials and everyone were busy in the area of speculation of bits

of paper variously called as allotments, scripts and shares into gold

and silver. At the end of the war the boom collapsed, many

companies became insolvent. Buying of securities was no more.

During the boom of 1860-1900 brokers and bank managers were a

privileged and a respectable class and the police had only “salam”

for them. After the war, brokers were considered as a social

nuisance and were driven from post to pillar. They were shifted

from place to place. Lastly they found a place in a street called

dalal street where they transacted their business.

The first stock exchange in India was established in 1875 in

Bombay on 9th of July. After its establishment in Bombay, the first

stock brokers association or organisatioin called ‘The Native share

and stock brokers Association’ was formally established in 1875,

which later became the Bombay stock exchange. It can rightly be

proud of being the cradle of the oldest stock exchange in Asia. The

process of establishing stock exchanges gradually spread to other

cities of the country.

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The second stock exchange started in 1894 at Ahmedabad as

‘Ahmedabad shares and stock brokers association’ to facilitate

dealings in the shares of the textile mills. Now it is called

‘Ahmedabad stock exchange. In 1908, the Calcutta stock exchange

came into existence and business was conducted under the ‘Neem

Trees” in the open with the sole objectives to provide a market for

transaction in plantations and jute mills shares. Next in 1930 at

Madhya Pradesh, 1943 in Hyderabad and in 1957 at Bangalore etc.

as a result the securities contracted in the initial year. It was the

first Act to regulate the stock exchange in the country.

By 1939 speculation arose in the country and the number of

stock exchanges increased from seven to 24 in 1945. During the

world war the security market under went several prolonged

changes that were brought about by the growth in the

manufacturing activities. This lead to the development of

organized stock exchanges in major cities in the country.

In 1950, the constitution was proclaimed that the stock

exchange was placed under the regulation of the government,

under securities contract regulation Act 1956. Only recognized

stock exchanges were permitted to function. The Government took

the responsibility of supervising and controlling the stock markets.

The stock markets in India grew at a moderate base from 1956-

1980. During this period Foreign exchange regulation Act, was

enacted which effected the securities markets whereby

corporations with more than 40% foreign share holders were

required to dilute the foreign ownership. As a result corporations

offered equity to the Indian public.

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The decade of 1980’s, however saw the birth of a number of

new recognized stock exchanges in the country. In 1978 Cochin

stock exchange was stared, in 1982 Pune and U.P stock exchanges

were started. In 1983 at Ludhiana and Guwathi and in 1986 at

Mangalore, Jaipur and patina, stock exchanges were stared. In

1990 at vadodara, in 1991 Coimbatore and Bhopal, stock

exchanges were started. In 1992 the over the counter exchange of

India [OTCEI] and National stock exchange [NSE] were started.

The stock market activities in India were relatively on low key

till the beginning of the decade of 80’s mainly because of an alien

regime until 1947, which concentrated more on administration than

on development and also the public sector dominating the

economy in the independent India after 1947.

The process of liberalization and deregulation was set by the

government headed by the late Sri Rajiv Gandhi as the PM in Nov

1984 and later it was followed more vigorously by the next PM

Sri. P. V. Narasimha Rao and Dr. Man Mohan Singh as the

Finance Minister in July 1991. it was expected that about 25% of

the domestic savings would be invested in corporate securities and

mutual funds by the end of the current century. The Indian

economy had vision the eastern sky. The day was extremely

important from the Indian economy’s point of view as it witnessed

its country take altogether a different shape created and crafted out

finely and timely.

The bold step taken with lots of complexities by the finance

minister had hardly faced any loopholes in the industrial policy.

The reason was same unnecessary bureaucratic control and

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government intervention in certain core areas. The policy aimed to

shed the load of the public sectors, which have shown a very slow

rate of return and high rate of incoming losses over the years, all

these reforms have lead to a pace of growth almost unparalleled in

the history of any nation.

BOMBAY STOCK EXCHANGE AND ITS GROWTH

The stock exchange Mumbai, which was established in 1875 as

“The Native Share and Stock Brokers Association], has been evolved

over the years to its present status as the premium stock exchange of

the country. It may be noted that the stock exchange is the oldest one

in Asia, even older than the Tokyo stock Exchange, which was

founded in 1878.

The exchange while providing an efficient market also upholds

the interests of the investors and ensured redressal of their grievances,

whether against the companies or its own member brokers. It also

strives to educate and enlighten the investors by making available

necessary informative inputs.

A Governing body comprises nine of elected directors [1/3rd of

them retire every year by rotation], an executive director,

3 government nominees, a Reserve Bank of India nominee and 5

public representatives is the apex body which regulates the exchange

and decides its policies.

A President, vice president and an honorary treasurer are

annually elected from among the elected directors by the Governing

board following the election of directors.

The Executive director as the chief executive officer is

responsible for the day-to-day administration of the exchange.

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The exchange has obtained permission from the Security

Exchange Board of India (SEBI) for expansion of the BSE-On-Line-

Trading [BOLT] network to locations outside Mumbai. In terms of the

permissions granted by SEBI, the members of the exchange are free to

install their trading terminals at various places in the country.

The then Finance Minister, Government of India Shri. P.

Chidambaram on August 30, 1997 inaugurated the expansion of

BOLT network. The exchange has now expanded the BOLT network

to centers outside Mumbai and covers 255 centers having 883 VSAT

[Very Small Aperture Terminals] and1146 TWS [Trader Work

Station] as on March 31, 2000.

With the expansion of BOLT outside Mumbai, the average

daily turn over at the exchange has increased. From Rs 1284 crores in

2001-02 to Rs 2729 crores in 2002-03. In the year 2004-05 it was Rs.

1326.33 crores. The average daily traders, which were about 80000 in

2000-01, has increased to 1, 95,000 in 2002-03. In the year 2004 the

number of traders has reached 148,001.44.

Total No1.1 GROWTH OF BSE IN THE LAST 4 YEARS.

2001-02 2002-03 2003-04 2004-05Average daily turnover (Rs.Crores)

1284 2729 1916.45 1326.33

No. of traders (in 000’s)

60,727.47 1,95,000 1,32,799.73 1,48,011.44

Total turnover (Rs. Crores)

5,27,960.16 9,98,655.27 4,75,278.79 3,32,909.01

Source: WWW.BSE INDIACOM

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http://WWW.BSEINDIACOM/

NATIONAL STOCK EXCHANGE AND ITS GROWTH

The high powered study group on establishment of new stock

exchanges popularly known as Pherwani committee had in 1991

recommended the promotion of a new stock exchange at New

Bombay as a model stock exchange and to act as the National Stock

exchange.

In order to provide nationwide stock Exchange facilities to

investors, upgrading the facilities and to bring the Indian capital

market in line with the international markets in 1992, the National

stock Exchange was established. The exchange has two separate

segment viz., capital market segment and money market segment

would cover trading inequalities, convertible debentures, non-

convertible debentures etc… NSE provides access to investors form

all across the country on an equal footing and works as an integral

component of the National stock Market system.

The growths of business on NSE in the recent years have been

very impressive since the time when exchange started its operations

i.e., on November 3, 1994. Over the period, the average trading

volume has increased manifold.

The value of the traded scripts during the year 1999-2000 on

NSE was 8,39,052 crores [40% of the total turnover of all the stock

exchanges combined in India]. Compared to Rs 3, 69,052 [30.49% of

the total turnover of all the stock exchanges in India] on the country’s

premium bourse the Bombay stock exchange.

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Table 1.2: GROWTH RATE OF NSE IN THE LAST 6 YEARS

Market segment – Selected indicators.

Segment At the end of March 2002 2004-051999-2000 to

2004-05

No of members

No of securities available a

Market capitalization

Turnover (Rs.

Crore)

Market Share (%)

Annual Compound

growth rate (%)CM 928 890 636861 513167 57 40.3

WDM 88 1790 756794 947191 60b 107.5

F & O 484 2010 c - 101925 d 98 -

Total 936 e 4690 1393655 1562283 80 f 64.4

CM - Capital Market

WDM - Wholesale Debt Market.

F & O - Futures and Options

a – Excludes suspended securities.

b – Share in SGL

c – Includes 3 futures, 68 index options, 93 stock features and 1846 stock

option contracts.

d – Includes notional turnover [(strike price + premium)*quantity] in case

of index options and stock options.

e – Do not add up to total because of multiple memberships

f – Share in turnover of all exchanges.

The year 2004-05 witnessed a total turnover of Rs 15, 62,283 crores

a turnover of Rs 17, 70,457 crores in the previous year. The annual

compound growth rates of turnover on NSE over 6 years from 1999-2000

to 2004-05 have been 64.4%. The CM and F & O segments of NSE

accounted for 57% and 98% of total turnover in the country in equities and

derivatives, respectively, while WDM segment accounted for 60% of total

SGL turnover during 2004-05.

Source: www.NSC INDIA.COM

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http://www.NSCINDIA.COM/

Table no 1.3 showing Growth, Establishment and recognition of

stock exchanges.

