Fundamental and technical analysis @ kotak mahindra mba project report

FUNDAMENTAL AND TECHNICAL ANALYSIS

EXECUTIVE SUMMARY:

In the recent past, the bank interest rates have been increased steadily. But the
rate of Inflation has also been increased. There is no big difference between the
interest rate and Inflation rate. Because of inflation, value of money has been
decreased and cost of living has been increased. This has created panic among lower,
middle and upper middle class families who considered keeping their savings in banks
as safe as well as remunerative. So, the invertors are searching for proper investment
avenues. Here, an attempt is made to predict the future movement of scrips. This
study helps the investors to invest in shares.

India has registered a growth rate of 8.6 percent in FY 2007-08 and is
expected to grow at the rate of 10% plus in this fiscal year, and is one of the fastest
growing economies in the world. It is one of the major attractions for FI’s and FII’s.
FII’s invest in India through secondary Markets. There is a great scope for India for
becoming member of G-8 nations committee.

The stock exchange comes in the secondary market. Stock exchange performs
activities such as trading in share, securities, bonds, mutual fund & commodities.
Stock Broking industry is growing at an enormous rate, as more and more people are
attracted towards stock exchanges with the hope of making profits.

But during this period the country also registered a fairly high industrial
growth. The old industries and business establishments who wanted to expand the
activities as well as the new industries and the business establishments floated shares
in the market to raise capital for their activities. The companies, which registered
steady growth, earned confidence of the people and their shares, were rated high in
the market.

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This project report helps the reader to understand the techniques of investing
in the stock market particularly in the secondary market. Some of the proven
techniques have been used in this report to help the reader or investor.
Fundamental Analysis is the study of everything from the overall economy
and industry conditions, to the financial condition and management of specific
companies (i.e., using real data to evaluate a stock’s value).

Technical analysis is the examination of past price movements to forecast
future price movements. Technical analysts are sometimes referred to as chartists
because they rely almost exclusively on charts for their analysis.

Objectives of the study:

To know the future movement of selected companies shares through fundamental and
technical analysis.

Sub objectives
o To predict the future price of the selected companies shares.
o To study the strategies to be adopted by the retail investors based on the technical
and fundamental analysis.
o To know the floor and cap price of the stock.
o To analyze individual company scrips by considering the factors relating to the
economy, industry and the respective company.
o To predict investor positions (Buy, sell & hold) based on historical price trends
and the likely company prospects.

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Findings and suggestion:
EXPECTED MARKET PRICE OF BHEL
year
particulars 2008 2009 2010
FUNDAMENTAL ANALISIS 2132.30 2707.42 3429.62
TECHNICAL ANALYSIS 2500 3750
current market price(31-03-08) 2,061.35

EXPECTED MARKET PRICE OF L&T
year
Particulars 2008 2009 2010
FUNDAMENTAL ANALISIS 2325.33 2451.38 2584.41
TECHNICAL ANALYSIS 4450 5800
current market price 3,024.80

INDIAN STOCK MARKET

OVERVIEW OF EQUITY MARKET IN INDIA

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BSE (Bombay Stock Exchange)

SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETS

Introduction:

For the premier Stock Exchange that pioneered the stock broking activity in India,
128 years of experience seems to be a proud milestone. A lot has changed since 1875
when 318 persons became members of what today is called "The Stock Exchange,
Mumbai" by paying a princely amount of Re1.
Since then, the country's capital markets have passed through both good and bad
periods. The journey in the 20th century has not been an easy one. Till the decade of
eighties, there was no scale to measure the ups and downs in the Indian stock market.
The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that
subsequently became the barometer of the Indian stock market.
SENSEX is not only scientifically designed but also based on globally
accepted construction and review methodology. First compiled in 1986, SENSEX is a
basket of 30 constituent stocks representing a sample of large, liquid and
representative companies. The base year of SENSEX is 1978-79 and the base value is
100. The index is widely reported in both domestic and international markets through
print as well as electronic media.
The Index was initially calculated based on the "Full Market Capitalization"
methodology but was shifted to the free-float methodology with effect from
September 1, 2003. The "Free-float Market Capitalization" methodology of index
construction is regarded as an industry best practice globally. All major index
providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float
methodology.
Due to its wide acceptance amongst the Indian investors, SENSEX is regarded
to be the pulse of the Indian stock market. As the oldest index in the country, it
provides the time series data over a fairly long period of time (From 1979 onwards).
Small wonder, the SENSEX has over the years become one of the most prominent
brands in the country.