Sl.No Name of Stock ExchangeYear of

EstablishmentRecognition

Date1 NSE 1992 NOV-1992

2 BSE 1875 31-08-1987

3 CALCUTTA 1908(INC.1923) 10-10-1957

4 DELHI 1947 09-10-1957

5 AHMEDABAD 1984 16-10-1957

6 UTTAR PRADESH 1982 03-06-1982

7 LUDIANA 1983 29-04-1983

8 PUNA 1982 02-09-1982

9 BANGALORE 1957 16-02-1963

10 HYDERABAD 1943 02-09-1958

11INTER CONNECTED STOCK

EXCHANGE1999 1999

12 COCHIN 1978 10-05-1979

13 OTCEI 1989 AUG-1989

14 MADRAS 1908 15-10-1975

15 MADHYA PRADESH 1930 04-12-1958

16 VADODARA 1990 05-11-1990

17 GAUHATI 1984 01-05-1984

18 BHUBANESHWAR 1989 05-06-1989

19 COIMBATORE 1991 18-09-1991

20 MAGADH 1986 11-12-1986

21 JAIPUR 1983-84 09-11-1989

22 MANGALORE 1984 09-09-1985

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Karvy stock Broking Limited-Profile

Origin, History and Growth

In 1982, a group of Hyderabad based practicing Charted

Accountants started Karvy consultations Limited. With a capital of Rs

150,000 offering auditing taxation services initially, later it forayed

into the registrar and share transfer activities and subsequently into

financial serves. All along Karvy’s strong work ethics and

professional background leveraged with information technology

enabled it to deliver quality services to the individual.

A decade of commitment, professional integrity and vision

helped Karvy to achieve a leadership position in its field when it

handled in the history of the Indian stock Market in a year Karvy

made in roads into a host of capital market services, corporate and

retail which proved to be a sound business synergy.

Today, Karvy has access to millions of Indian share holders,

besides companies, banks, financial institutions and regular agencies.

Over the past one and half decades Karvy has evolved as a veritable

link between industry, finance and people. In Jan 98 Karvy became

the first depository participant in Andhra Pradesh. An ISO9002

company certified Karvy because of its commitment to quality and

retail reach has made it an integrated service company.

Group Companies:

Karvy Consultants Limited:

Deals in registrar and demat.

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Karvy Securities Limited:

Deals in distribution of various investments products viz. mutual fund,

bonds, debentures, Fixed Deposits, Insurance policies for the investor.

Karvy Investor’s Service Limited.

Deals in issue management, investment banking.

Karvy Stock Broking Limited

Deals in buying and selling equity shares and debentures on the

NSE, the Hyderabad Stock Replace [HSE]. Over The Counter

Exchange of India and BSE

Alliance:

Karvy has a strategic alliance with Jardine Flaming India

Securities Limited [JFISC], one of the Asia’s most prestigious

investment bankers. Hence, Karvy leverage on the letter’s investment

banking expertise. This would provide the Indian investor access to

the best global and locals insights on financial markets.

Jardine is a respected investment bankers with a demonstrated

track record of delivering value to its clients spread over 43 countries.

It is ranked amongst the world’s top three FII’s.

Quality Policy

To achieve and retain leadership, Karvy still aim for complete

customer’s satisfaction, by combining its human and technology

resources to provide superior quality financial services. In the process,

Karvy will strive to exceed customer’s expectation.

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Quality Objectives

As per the quality policy, Karvy will

Build in house processes that will ensure transparent and

harmonious relationship with its client and investors to

provide high quality services.

Establish a partner’s relationship with its investor services

agents and vendors that will help in keeping up its

commitments to the customers.

Provide high quality of work life for all its employees and

equip them with adequate knowledge and skills to respond

to customer needs.

Continue to uphold the values of honesty, integrity and

strive to establish unparalleled standards in business ethics.

Use state of the art information technology in developing

new and innovative financial products and services to meet

the changing needs of investors and client.

Strive to keep all stake holders [share holders, client,

investors, employees, supplier and regulatory authorities]

proud and satisfied.

Strive to be reliable source of value added financial

products, services and constantly guide the individuals and

institutions in making a judicious choice of the scheme.

Achievements:

Largest mobiles of funds as per prime database.

First ISO-9002 certified register in India.

A category – I register to public issues.

Ranked as “the most admired register” by MARG.

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Handled the largest every public issues as IDBI.

Strategic tie up with Jardine Flaming India service limited.

Handled over 500 public issues as registrars.

Handled the Reliance accounts for nearly 10 million account

holders.

First depository participant from AP.

Karvy stock Broking Limited, Shimoga Branch.

Karvy stock Broking limited, Shimoga branch was setup on 24

April 2000. Till now it has been rendering on excellent service to

public at large.

From the date of its establishment till 2005 it has made 5000

investors, holding 2000 trading accounts and 3000 DMAT accounts.

Moreover, it has achieved a turnover around 3 crore, including retail

and High Net-worth Individuals [HNIs].

Working Procedure

First of all a Demat account has to be opened by the customer.

Secondly he has to open trading account for purchase/sale of

securities in the stock market.

Weakly share market carries on work from Monday to Friday

daily from 9.55am to 3.30pm, where purchase and sale of

transactions takes place.

After the end of days transaction the customer must issue carry

over cheque to retain and to hold those securities in the future

and its value will be credited in Demat account of the

customers.

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After the issue of cheque they would be issued a buying

contract note from the Karvy.

A margin at 10% on purchase/sale on cost has to be maintained

on each and every security.

Finally, the settlements are done on T+2 settlement basis on the

sale of the securities.

Finally, chances of grievances are very low as the transactions are

made after giving each and every information to the customers.

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INVESTMENT

Investment is the sacrifice of certain present value for the

uncertain future reward. Such decision – making has not only to be

continuous but rational too. Broadly speaking, an investment decision

is a trade off between risk and return.

Investment choices or decisions are found to be the outcome of

3 different but related classes of factors.

1. The first may be described as factual or informational premises.

2. The second class of factors is expectational premises.

3. The third and final class of factors may be valuational premises.

Investing has been an activity confined to the rich and business

class in the past. But, today we find that investment has become a

house hold word and is very popular with people from all walks of

life. Increasing popularity of investment can be attributed to the

following factors:

1. Increasing in working population, larger family incomes and

consequent higher savings.

2. Previsions of tax incentives in respect of investment in

specified channels.

3. Increase in tendency of people to hedge against inflation.

4. Availability of large and attractive investment alternatives.

5. Increase in investment related publicity.

6. Availability of investments to provide income and capital

gains etc.

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THE INVESTMENT PROCESS

The investment process describes how an investor should go

about making decisions about marketable securities in which to invest,

how extensive the investment should be and when the investment

should be made.

The 5 steps procedure for making these decisions forms the

basis of the investment process.

Set investment policy.

Perform Security analysis.

Construct a portfolio.

Revise the portfolio.

Revise the Portfolio.

Evaluate the performance of the portfolio.

All investment are risky, as the investor parts with his money.

An efficient investor with proper training can reduce the risk and

maximize the returns. He can avoid pit falls and protect his interests.

The management of risk and return requires expertise. Investment is

both an art and a science. Investment in financial market is not a

gamble or speculation that some investors indulge in and it is highly

risky. Investors should be those who invest with the objective of

receiving some income, share in the prosperity of the company and

gain capital appreciation in a longer time span.

Investing in stock market is always interesting. Challenging and

rewarding. Interesting because the stock market is dynamic; there is

never a dull movement. Challenging because its uncertain; the only

certainty is uncertainty. Rewarding because it is risky and is likely to

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yield high returns. Risk and reward go together. Stock markets are

dynamic, volatile and unpredictable.

OBJECTIVES OF THE STUDY

To study the share price movement of automobile companies.

To study the relative movements of the share prices with NSE

NIFTY index.

To find out the average returns and standard deviation for

automobile shares.

To calculate beta for automobile shares.

To find out the co-efficient of correlation between the NSE NIFTY

index and individual automobile shares.

To find out the co-efficient of correlation between different

automobile shares.

To find out the diversifying investment opportunities by reducing

the risk.

Methodology

1. Computation of rate of return for automobile share. The rate of

return for automobile stocks is calculated using weekly closing

share price of each company.

Y = Rt = Closing price – opening price x 100 Opening price

Rt is rate of return on common stock for time’t’.

2. Computation of rate of return for NSE NIFTY index. The rate of

return for NSE NIFTY index is calculated using weekly closing

index price.

X = Rxt = Closing price – opening price x 100

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Opening price

Rxt is rate of return on index stock for time’t’.

3. Computation of Beta.

= N R xRy – R x. R y

NRx2 – (Rx)2

Where, Rx = Market returns

Ry = Individual Stock returns.

N = Number of pairs of observations.

4. Computation of co-efficient of correlation. Co-efficient of

correlation is a statistical technique, which measure the

degree or extent to which two/more variables fluctuate with

reference to one another. It is calculated using the following

formula.

r = N R xRy – R x . R y NRx

2 – (Rx) 2. NRy2 – (Ry) 2

Where, r = Co-efficient of correlation between x & y,

Rx = Returns on index,

Ry = Returns on automobile company.

N = Number of pairs of observations.

5. Usage of MS-Office programs for calculating average

returns, standard deviation, Beta values and correlate

companies securities with market index as well as security

returns.

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Limitations

A good number of explanatory variables must be taken in to

consideration in order to assess the share price movement. But

due to time constraints detailed analysis of each company were

not made.

The information regarding the company’s, which were

considered for the analysis, not uniform in nature. That is,

number of observations differs from one/two company’s to

other company’s.

Generalization of findings and conclusions of the study are

likely to be disputed as security prices are determined by so

many factors. However, the findings and conclusions drawn

upon the primary and secondary data collected are expected to

throw some light on volatility of share prices.

This is a one time study.

This being an academic study suffers from time and cost

constraints.

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Primary data

The primary data for the study was collected from Karvy Stock

Exchange database (Shimoga) and survey.

Secondary data

The secondary data for the study was collected from the

relevant journals, newspapers and text books.

Sample design

The survey was focused on 8 automobile companies along with

S&P Cnx Nifty index. The data is collected for the following

companies.

Ashok Leyland

Bajaj Auto

Hero Honda

Hindustan Motors

Mahindra and Mahindra

LML

TATA Motors

TVS Motors

The share price data of the above company’s along with S & P

Cnx Nifty was collected from Karvy Stock exchange databank 1st

April 2000 to 31st March 2005.

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TOOLS AND TECHNIQUES OF DATA COLLECTION.

Information used for the study.

The statistical measures are calculated using the data of

5 years. The weekly closing share prices of each company to be

collected for the above period. The weekly NSE NIFTY indexes

for the above period have been used as the market index.

Usage of MS-Office programs for calculating average

returns, standard deviations, Beta values and correlate company’s

securities with market index as well as security returns.

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Analysis

If you have more money than you need for current

consumption, you are a potential investor. You may deposit your

surplus in a bank account to earn a fixed rate of interest or purchase a

speculative share on the stock market or buy gold or invest in some

other form. What every decision, you are essentially making a

sacrifice at present with the hope of deriving benefits in future. Your

economic well being in the long sun depends significantly on how

wisely or foolishly you invest.

Investing in stock market is an activity that fascinates people

from all walks of life regardless of their occupation, economic status,

education, family background etc. very few of them, however,

succeed in turning this into a profitable venture because majority of

investors do not evolve their portfolio scientifically.

The following study will show an investor can reduce expected

risk through diversification, why this risk reduction results from

“proper” diversification and how the investor may estimate the

expected return and expected risk level of a given portfolio of assets.

Security Analysis

“The entire process of estimating return and risk for individual

securities is known as “security analysis”.

Security analysis takes three forms:

1. Fundamental Analysis.

2. Technical Analysis.

3. Efficient capital market theory.

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Fundamental Analysis

The objective of fundamental analysis is to appraise the

‘intrinsic value’ of the security. The intrinsic value is the true

economic worth of a financial asset. Fundamental analysis involves an

in depth analysis of the earnings of the company whose security is

being evaluated, its management, the economic outlook the forms

competitors, the market conditions and other factors which are likely

to influence the earning capacity of the company.

Relying upon this reasoning, the fundamentalists attempts the

real worth of a security by considering the earning potential of a firm

which in turn will depend on investment environmental factors such

as state and growth of national economy, monetary policies of the

Reserve Bank of India, corporate laws, social and political

environment and the factor relating to the specific industry such as

state of product and the growth potential of the industry.

Fundamental analysis involves establishment of the relationship

between various economy, industry and company variables.

Economic Analysis

An investor would like to be rational in his investment activity

and evaluate a lot of information about the past performance and the

expected future performance of company’s, industries and the

economy as a whole before taking investment decision.

Under the aegis of Dr. Man Mohan Singh as finance minister,

India began its transaction from state dominated, licence – intensive,

foreign investment hostile country to a market oriented, competition

promoting and internationally responsive economy.

27

After liberalization, India has seen many changes in terms of its

social environment, economic environment, corporate sector, etc., the

entry of MNC’s gave corporate sector a new look.

The GDP is expected to grow at 6% in the year 2006. The

industry and service sector is contributing largely to the economy. The

Manufacturing sector in India is picking up year after year. After

liberalization many India company’s have entered global markets. The

automobile industry has entered African continent. The present trend

of economy is showing good signs of growth.

The economic analysis involves the study of various economic

indicators such as :

Gross national product.

Employment level.

Personal income and personal disposable income.

Balance of payment position.

Inflation.

Government deficits.

Inflation and aggregate corporate growth and profits.

Government policies on economic growth and their impact on

economic development.

International economic trends and their impact on the Indian

economy.

Industry Analysis

The Indian automobile industry has a total sales of over Rs

20,000 crores, with more than 400 players who have together invested

Rs 11,500 crores, offering direct employment to over 2.5 lakh people.

It caters to the transport sector and is the backbone of the economy.

28

To put the industry’s current scenario in perspective let us re-

examine how it evolved over the years. Till the onset of liberalization

in the early 1990’s, the automobile industry was less complicated in

terms of models and technology. There was no incentive either to

invest in research and development [R & D] or in product

development.

The opening up of the economy in 1991 transformed the

scenario entirely. There was a sudden influx of foreign models in cars

and bikes as the country jumped from the technology of the 1950’s, as

represented by the Ambassador, to the latest from the who’s who of

the global auto industry. The domination of a few players in the early

1990’s has done a complete turn around into a mature market with

increased customer choice, large number of manufacturers catering to

different customer segments, lower vehicle or model life, and

increasing demand and production of vehicles. The auto sector

comprises a wide range of vehicles:

Medium and heavy commercial vehicles.

Light commercial vehicles.

Passenger cars.

Multi-utility vehicles.

Two wheelers [Scooters, Mopeds, Motorcycles].

Three wheelers.

29

The key players are:

* Ashok Leyland * Bajaj Auto

* Daewoo Motors * Eicher Motors

* Hyundai India Auto Ltd * General Motors

* Hero Honda * Hindustan Motors.

* Honda Motors * Ford

* Kinetic Motors * LML

* Mahindra and Mahindra * MUL

* Royal Enfield * Skoda

* Swaraj Mazda Limited * Volva

* TVS Motors

An analysis of the industrial sector in which the company

operated and its projected growth vis-à-vis other industry is made.

Industry’s vulnerability to the business cycle.

Policy of the Government.

Export potential of the industry.

Pricing and production control.

Infrastructure.

The implication of labour relations.

Trends in the International Market.

Prospective technology change.

The life cycles.

Economic phase of industry.

These are the few aspects, which are analysed while conducting

the industry analysis. The figure for the entire year 2004-2005 shows

encouraging results for all segments of the automobile industry.

30

Mr. Seshasayee, president, SIAM and managing Director,

Ashok Leyland limited, said that the year gone by has been quite

eventful for the vehicle manufacturers. New vehicles indigenously

developed by home grown vehicle manufacturers had generated a lot

of excitement and have created strong and healthy competition. In the

process the confidence gained by them promises introduction of more

such launches during the year 2004-05. This would prompt a lot of

activities in R&D, Designing and styling. During the year 2004-05 the

automobile industry has registered a growth of around 15% in number

and 14% in value terms. The union government has also pitched in

with positive changes in the budge proposals for the year 2005-06.

Table No 4.1:

The Market share of wide range of vehicles in auto sector in

2004-05.

Market share 2004-05

CVs 3%Passenger Vehicles 12%

Two Wheelers 81%Three Wheelers 4%

Graph no 4.01 Market share of vehicles in auto sector in 2004-05

3% 12%

81%

4%

0%

20%

40%

60%

80%

100%

Market share Percentage

CVs PassengerVehicles

Two Wheelers Three Wheelers

Vehicles

Market Share 2004-05

Series1

31

Table No 4.2

The Gross turn over of the automobile industry in 2004-05.

YearRs

[in Million]1999-00 313580

2000-01 364450

2001-02 365411

2002-03 368262

2003-04 422933

2004-05 492024

Graph No 4.2

The Gross turn over of the automobile industry in 2004-05.

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

years

Gross turnover of automobile industry

Rs [in Million]

32

Table no: 4.3 The domestic sales of the automobile industry in 2004-05

Catogory 2000-01 2001-02 2002-03 2003-04 2004-05M & HCVs 79124 106106 82071 89999 116167LCVs 50698 55301 54602 56672 75034Total CVs 129822 161407 136673 146671 191201Passenger Cars 384483 615544 567734 509088 541738UVs 109089 118274 122831 104253 114316MPVs - - - 61775 52024Total Passenger Vehicles

493565 733818 690565 675116 708078

Total 4 Wheelers 623387 895225 827238 821787 899279Scooters 1297115 1233781 876252 908268 835508Motor cycle 1360196 1761439 2114693 2887194 3705893Mopeds 646114 698321 643461 408263 332588Total Two Wheelers

3303425 3693541 3634406 4203725 4873989

Three Wheelers 189082 186850 181899 200276 226052Grand Total 4115894 4775616 4643543 5225788 5999320

Graph no: 4.3 The domestic sales of automobile industry

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

Vehic

le Sold

2000-01 2001-02 2002-03 2003-04 2004-05

Years

Domastic Sales of Automobile Industry

Total 4 Wheelers

Total Two Wheelers

Three Wheelers

33

Table no: 4.4 The export sales of the automobile industry in 2004-05

Catogory 2000-01 2001-02 2002-03 2003-04 2004-05M & HCVs 4544 5089 5517 4824 4804LCVs 5564 4823 8262 7046 5900Total CVs 10108 9912 13779 11870 10704Passenger Cars 25468 23271 22913 49273 69977UVs 2654 5148 4122 3077 1106MPVs - - - 815 570Total Passenger Vehicles

28122 28419 27035 53165 71653

Total 4 Wheelers

38230 38331 40814 63035 82357

Scooters 28753 20188 25625 28332 30116Motor cycle 35461 35295 41339 56880 126122Mopeds 35788 27754 44174 18971 23330Total Two Wheelers

100002 83237 111138 104183 179568

Three Wheelers 21138 18388 16263 15462 43443Grand Total 159370 139956 168215 184680 305368

Graph no: 4.4

The export sales of automobile industry

020000400006000080000

100000120000140000160000180000

Vehi

cles

sol

d

2000-01 2001-02 2002-03 2003-04 2004-05

Years

Export Sales of Automobile Industry

Three Wheelers

Total Tw o Wheelers

Total 4 Wheelers

Company Analysis

34

The company analysis involves the consideration of the

following major factors in appraising the value of a share.