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The growth of equity markets in India has been phenomenal in the decade
gone by. Right from early nineties the stock market witnessed heightened activity in
terms of various bull and bear runs. The SENSEX captured all these events in the
most judicial manner. One can identify the booms and busts of the Indian stock
market through sensex.

NSE (NATIONAL STOCK EXCHANGE)
The Organization:
The National Stock Exchange of India Limited has genesis in the report of the
High Powered Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions (FIs)
to provide access to investors from all across the country on an equal footing. Based
on the recommendations, NSE was promoted by leading Financial Institutions at the
behest of the Government of India and was incorporated in November 1992 as a tax-
paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market
(WDM) segment in June 1994. The Capital Market (Equities) segment commenced
operations in November 1994 and operations in Derivatives segment commenced in
June 2000.

NIFTY:

The Nifty is relatively a new comer in the Indian market. S&P CNX Nifty is a
50 stock index accounting for 23 sectors of the economy. It is used for purposes such
as benchmarking fund portfolios; index based derivatives and index funds. The base
period selected for Nifty is the close of prices on November 3, 1995, which marked
the completion of one-year of operations of NSE's capital market segment. The base
value of index was set at 1000. S&P CNX Nifty is owned and managed by India
Index Services and Products Ltd. (IISL), which is a joint venture between NSE and
CRISIL. IISL is a specialized company focused upon the index as a core product.

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IISL have a consulting and licensing agreement with Standard & Poor's (S&P), who
are world leaders in index services.

FII in Indian stock market
As part of its initiative to liberalize its financial markets, India opened her
doors to foreign institutional investors in September, 1992. This event represents a
landmark event since it resulted in effectively globalizing its financial services
industry.
Year net investment by FII
1992-93 4.27
1993-94 5444.6
1994-95 4776.6
1995-96 6720.9
1996-97 7386.2
1997-98 5908.45 -
1998-99 729.11
1999-00 9765.13
2000-01 9682.52
2001-02 8272.9
2002-03 2668.9
2003-04 44000.03
2004-05 41416.45
2005-06 67432.34
2006-07 94327.87
What does India Need - FDI or FII
FDI usually is associated with export growth. It comes only when all the
criteria to set up an export industry are met. That includes, reduced taxes, favorable
labor law, freedom to move money in and out of country, government assistance to
acquire land, full grown infrastructure, reduced bureaucratic involvement etc. IT,
BPO, Auto Parts, Pharmaceuticals, unexplored service sectors including accounting;
drug testing, medical care etc are key sectors for foreign investment. Manufacturing
is a brick and mortar investment. It is permanent and stays in the country for a very
long time. Huge investments are needed to set this industry. It provides employment
potential to semi skilled and skilled labor. On the other hand the service sector
requires fewer but highly skilled workers. Both are needed in India. Conventional
wisdom is that China will have an upper hand in manufacturing for a long time. If

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India plays its cards right India may be the hub for the service sector. Still high end
manufacturing in auto parts and pharmaceuticals should be India’s target.

The FII (Foreign Institutional Investor) is monies, which chases the stocks in
the market place. It is not exactly brick and mortar money, but in the long run it may
translate into brick and mortar. Sudden influx of this drives the stock market up as too
much money chases too little stock. In last four months an influx of about $1.5 Billion
has driven the Indian stock market 20% higher.

Where FDI is a bit of a permanent nature, the FII flies away at the shortest
political or economical disturbance. The late nineties economic disaster of Asian
Tigers is a key example of the latter. Once this money leaves, it leaves ruined
economy and ruined lives behind. Hence FII is to be welcomed with strict political
and economical discipline.