Accounting Practices

A company balance sheet and income statement are not taken

by the security analyst at face value. Interpretation of reported figures

is an essential past of analysis because analysis of the accounting

practices adopted by different units in the industry facilitates proper

comparison of the working and financial health of two or more units

in the same industry.

Capital Structure

Study of the capital structure of a company reveals the status of

long terms liabilities of a company towards repayment of long term

loans, larger bank loans or short term loans undermine the position of

a company’s security, if there is any question on the ability of the

enterprise to pay such obligations as they fall due.

Dividend Prospects and the retention policy

Price earning ratio is affected by the amount to be paid in the

shape of dividend. This payment of dividend enhances “the growth

image” of the company and creates investor confidence and interest in

the company. The retention policy is greatly affected by investment

avenues available to a company. Other than this company may, as a

matter of policy follow a conservative dividend payment policy.

Cash Flows

It may be required for the purposes of acquisition of new

productive assets, to reply debts and other corporate expenses etc.,

which affects capital earnings.

Working capital position

35

Strong working capital position gives assurance that the

company shall maintain the dividend status despite fall in earning

temporarily weak working capital funds and hence due to the funds

constraints, dividends to the share holders nay not be forth coming.

Block up of funds in inventory, high receivables or high liability all

indicate weak working capital status of the company.

Prospective earning [profitability]

Sales prospects, selling price and costs are the main

considerations that give a clue about the future growth of the company

and its competitive strength in the market.

There are also certain other factors which are considered while

understanding company analysis are:

Company market value.

Its cost structure and break even analysis.

Turn over of assets.

Capacity utilization.

Product lines of the company.

Attitude of the government towards the company.

Quality of management and assets.

Technological superiority over other companies.

36

Table no: 4.5 Showing the prospective earnings of

ASHOK LEYLAND

YEAR 2004-05 2003-04 2002-03

Debt-equity ratio 0.83 0.84 0.84Long term debt equity ratio

0.67 0.65 0.66

Current ratio 1.59 1.82 2.2

TURNOVER RATIOSFixed assets 1.81 1.69 1.79Inventory 6.22 4.85 5.47Debtors 6.18 4.65 3.75Interest cover ratio

2.78 2.15 1.77

PBITDTM (%) 11.8 12.71 12.08PBITM (%) 8.5 9.18 8.77PBDTM (%) 8.75 8.44 7.13CPM (%) 7.14 6.96 6.74APATM (%) 3.85 3.42 3.43ROCE (%) 14.99 12.47 11.29RONW (%) 12.37 8.53 8.1

It is observed from the table that the Ashok Leyland company’s

current ratio has declined from 2.2 to 1.59 from 2002-03 to

2004-05.This shows that it is not having the sufficient liquidity

position.

It is also observed that inventories and debtors turnover ratio

has increased for the same period. This has increased the interest

coverage ratio.

37

Table no: 4.6 Showing the prospective earnings of BAJAJ AUTO LTD

YEAR 2004-05 2003-04 2002-03Debt-equity ratio 0.24 0.21 0.17Long term debt equity ratio

0.23 0.19 0.15


TURNOVER RATIOSFixed assets 1.85 1.66 1.6Inventory 24.67 19.17 13.98Debtors 26.15 26.01 23.48Interest cover ratio 704.8 176.39 45.97PBITDTM (%) 20.12 18.71 14.37PBITM (%) 16.53 14.38 9.44PBDTM (%) 20.09 18.63 14.16CPM (%) 14.86 14.9 13.31APATM (%) 11.28 10.57 8.39ROCE (%) 20.91 18.03 9.94RONW (%) 17.63 15.93 10.33

It is observed from the table that the BAJAJ company’s current

ratio has declined from 1.32 to 1.02 from 2002-03 to 2004-05.This

shows that it is not having the sufficient liquidity position.



coverage ratio.

38


HERO HONDA

YEAR 2004-05 2003-04 2002-03Debt-equity ratio 0.16 0.14 0.11Long term debt equity ratio 0.16 0.14 0.11Current ratio 0.47 0.65 0.86

TURNOVER RATIOS

Fixed assets 6.92 6.77 5.68Inventory 26.9 23.7 17.23Debtors 42.3 62.89 85.15Interest cover ratio 512.31 460.85 149.99PBITDTM (%) 18.51 16.73 13.36PBITM (%) 17.37 15.58 11.97PBDTM (%) 18.47 16.69 13.28CPM (%) 12.52 11.51 9.18APATM (%) 11.38 10.37 7.79ROCE (%) 99.82 94.84 64.86RONW (%) 75.09 70.41 45.82

It is observed from the table that the HERO HONDA

company’s current ratio has declined from 0.86to 0.47 from 2002-03

to 2004-05.This shows that it is not having the sufficient liquidity

position. It is also seen the profits and returns have increased in last

two years to a greater extent compared to 2001.



coverage ratio.

39

Table no: 4.8 Showing the prospective earnings of HINDUSTAN MOTORS


TURNOVER RATIOSFixed assets 1.48 1.69 2.23Inventory 5.65 6.37 6.13Debtors 7.85 6.82 7.85Interest cover ratio 0.26 0.11 -0.19PBITDTM (%) 5.21 3.9 1.56PBITM (%) 1.33 0.53 -1.12PBDTM (%) 0.1 -1.12 -4.38CPM (%) 1.39 0.56 -4.38APATM (%) -2.49 -2.81 -7.07ROCE (%) 0 0 -2.78RONW (%) 0 0 -61.22

It is observed from the table that the HINDUSTAN MOTORS

company’s current ratio has declined from 1.18 to 1.15 from 2002-03


position. .



coverage ratio.

40


LML MOTORS


TURNOVER RATIOS

Fixed assets 1.18 1.46 1.87Inventory 3.66 4.41 5.78Debtors 17.53 17.27 13.77Interest cover ratio -0.56 -0.15 1.26PBITDTM (%) -0.27 2.82 7.74PBITM (%) -4.59 -0.83 4.61PBDTM (%) -8.4 -2.9 4.09CPM (%) -3.91 -2.9 3.98APATM (%) -8.23 -6.57 0.85ROCE (%) 0 -1.58 9.47RONW (%) 0 -27.98 4.29

It is observed from the table that the LML MOTORS



position. It is also observed that there is no profits and returns for the

last two years. It shows that the company is incurring loss.

41


MAHINDRA & MAHINDRA LTD

YEAR 2004-05 2003-04 2002-03Debt-equity ratio 0.83 0.71 0.52

Long term debt equity ratio 0.77 0.59 0.43Current ratio 1.25 1.34 1.15

TURNOVER RATIOS

Fixed assets 2.01 1.97 2.36Inventory 9.71 7.7 8Debtors 7.72 6.15 7.82Interest cover ratio 2.18 1.84 2.14PBITDTM (%) 9.29 8.94 8.92PBITM (%) 5.61 5.4 5.64PBDTM (%) 6.72 6 6.28CPM (%) 5.92 6.53 6.1APATM (%) 2.24 2.99 2.82ROCE (%) 9.15 7.28 8.38RONW (%) 6.63 6.64 5.95

It is observed from the table that the MAHINDRA &

MAHINDRA LTD company’s current ratio has declined from 1.55 to

1.25 from 2002-03 to 2004-05.This shows that it is not having the

sufficient liquidity position.



coverage ratio.

42


TATA MOTORS

YEAR 2004-05 2003-04 2002-03

Debt-equity ratio 0.74 0.93 0.86Long term debt equity ratio

0.66 0.74 0.64


TURNOVER RATIOS

Fixed assets 1.84 1.52 1.43Inventory 9.95 8.29 7.56Debtors 12.33 11.24 9.77Interest cover ratio 2.65 0.85 -0.02PBITDTM (%) 11.04 8.14 4.27PBITM (%) 7.68 4.05 -0.11PBDTM (%) 8.15 3.35 -1.93CPM (%) 6.18 3.99 -1.93APATM (%) 2.81 -0.1 -6.31ROCE (%) 18.77 6.95 -0.16RONW (%) 11.86 -0.29 -14.28

It is observed from the table that the TATA MOTORS



position.



coverage ratio.

43

Table no: 4.12 Showing the prospective earnings of TVS MOTORS


TURNOVER RATIOSFixed assets 3 3.1 5.52Inventory 12.83 13.45 25.96Debtors 19.96 18.61 34.73Interest cover ratio 5.59 4.56 6.36PBITDTM (%) 7.75 8.15 13.23PBITM (%) 5.2 5.75 10.6PBDTM (%) 6.82 6.89 11.56CPM (%) 5.34 5.84 9.48APATM (%) 2.79 3.44 6.85ROCE (%) 18.59 18.75 62.08RONW (%) 15.84 18.63 66.98

It is observed from the table that the TVS MOTORS company’s

current ratio has declined from 1.46 to 1.18 from 2002-03 to 2004-

05.This shows that it is not having the sufficient liquidity position.



coverage ratio.

44

Technical Analysis

The technical analysis believe that the prices of stock depends

on supply and demand in the market place and has little relationship to

value, if any such concept even exists. Price is governed by basic

economic and psychological inputs so numerous and complex that no

individual can hope to understand and measure them correctly. All

financial data and market information of a given security already

reflected in the market price of a security. There fore an attempt is

made through charts to identify price movement patterns, which

predict future movements of the security.

The Dow Theory is one of the oldest technical methods still

widely followed. There are many version of this theory, but

essentially it consists of three types of market movements: the Major

market trend, which can often last a year or more; a secondary

intermediate trend, which can move against the primary trend for one

or several months; and minor movements lasting only for hours to a

few days.