China receives mainly the FDI. They do not have instruments to receive the FII i.e.
laws, institutions and political and judicial framework. On the contrary, India should
welcome both and work hard to retain both.

INTRODUCTION TO KOTAK SECURITIES

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THE KOTAK MAHINDRA GROUP:

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management
Finance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto
and Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took a
stake in 1986, and that's when the company changed its name to Kotak Mahindra
Finance Limited.
Kotak Mahindra is one of India's leading financial institutions, offering
complete financial solutions that encompass every sphere of life. From commercial
banking, to stock broking, to mutual funds, to life insurance, to investment banking,
the group caters to the financial needs of individuals and corporates.
As on December 31, 2006, the group has a net worth of over Rs.3, 100 crore,
and the AUM across the group is around Rs. 225 billion and employs over 9,600
employees in its various businesses. With a presence in 282 cities in India and offices
in New York, London, Dubai and Mauritius, it services a customer base of over
around 2.2 million.
The group specializes in offering top class financial services, catering to every
segment of the industry. The various group companies include:
1. Kotak Mahindra Capital Company Limited
2. Kotak Mahindra Securities Limited
3. Kotak Mahindra Inc
4. Kotak Mahindra (International) Limited
5. Global Investments Opportunities Fund Limited
6. Kotak Mahindra (UK) Limited
7. Kotak Securities Limited
8. Kotak Mahindra Old Mutual Life Insurance Company Limited
9. Kotak Mahindra Asset Management Company Limited
10. Kotak Mahindra Trustee Company Limited
11. Kotak Mahindra Investments Limited
12. Kotak Forex Brokerage Limited
13. Kotak Mahindra Private-Equity Trustee Limited
14. Kotak Mahindra Prime Limited

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Kotak Mahindra has international partnerships with Goldman Sachs (one of
the world's largest investment banks and brokerage firms), Ford Credit (one of the
world's largest dedicated automobile financiers) and Old Mutual (a large insurance,
banking and asset management conglomerate).

Kotak Securities, an affiliate of Kotak Mahindra Bank, is the stock-broking
and distribution arm of the Kotak Mahindra Group. The institutional business
division, which provides AKSESS, primarily covers secondary market broking. It
caters to the needs of foreign and Indian institutional investors in Indian equities (both
local shares and GDRs). The division also has a comprehensive research cell with
sectoral analysts covering all the major areas of the Indian economy.

Kotak Securities Ltd. is India's leading stock broking house with a market
share of around 8.5 % as on 31st March. Kotak Securities Ltd. has been the largest in
IPO distribution.

The accolades that Kotak Securities has been graced with include:

1. Prime Ranking Award (2003-04)- Largest Distributor of IPO's
2. Finance Asia Award (2004)- India's best Equity House
3. Euro money Award (2005)-Best Equities House In India
4. Finance Asia Award (2005)-Best Broker In India
5. Finance Asia Award (2006)- Best Broker In India
6. Euro money Award (2006) - Best Provider of Portfolio Management: Equities
The company has a full-fledged research division involved in Macro
Economic studies, Sectorial research and Company Specific Equity Research
combined with a strong and well networked sales force which helps deliver current
and up to date market information and news.
Kotak Securities Ltd is also a depository participant with National Securities
Depository Limited (NSDL) and Central Depository Services Limited (CDSL),
providing dual benefit services wherein the investors can use the brokerage services
of the company for executing the transactions and the depository services for settling

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them.
Kotak Securities has 195 branches servicing more than 2,20,000 customers
and a coverage of 231 Cities. Kotaksecurities.com, the online division of Kotak
Securities Limited offers Internet Broking services and also online IPO and Mutual
Fund Investments.
Kotak Securities Limited manages assets over 2500 crores of Assets Under
Management (AUM) .The portfolio Management Services provides top class service,
catering to the high end of the market. Portfolio Management from Kotak Securities
comes as an answer to those who would like to grow exponentially on the crest of the
stock market, with the backing of an expert.