The Dow Theory is built upon the assertion that measures of

stock prices trend to move together. If the Dow Jones industrial

average is rising, then, the transportation averages a strong bull

market. Conversely, a decline in both the industrial and transportation

averages are moving in opposite directions, the market is uncertain as

to the direction of future stock prices.

If one of the averages starts to decline after a period of rising

stock prices, then the two are at odds. The converse occurs when after

a period of falling security prices one of the averages starts to rise

while the other continue to fall. According to the Dow Theory, this

45

divergence suggests that this phase is over and that security prices in

general will soon start to rise.

If investors believe this theory, they will try to liquidate

when a sell signal becomes apparent, which in turn will drive down

prices. Buy signals have the opposite effect. Investors will try to

purchase securities, which will drive up their prices. Unfortunately, by

the time many investors perceive the signal and act, the price change

will have already occurred, and much of the potential profit from the

alternation in the portfolio will have evaporated.

There are several problems with the Dow Theory. The

first is that it is not a theory but an interpretation of known data. It

does not explain why the two averages should be able to forecast

future stock prices. In addition, there may be a considerable lag

between actual turning point and those indicated by the forecast. It

may be months before the two averages confirm each other, during

which time individual stocks may show substantial price changes.

The accuracy of the Dow Theory and its predictive power has

been the subject of much criticism. Between 1929 and 1960 the Dow

Theory made only 9 correct predictions out of 24 buy or sell signals.

The Dow Theory might work only when a long, wide, upward or

downward movement is registered in the market. It is mostly

unsuitable as a market predictor when the market unsuitable as a

market predictor when the market trend frequently reserves itself in

the short or intermediate term. Another major drawback is that the

theory does not attempt to explain a consistent pattern of the stock

price movements.

46

Efficient Capital Market Theory

Market efficiency implies that all known information is

immediately discounted by all investors and reflected in share prices

in the stock market. As such no one has an information edge. In the

ideal efficient market, everyone knows all possible - to – know

information simultaneously, interprets it similarly and behaves

rationally. But, human beings what they are, this of course rarely

happens.

James. H. Lorie explained what is meant by efficient

security market in these words “Efficiency in this context means the

ability of the capital markets to function so that prices of securities

react rapidly to new information. Such efficiency will produce prices

that are ‘appropriate’ in terms of current knowledge and investors will

be less likely to make unwise investments. A corollary is that

investors will also be less likely to discover great bargains and thereby

earn extra ordinary high rates of return”.

The requirements for a securities market to be efficient are:

1. Prices must be efficient so that new inventions and better

products will cause a firms security prices to rise and

motivate investors to supple capital to the firm [i.e., buy it

stock];

2. Information must be discussed freely and quickly across the

nations so all investors can react to new information;

3. Transactions costs such as sales commissions on securities

are ignored;

4. Taxes are assumed to have no noticeable effect on

investment policy;

47

5. Every investors is allowed to borrow or lend at the same

rate; and finally.

6. Investors must be rational and able to recognize efficient

assets and that they will want to invest money where it is

needed most [i.e., in the assets with relatively high returns].

Efficient market hypothesis can broadly be classified into

3 categories. They are

a. Weak form and the random walk

It holds that present stock market prices reflects all known

information with respect to past stock prices, trends and volumes.

Thus, it is asserted, such past data cannot be used to predict future

stock prices.

In other words, the stock prices approximate a random walk. As

time passes, prices wander or walk more or less randomly across the

charts. Since the walk is random, a knowledge of past price changes

does nothing to inform the analyst about whether the prices tomorrow,

next year will be higher or lower than today’s price.

According to Adam smith: “Prices have no memory, and

yesterday has nothing to do with tomorrow”. Thus, if the random walk

hypothesis is empherically confirmed, we may not assert that the

stock market is weak form efficient. In this case any work done by

chartists based on past patterns is worthless.

Thus reflecting the historical development, the weak form

implies that the knowledge of the past patterns of stock prices does

not aid investors to attain improved performance. Random walk

theorists view stock prices as moving randomly about a trend line,

which is based on anticipated earning power. Hence they consider that

48

1. Analysing past data does not permit the technician to forecast

the movement of price about the trend line and

2. New information affecting stock prices enters the market in

random fashion i.e., tomorrow’s news cannot be predicted nor

can future stock price movements be attributable to that news.

b. Semi – strong form

This form centers on how rapidly and efficiently market prices

adjust to new publicity available information. Research effort

on market efficiency has mainly turned to an examination of the

effect of the release of public information on share prices. The

studies of the semi – strong form of market efficiencies have

involved different methods that used to test week form of

efficiency. The tests have typically been based on the use of the

capital assets pricing model or variation of it.

The semi strong form of the efficient market hypothesis

maintains that as soon as information becomes publicly

available, it is absorbed and reflected in stock prices. So efforts

by analysts and investors to acquire and analyse public

information will not yield consistently superior returns to

analyst.

c. Strong form

The strong form of efficient market hypothesis maintains

that not only is publicly available information useless to the

investor or analyst but all information is useless specifically, no

information that is available, be it public or inside, can be used

to consistently earn superior investment returns.

49

This implies that not even securities analysts and

portfolio managers who have access to information more

quickly than the general investing public are able to use this

information to earn superior returns.

Portfolio Management

Portfolio Theory:

Portfolio management has assumed importance with the

increasing array of the instrument of finance, growing complexities of

the securities market and the volatility of the investment transaction.

Portfolio Management refers to managing efficiently the

investment in the securities by professionals for both small investors

and corporate investors who may not have the time and skills to arrive

at sound investment decisions.

A portfolio is a collection of securities. Since it is rarely

desirable to invest the entire funds of an individual or an institution in

a single security, it is essential that every security be viewed in a

portfolio context. Thus it seems logical that the expected return of a

portfolio should depend on the expected return of each of the security

in the portfolio. It also seems logical that the amounts invested in each

security should be important. Since portfolio expected return is a

weighted average of the expected returns of its securities, the

contribution of each security to the portfolio’s expected returns

depends on its expected returns and its proportionate share of the

initial portfolio’s market value.

The basic objectives of portfolio Management are:

Safely of fund or capital.

Minimum commitment and risk.

50

Reasonable return on investment or minimum appreciation.

Liquidity of portfolio.

Portfolio Investment Process

Since it is rarely desirable to invest the entire funds of an

individual or an institution in a single security, it is essential that

every security be viewed in a portfolio context. The basic problem of

portfolio management is to establish an investment goal or objective

and then decide how best to reach that goal with the securities

available.

Contain basic principles should be applied to all portfolio

decisions:

1. It is the portfolio that matters:

Individual securities are important only to the extent that they

affect the aggregate portfolio. All decisions should focus on the

impact the decision will have on the aggregate portfolio of all assets

held.

2. Larger expected returns come only with larger portfolio

risk:

The most important portfolio decision is the amount of risk,

which is acceptable, which is determined by the asset allocation

within the security portfolio.

3. The risk associated with a security type depends on when

the investment will be liquidation:

A person who plans to sell in one year will find equity returns to

be more risky than a person who plans to sell in 10 years.

Alternatively, the person who plans to sell in 10 years will find one

year maturity bonds to be more risky than the person who plans to sell

51

in one year. Risk is reduced by selecting securities with a payoff close

to when the portfolio is to be liquidated

4. Diversification works:

Diversification across various securities may reduced

portfolio’s risk. If such a broad diversification results in an expected

portfolio return or risk level, which is lower [or higher] than

described, then borrowing [or lending] can be used to achieve the

desired level.

5. Each portfolio should be tailored to the particular needs

of its owner:

People having varying tax rates, knowledge, and transaction

costs etc. portfolio strategy should be molded to the unique needs and

characteristics of the portfolio’s owner.

6. Competition for abnormal returns is extensive:

A large number of people are continuously using a large variety

of techniques in an attempt to obtain abnormal returns. If the actions

of these speculators are truly effective, security prices will adjust

instantaneously to new information.

The process used to manage a security portfolio is conceptually

the same as that used in any managerial decision. One should

1. Plan;

2. Implement the plan; and

3. Monitor the results.

The steps involved in the portfolio investment process are:

Planning

Investor Conditions.

Market conditions.

52

Investments or speculative policies.

Statement of investment policy.

Strategic asset allocation.

Implementation

Rebalance strategic asset allocation.

Tactical asset allocation.

Security selection.

Evaluate statement of investment policy.

Evaluate investment performance.

Diversification of Portfolio

One of the essential characteristics of a good portfolio is that it

should be well diversified. Investing all investor’s funds in just one or

two stocks may not be desirable because of the risks involved. It is

necessary to spread the investment over a few selected securities.

Following guidelines should be kept in mind:

“Don’t put all your eggs in one basket”. The risk in doing so

simply too high. Diversification of your portfolio is essential.

“Do not over diversify”, you do not gain much by having a

portfolio with more than ten to twenty different stocks, your

portfolio risk does not significantly come down by over

diversification.

Significance of Portfolio

Individual securities have risk return characteristics of their

own. Portfolio’s, which are combination of securities, may or may not

take on the aggregate characteristics of their individual parts.

Portfolio analysis considered the determination of future risk

and return in holding various blends of individual securities.

53

Traditional security analysis recognizes the key importance of risk

and return to the investor.

Risk is defined as the standard deviation around the expected

return. Effect we have to equate a security’s risk with variability of its

return. More dispersion of variability about a security’s expected

return meant the security will have riskier than one will less

dispersion.

As the securities carry differing degrees of expected risk leads

most of the investors to the notion of holding more than one security

at a time, in an attention to spread risks by not putting all their eggs

into one basket.

Diversification of one’s holding is intended to reduce risk in an

economy in which every asset returns are subject to some degree of

uncertainty. Even value of cash suffers from in roads of inflation.

Most investors hope that if they hold several assets, even if one

goes better the other will provide some protection from an extreme

loss.

Approaches of portfolio Diversification

Markowitz: Portfolio selection model

According to Dr.Harry. M. Markowitz, a portfolio is efficient

when it is expected to yield the highest return for the level of risk

accepted, or alternatively, the smallest portfolio risk for a specified

level of expected return. To build an efficient portfolio an expected

return level is chosen, and assets are substituted until the portfolio

combination with the smallest variance at the return level is found. As

this process is repeated for other expected returns, set of efficient

portfolio is generated.

54

Assumptions:

1. Investors consider each investment alternative as being

represented by a probability distribution of expected returns

over some holding period.

2. Investors Maximise on period expected utility and possess

utility curve, which demonstrates diminishing marginal

utility of wealth.

3. Individuals estimate risk on the basis of the variability of

expected returns.

4. Investors base decisions solely on expected return and

variance [or standard deviation] of returns only.

5. For a given risk level, investors prefer high returns to lower

returns.

Similarly, for a given level of expected return, investor prefer

less risk to more risk.

Under these assumptions, a single asset or portfolio of assets is

considered to be “efficient” if on other asset or portfolio of assets

offers higher expected return with the same [or lower] risk or lower

risk with the same[or higher] expected return.

Data needed for each stock

Under Markowitz’s system of portfolio analysis we need three

bits of information for each stock:

Expected return for the holding period.

Expected risk for the holding period.

Expected co-variance for each pair of stocks.

SHARPE: The Single index model

55

William. F. Sharpe published a model simplifying the

mathematical calculations required by the Markowitz model. Sharpe

assumed that, for the sake of simplicity, the return on a security could

be regarded as being linearly related to a single index like the market

index should consist of all securities trading on the market.

Acceptance of the idea of a market index, Sharpe argued, would

obviate the need for calculating thousands of con or variances

between individual securities, because any movement in securities

could be attributed to movements in the single underlying factor being

measured by the market index.

In his terms, it is possible to consider the return for each

security to be represented by the following equation.

Ri = i + i I + ei

Where,

Ri = Expected return on security ‘i’.

i = intercept of a straight line or alpha coefficient.

i = Slope of a straight line or Beta coefficient.

I = Expected return on index.

ei = error term with a mean of Zero and a standard

Deviation which is a constant.

Data needed for each stock

Expected return for the holding period.

Expected risk for the holding period.

Covariance estimates for each stock relative to the market

index.

In addition, in Sharpe’s model we need to estimate the return

and variance on the index for the holding period.

56

Capital Asset Pricing Model

Capital market theory is a major extension of the portfolio

theory of Markowitz. Portfolio theory is really a description of how

rational investors should build efficient portfolios. Capital market

theory tells us how assets should be priced in the capital market.

The specific assumptions underlying capital market theory are:

1. Investors make decisions based solely upon risk and return

assessments, i.e., expected returns and standard deviation

measures.

2. The purchase or sale of a security can be undertaken in

infinitely divisible units.

3. Investors can short sell any amount of shares with out limit.

4. Purchases and sales by a single investor can’t affect prices. This

means that there is perfect competition.

5. There are no transaction costs.

6. The purchase or sale of securities is done in the absence of

personal income taxes.

7. The investors can barrow or lend any amount of funds desired

at an identical risk less rate.

8. Investors share identical expectations with regard to the

relevant decision period, the necessary decision inputs, their

form and size. Thus investors are presumed to have identical

planning horizons.

Many or the assumptions no doubt seem objectionable.

However, despite the strict assumptions, the model we will view does

a very good job of describing prices in the capital markets. Reality is

not materially distorted by making these assumptions.

57

Combines risk return measures for the mixed portfolio is given

by the following formula

Rp = X RM + (1-X) RF

Where,

Rp = Expected return on portfolio

X =Percentage of funds invested in risky portfolio.

(1-X) = Percentage of funds invested in risk less asset.

RM = Expected return on risky portfolio.

RF = Expected return on risk less portfolio.

And

p = Xm

where,

p = Expected standard deviation of the portfolio.

X = Percent of funds invested in risky portfolio.

m = Expected standard deviation on risky portfolio.

The key insights of the CAPM are:

1. A security’s risk is measured by its beta value.

2. The required rate of return on a security depends on the risk

less rate of interest, the market risk premium and the

security’s beta.

3. Investors should own risky securities only as part of a highly

diversified portfolio of such securities.

4. The only way to increase the expected rate of return from

investment is to take an additional risk.

Arbitrage Pricing Theory

The Arbitrage pricing theory introduced by Ross providers

another model for explaining the relationship between risk and return.

58

The theory relates the expected return of an asset to the return from

the risk free asset and a series of other common factors that

systematically enhance or detract from that expected return.

Of the assumptions made by the CAMP, only certain aspects

are considered under Arbitrage pricing theory:

1. Investors seek return tempered by risk. They are risk average

and seek to maximise their terminal wealth.

2. Investors can borrow and lend at the risk free rate.

3. There are no market frictions such as transactions costs, taxes

or restriction of short selling.

Arbitrage pricing theory, does have two other assumption that

are peculiar to it:

1. The first of the unique APT assumptions suggests that asset

returns are determined by many factors, not just “the market”.

2. The second describes investor’s behaviour in the market place:

they seek arbitrage opportunities and though strategies designed

to capture the risk less profit.

The core of arbitrage pricing theory is that several systematic

factors [anticipated or unanticipated] affect the security returns.

Empirical work has shown 3 to 4 factors adequately capture the

influence of systematic factors on market returns. These factors are

incorporated in APT as shown below:

R = E + (b1) (f1) + (b2)(f2) + (b3)(t3) + (b4)(f4) + e

Where,

E = Expected return on security.

59

b1, b2, b3 = Security sensitivity to the change in systematic factor.

f1, f2, f3 = Anticipated or unanticipated return on the systematic

factors.

e = unexplained variance or unsystematic risk.

The problems with this theory are factor identification and

separating unanticipated from anticipated factor movements in the

measurement of sensitivities and on stock is so influenced by some

peculiar forces that it is very difficult to determine the precise

relationship between its return and a given factor.

Tools of analysis

60

Before calculating beta and correlation coefficient for each of

the securities we have to calculate the returns and standard deviation

i.e., the risk factors for the individual securities.

The following tables show the returns and standard deviation

for each of the securities based on the total observations and matched

observations with S&P Cnx Nifty Index. Here the N values differ

because we are calculating risk and return based on the weekly

closing share prices of individual securities and there is a change that

certain securities might not have been traded for some weeks.

Table No 4.13: Showing returns of different securities of

automobile industry and returns with S & P Cnx Nifty as a market

index.

Returns of automobile companies

Company

NameTotal

With S&P Cnx

Nifty

N Returns N Returns

A.L 261 0.0021 261 0.0012

B.A 261 -0.0010 261 -0.0004

HHL 261 0.0033 261 0.0017

HM 261 -0.0029 261 -0.0013

LML 261 -0.0049 261 -0.0024

M&M 261 -0.0060 261 -0.0029

TATA 261 -0.0017 261 -0.0008

TVS 261 0.0072 261 0.0037

TABLE NO 4.14: Showing Standard deviation of different

securities of automobile industry and Standard deviation with

S&P Cnx Nifty as a market index

61

Standard deviation of automobile companies

Company

NameTotal

With S&P

Cnx Nifty

N Returns N Returns

A.L 261 0.0832 261 0.0640

B.A 261 0.0527 261 0.0450

HHL 261 0.0647 261 0.0523

HM 261 0.1159 261 0.0857

LML 261 0.0795 261 0.0617

M&M 261 0.0768 261 0.0599

TATA 261 0.0794 261 0.0615

TVS 261 0.0831 261 0.0636

BETA

An important measure of risk, the beta coefficient or simply

‘beta’ measure the sensitivity of a stock price relative to the

fluctuations of a particular stock market index. Risk and return are the

two sides of the investment coin. Many investors are familiar with

techniques to calculate returns of investment; but they are not familiar

with the measure of risk of an investment. Beta is calculated by

relating the relevant returns on a security with the returns for the

market. Market return is measured by the average returns of a large

sample of stocks such as BSE Sensex, S&P Cnx Nifty etc., beta can

be positive or negative.

The risk in a share can be divided into two part; one is market

risk and other is company specific risk. The market risk is also called

62

systematic risk; affect all the stocks in the market. Eg., a change of

government policy, revision of interest rates, exim policy etc., will

affect all the stocks in the market. The company specific risk is also

known as unsystematic risk and affects the specific company or

industry.

The systematic portion of risk is practically impossible to

reduce. So it is important to quantity this market risk. This risk can be

measured by the scrips betas. If a stock moves exactly in tandem with

a market index such as the S&P Cnx Nifty, it is said to have a beta of

1. A stock with a beta higher than one is called a risky stock and its

market price may move faster than the market. If beta is less than one,

the stock is called a defensive stock.

The concept of beta for measuring the riskiness of a stock is

ideal for constructing a balanced portfolio. If an investor selects

stocks with low betas [i.e., less than 1], investor’s portfolio will suffer

less in a falling market. Of course, at the same time investor will also

stand to gain less than the market average in rising market. In case an

investor is prepared to take greater risk an investor can choose stocks

with higher betas [beta>1] in order to gain more than the market

average in a rising market. At the same time the investor should be

prepared to lose more than the market average, in case the market

crashes. However, it is desirable to have a mix of stocks in a portfolio

with betas varying between 0.5 and 1.5.

We have the following points about beta as a measure of risk:

The value of a diversified portfolio moves with the market as a

whole [up and down together].

63

Beta measures how sharply and closely a security’s price moves

on average with the market, and therefore beta measures how

closely a security’s price moves with the returns from a

diversified portfolio.

Adding a high beta [beta>1.0] security to a diversified portfolio

increases the portfolio’s risk, and adding a low beta [beta<1.0]

or negative beta [beta<0.0] security to a diversified portfolio

reduces the portfolio’s risk.

Beta Analysis

TABLE NO 4.15: Showing Standard deviation of different

securities of automobile industry and Standard deviation with

S&P Cnx Nifty as a market index

Standard deviation of automobile companies

Company Name With S&P Cnx Nifty

N Returns

A.L 261 0.9000

B.A 261 0.5351

HHL 261 0.4661

HM 261 0.9183

LML 261 1.0415

M&M 261 1.2513

TATA 261 1.2824

TVS 261 0.5655

TABLE NO 4.16: Given below indicates the break up of beta of companies taking S&P Cnx Nifty as a market index

Beta No. of co’s with

64

values S&P Cnx Nifty0.0 to 0.5 20.5 to 1.0 31.0 To 1.5 3

Total 8

Compared with S&P Cnx Nifty TATA motors ltd with beta of

1.2824 leading the beta and Hero Honda lt., with 0.4661 least among

the list.

2 companies are having beta in the range of 0.0 to 0.5. When

the market moves up by 10 percent, the stocks of these companies will

move up by 0 to 5 and if the market declines by 10 percent, the stock

price will decline an average by 0 to 5 percent.

Betas of 6 companies are in the range of 0.5 to 1.5 percent. This

shows that the stock prices of most of the companies moves upwards

and falls depending on the movement of the S7p Cnx Nifty index. If

the index moves up by 10 percent, the stock price of these companies

also move up on an average by 5 to 15 percent and vice versa.

For the above study, we have taken into consideration the

weekly opening and closing value of each automobile security as per

the National stock Exchange.

The following graph indicates the break up beta of companies.

Graph No 4.5 Break-up value of beta.

65

0

0.5

1

1.5

2

2.5

3

No

. of

Co

mp

anie

s

0.0 to 0.5 0.5 to 1.0 1.0 To 1.5

Beta values

Break-up value of Beta

No. of co’s w ithS&P Cnx Nifty

TABLE NO 4.17: Showing correlation values of different securities

of automobile taking S&P Cnx Nifty as a market index

Correlation coefficient of automobile companies

Company

Name

With S&P Cnx

Nifty

N Returns

A.L 261 0.3853

B.A 261 0.3615

HHL 261 0.2564

HM 261 0.2822

LML 261 0.4662

M&M 261 0.5804

TATA 261 0.5749

TVS 261 0.2497

66

TABLE NO 4.18: Given below indicates the break up of Correlation coefficient of companies taking S&P Cnx Nifty as a market index

Beta valuesNo. of co’s with S&P Cnx Nifty

0.0 to 0.2 0

0.2 to 0.4 5

0.4to 0.6 3

0.6 to 0.8 0

0.8 to 1.0 0

Total 8

All the companies fall between the range of 0.2 to 0.6, that

means though the company share prices of these companies move in

the same direction as compared with the index, perfect forecast is not

possible.

Thus our study reveals that all the companies are positively

correlated with NSE index to show that there is a direct relationship

between the share price of a company and index.

Correlation between the companies

In order to minimize the risk it is always advised that you have

to diversify your investment. So in order to know in which company

you have to invest, correlation coefficient has to be found out to know

the nature.

When diversification does not help:

Perfectly positively correlated returns.

When two securities returns are perfectly positively

correlated, the risk of a combination or diversification does not

provide risk reduction but only risk averaging.

67

When diversification can eliminate risk:

Perfectly negative correlated return

When two securities returns are perfectly negatively correlated, it is

possible to combine them in a manner that will eliminate all risk. This

principle motivates all hedging strategies. This object is to take

position that will off set each other with regard to certain kind of risk,

reducing or completely eliminating such sources of uncertainty.

The Insurance Principle:

[Uncorrelated returns]

Some risk can be substantially reduced by pooling. This has

crucial implications or investment management. Diversification

provides substantial risk reduction if the components of a portfolio are

uncorrelated. In fact, if enough securities are included, the overall risk

on the portfolio will be almost zero. This is why, insurance companies

attempt to write many individual policies and spread their coverage so

as to minimize overall risk. The following table No. reveals the

correlation coefficient between the automobile company’s.

68

Correlation among automobile company’s

Table No 4.19: Reveals the correlation co-efficient between the

automobile Companies

Compan

y NameAL B.A HHL HM LML M&M TATA TVS

AL - 0.2730 0.2208 0.2776 0.3949 0.3289 0.4363 0.1804

BA 0.2730 - 0.2536 0.1402 0.3467 0.2984 0.3246 0.2457

HHL 0.2208 0.2536 - 0.0847 0.1373 0.2509 0.1535 0.1299

HM 0.2776 0.1402 0.0847 - 0.2294 0.2195 0.1806 0.1137

LML 0.3949 0.3467 0.1373 0.2294 - 0.3784 0.4343 0.2286

M&M 0.3289 0.2984 0.2509 0.2195 0.3785 - 0.4709 0.2001

TATA 0.4363 0.3246 0.1535 0.1806 0.4343 0.4709 - 0.1630

TVS 0.1804 0.2457 0.1299 0.1137 0.2286 0.2001 0.1630 -

According to table all the companies show positive correlation

between them.

Among them Hero Honda shows the least correlation 0.0847

with HM and the second least being 0.1137 of HM with TVS.

The highest correlation is 0.4709 of TATA Motors with M&M

and second highest being 0.4363 of TATA Motors with Ashok

Leyland.

69

Survey

Survey has been done covering 50 share holders holding auto

mobile securities.

1. Classification of respondents on the basis of Sex.

Type of respondents Number of respondents Percentage (%)

Male 38 76

Female 12 24

Total 50 100

Above table shows the classification of respondents on

the basis of Sex. The respondents who come under male is 76% and

that of female is 25%.

2. Classification of respondents on the basis of qualification.

Qualification of

respondents

Number of

respondents

Percentage

(%)

S.S.L.C 06 12

P.U.C 14 28

Graduate 22 44

P.G 8 16

Total 50 100


the basis of qualification 12% have done SSLC, 28% of them have

done PUC, 44% of them have done Graduation and 16% of them have

done P.G.

70

3. Classification on the basis of occupation

Occupation of

respondentsNumber of respondents Percentage (%)

Govt. Service 10 20

Student 2 4

Business 22 44

Profession 16 32

Total 50 100

Above table shows the classification of the respondents

on the basis of occupation. 20% are government Servants, 4% are

students, 44% are carrying on business and 32% are professionals.

4. Classification of respondents on the basis of marital status.

Marital Status Number of respondents Percentage (%)

Married 28 56

Unmarried 22 44

Total 50 100


on the basis of marital status. 56% of the investors are married and

44% of them are unmarried.

5. Classification on the basis of preference in investment in companies.

Companies Number of respondents Percentage (%)

New company’s 22 44

Pre-existing Company’s 28 56

Total 50 100

71


on the basis of reference in investment in company’s and 56% of them

have invested in pre-existing company’s.

6. Classification on the basis on period of investment.

Period of Investment Number of respondents Percentage (%)

Long term 35 70

Short term 15 30

Total 50 100


the basis on period of investment. 70% of them have invested for long

term and 30% have invested in short term.

7. Classification on the basis of source of information about Karvy.

Medias Number of respondents Percentage (%)

Friends and relatives 8 16

News Papers 20 40

Advertisement 6 12

Business Magazine 15 30

Others 1 2

Total 50 100

Above table shows the classification of investors on the

basis of source of information about Karvy. 16% from friends and

relatives, 40$ form news papers, 12% from advertisements, 30% from

business magazines and 2% by other.

72

8. Classification of the respondents on the basis of preference to invest in

automobile companies.

Automobile

CompaniesNumber of respondents Percentage (%)

MUL 10 20

AL 13 26

HHL 9 18

BAJAJ 6 12

TATA 4 8

M & M 6 12

Others 2 4

Total 50 100

Above table shows the classification of investors on the

basis of preference to invest in automobile companies. 20% on

MUL, 26% on Ashok Leyland, 18% on HHL, 12% on Bajaj,

8% on TATA motors, 12% on M&M and only.

9. Classification of respondents based on consideration for investment.

Consideration for Investment

Number of respondents

Percentage (%)

Owned by Govt. 5 10

Popularity of Co. 15 30

High rate of earnings 15 30

Liberal dividend payment 10 20

High demand in Market 5 10

Others 0 0

Total 50 100

73

Above table shows the classification of respondents

based on consideration for investment 10% for companies are

owned by the Government, 30% for popularity of the company,

30% on high rate of earnings, 20% on liberal dividend payout

policy of the company and 10% on high demand in the market.

10.Classification of respondents on the basis of investment in auto ancillary

company’s

Auto ancillary

companies

Number of

respondentsPercentage (%)

Sona Steering 8 16

Bharath Gears 6 12

Munjal Showa 12 24

Shanty gas 10 20

Mother-son suni

system12 24

Others 2 4

Total 50 100

Above table shows the classification of respondents

based on investment in auto ancillary company’s 16% for Sona

steering gears, 24% on Mother-Son Suni system and only 4%

on others.

74

Summery of findings [Primary Data Survey]

1. Survey showed that Male participation in stock exchange is

more than females i.e., the ratio is nearly 3 : 1.

2. The percentage of participation of graduates and post graduates

is more compared to SSLC and PUC participants.

3. Business men and professionals take part in higher percentage

in stock exchange.

4. There is not much gap between the married and unmarried

respondents who take part in stock exchange.

5. Investment in pre-existing company’s is generally preferred by

long term investors but more investors want to buy new

company’s shares for speculative profits where more number of

shares are sold or purchased at lower prices.

6. Investors give more preference in investing in MUL and Ashok

Leyland company’s shares because of the popularity of the

company’s

7. High rate of earnings and popularity of the company have

gained same amount of percentage preference by the investors.

8. More speculative transactions take place in ancillary units

shares.

Summery of findings [Secondary Data]

Since both returns and risk are important in the evaluation of a

portfolio we are confronted with the problem if how to combine these

factors into an index for the evaluation of a portfolio. Initially

investors evaluated portfolios almost entirely on the basis of the rate

of return. They were clearly aware of the motion of risk and

uncertainly, but did not know how to quantity risk. So, following

75

analysis are developed to quantify risk in terms of variability of

returns.

BETA ANALYSIS

For the purpose of analyzing beta value we have taken into

account the returns on share prices of automobiles company’s as the

scrip return and S&P Cnx Nifty as market returns.

The study shows the positive beta values for all the company’s,

which was ranked in the table.

The TATA motors is having highest beta of 1.2824, which

indicates that, the company’s systematic price risk is high.

The HERO HONDA motors is having lowest beta of 0.4661,

which indicates that, the company’s systematic price risk is low.

The reason might be some other factors, which were not

captured by market index, resulting in such wide variations.

Since most betas range between 0.5 to 1.5, it is better to have a

mix of stocks which are falling in this range. The share prices of the

company moves upwards and downwards along with the market

movement.

Correlation analysis

The general observation of our study shows that, there is direct

correlation relationship between the market index and the share prices

at the company’s, the reason being all the company’s are positively

correlated with the index.

It is rather difficult to assess all the factors which influence the

share prices of a particular company’s unless detailed analyses of

factors affecting the company are captured.

76

As far as, arbitrage pricing theory is concerned, the returns on

securities are generated by a factor model. But arbitrage pricing

theory does not identify these factors. In other words, the returns on

security are related to the unknown numbers of unknown factors.

Since, these factors are difficult to estimate, it is not easy to calculate

returns on securities on that basis.

To conclude, we can say that diversifying the portfolio is a

must in order to reduce the risk for the same or increased level of

returns. Although Markowitz and sharpe’s approach to portfolio

diversification have their own limitation, the present study has shown

that they are useful tools to assess risk and returns for portfolio

diversifications.

77

Suggestions from Survey

1. As the stock market trading techniques are not properly known

to the people, it was suggested by the respondents to educate

the people in stock market trading.

2. Due to low level of advertisement form Karvy, people are not

aware of the multifarious service rendered by the Karvy

consultancy. Hence, it is suggested that more advertisement

should come from Karvy abut is activities and operations to

enhance its image in the minds of the investors.

3. It is also suggested that even the educated class especially

Commerce and Management students should be educated

properly in the field of stock market activities.

4. On line information had not been supplied properly to the

investors. So they have to make proper use of on-line to serve

the investors properly.

Investment analysis to potential investors

Table no 6.1: Showing the investment analysis for potential

Investors

Company name BETA CPM ROCE ROWN

Hero Honda 0.4661 12.52 99.82 75.09Bajaj Auto 0.5351 14.86 20.91 17.63

TVS Motors 0.5655 5.34 18.59 15.84Ashok Leyland 0.9000 7.14 14.99 12.37

Hindustan Motors 0.9183 1.39 0 0LML Motors 1.0415 -3.91 0 0

Mahindra & Mahindra 1.2513 5.92 9.15 6.63TATA Motors 1.2824 6.18 18.77 11.86

GRAPH NO 6.1 Investment Analysis

78

-20

0

20

40

60

80

100

co

mp

ari

sio

n

Hero Honda Bajaj Auto TVS Motors AshokLeyland

HindustanMotors

LML Motors Mahindra &Mahindra

TATAMotors

com panies

Investment Analysis

BETA

CPM

ROCE

ROWN

According to the Beta Analysis one can invest in the above top 4

company’s, as the beta is lower than 1 and they are less risky stocks and are

defensive stocks. They will definitely provide no losses or no risk by

investing in those companies. The portfolio consisting of those stocks will

suffer less in a falling market.

And also by analyzing the above table and graph one can see that the

CPM [Cash Profit Margin], ROCE [Return On Capital Employed] and

RONW [Return On Net Worth] is better compared to the other company’s.

All these all are important while evaluating the company’s performances,

the analysis show the top 4 company’s are in a far better and safe position

when compared to other companies. These company’s show positive and

safe figures, those are required for the investor’s to be safe, but other

company’s are having negative figures and are not up to the mark. Hence

one can invest and can have the top 4 company’s in the table in their

portfolio to be in a safe and risk less position and can earn more profit in a

long run.

Other things being equal as a researcher. I would like to advise to

invest in low beta securities like Hero Honda, Bajaj Auto, TVS motors and

Ashok Leyland.

79

Questionnaire

Respected sir,

I am a student of final year BBM, ARG college of Arts and

Commerce Davangere. As a part of our curriculum I have taken up a project work

on “A Study on portfolio on automobile industries” (a case study conducted at

karvy consultancy, Shimoga branch”, I request you to fill the following questions

accurately as for as possible. The information provided by you will be used for

the academic purpose only. Please co-operate.

Thanking you, Yours sincerely

(PRADEEP.B.R)

1. Name :…………………………………………..

2. Address :…………………………………………. …………………………………………. …………………………………………..

3. Sex : Male[ ] Female[ ]

4. Qualification: SSLC [ ] Graduation [ ]PUC [ ] PG [ ]

5. Occupation : Govt service [ ] Business [ ]Student [ ] Profession [ ]

6. Marital status: Married [ ] Unmarried [ ]

7. Monthly income: <10000 [ ] <20000 [ ]<30000 [ ] >30000 [ ]

8: On what types of company securities would you like to invest ? a. New companies [ ] b.Pre-Existing companies [ ] Reasons:………………………………………………… …………………………………………………..

9. Have you invested in any of the automobile industrial securities ?a. Yes [ ] b. No [ ]

80

10. In which automobile industry you have invested ?a. Maruthi Udyog Ltd. [ ] b.Ashok Leyland [ ]c. Hero Honda Ltd [ ] d.Bajaj Auto Ltd [ ] e. TATA motors [ ] f.Mahindra & Mahindra Ltd [ ]

g.others (if any specify) [ ]………………………………………

11. Consideration for investment in above companies ? a. Owned by the Government [ ] b. Popularity of the company [ ] c. High rate of earnings [ ] d. Liberal dividend payment [ ] e. High demand in the market [ ] f. Others (if any) [ ] …………………………………………………………………………

12. Are you satisfied with the returns on your investment ?a. Yes [ ] b. No [ ]

13. Have you invested in auto ancillary companies ? a. Sona Steering [ ] b. Munjal Showa [ ] c.Bharath Gears [ ] d. Shanti Gears [ ] e. Mother- son Suni systems [ ] f. Others [ ]

14. How did you came to know about Karvy Consultancy ? a. Friends and relatives [ ] b. News papers [ ] c. Advertisements [ ] d. Business magazines [ ] e. Others [ ]

15. Are you satisfied with the services of Karvy Consultancy ? a. Yes [ ] b. No [ ]

16. Your opinion on Cost charged by Karvy Consultancy for services ?a. Reasonable [ ] b. Costlier [ ]

17. Are you a long-term or short-term investor ? a. Long term [ ] b. Short term [ ]

18. suggestions (if any) …………………………………………………………………….. ………………………………………………………………………

Date: Place: Signature

………............

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ANNEXURES

LCVs : Light Commercial Vehicles.

MCVs : Medium Commercial Vehicles.

HCVs : Heavy Commercial Vehicles.

MUVs : Multi Utility Vehicles.

SUVs : Sports Utility Vehicles.

SIAM : Society of Indian Automobile Manufacturers.

PBIDTM : Profit Before Interest Depreciation and Tax Margin.

PBITM : Profit Before Interest and Tax Margin.

PBDTM : Profit Before Depreciation and Tax Margin.

APATM : Annual Profit After Tax Margin.

ROCE : Return On Capital Employed.

RONW : Return On Net Worth.

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BIBLOGRAPHY

Data Bank, Capitaline-2004 at Karvy Stock Exchange.

Web sites

WWW.SIAMINDIA.COM

WWW.ASHOK LEYLAND.COM

WWW.HINDUSTAN MOTORS.COM

WWW.HEROHONDA.COM

WWW.MAHINDRAWORLD.COM

WWW.TELCO INDIA.COM

WWW.BSEINDIA.COM

WWW.NSCINDIA.COM

Books

“Security Analysis and Portfolio Management”-Donald E Fischer and Ronald J Jordan, Prentice Hall of India. “Financial Management”-I.M.Pandey, Vikas publication house pvt ltd.

“Investment Management”-V.A.Avadhani, Himalaya publishing house.

“Investment Management”-Preeti Singh, Himalaya publishing house. MAGAZINES

Business World- September 2005

83

http://WWW.NSCINDIA.COM/

http://WWW.BSEINDIA.COM/

http://WWW.MAHINDRAWORLD.COM/

http://WWW.HEROHONDA.COM/

http://WWW.SIAMINDIA.COM/

Documents

Karvy Project