INTRODUCTION TO THE TOPIC

FUNDAMENTAL AND TECHNICAL ANALYSIS:

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Fundamental analysis
The basic purpose of buying a security is to earn dividends and ultimately sell
it at higher price. An investor therefore is interested in obtaining estimates of future
prices of the share. These in turn will depend upon the performance of the industry to
which the company belongs and the general economic situation of the country. The
multitude of factors affecting a company’s profitability can be broadly classified as:

1. Economic wide factors: these includes the factors like growth rate of the
economy, the rate of inflation, foreign exchange rates etc which affects
profitability of all companies.

2. Industry wide factors: these include factors which are specific to
industry to which the company belongs. For instance the demand supply gap
in the industry, the emergence of substitutes, and changes in government
policies towards industry affects the company belonging to an industry.

3. Company wide factor: these factors are specific to a firm. The firm
specific factors like plant and machinery, the brand image of the product, and
ability of the management to affect the profitability.

Fundamental analysis considers the financial and economic data that may
influence the viability of a company. There are many flavors of fundamental analysis
centered on such concepts as value, growth and turnarounds. Technical analysis is the
study of the price chart. It assumes that by looking at the progress of that little
squiggly line you can forecast the future trend of a stock. Fundamental analysis is
essential to most investors, and technical analysis is essential to most traders and
speculators.

An investor with rational and scientific approach will therefore be interested in
analyzing the influence of the expected performance of the company, industry and

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economy as a whole on share prices, even before taking the investment decision such
analysis is called fundamental analysis.

Fundamental analysis is the method of evaluating securities by attempting to
measure the intrinsic value of a particular stock. It is the study of everything from the
overall economy and industry conditions, to the financial condition and management
of specific companies (i.e., using real data to evaluate a stock’s value). The method
utilizes items such as revenues, earnings, return on equity and profit margins to
determine a company’s underlying value and potential for future growth.

One of the major assumptions under fundamental analysis is that, even though
things get mis priced in the market from time to time, the price of an asset will
eventually gravitate toward its true value. This seems to be a reasonable bet
considering the long upward march of quality stocks in general despite regular
setbacks and periods of irrational exuberance. The key strategy for the fundamentalist
is to buy when prices are at or below this intrinsic value and sell when they got
overpriced.

TECHNICAL ANALYSIS:

Technical analysis is the examination of past price movements to forecast
future price movements. Technical analysts are sometimes referred to as chartists
because they rely almost exclusively on charts for their analysis.

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Moving Average:

A Moving Average is an indicator that shows the average value of a security's
price over a period of time. When calculating a moving average, a mathematical
analysis of the security's average value over a predetermined time period is made. As
the securities price changes, its average price moves up or down.

There are several popular ways to calculate a moving average. Meta Stock for
Java calculates a "simple" moving average--meaning that equal weight is given to
each price over the calculation period.

Interpretation:

The most popular method of interpreting a moving average is to compare the
relationship between moving averages of the security's price with the security's price
itself. A buy signal is generated when the security's price rises above its moving
average and a sell signal is generated when the security's price falls below its moving
average.

This type of moving average trading system is not intended to get you in at the
exact bottom nor out at the exact top. Rather, it is designed to keep you in line with
the security's price trend by buying shortly after the security's price bottoms and
selling shortly after it tops.

The critical element in a moving average is the number of time periods used in
calculating the average. When using hindsight, you can always find a moving
average that would have been profitable. The key is to find a moving average that
will be consistently profitable. The most popular moving average is the 39-week (or
200-day) moving average. This moving average has an excellent track record in
timing the major (long-term) market cycles.

Advantages:

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The advantage of moving average system of this type (i.e., buying and selling
when prices break through their moving average) is that you will always be on the
"right" side of the market: prices cannot rise very much without the price rising above
its average price. The disadvantage is that you will always buy and sell some late. If
the trend does not last for a significant period of time, typically twice the length of the
moving average, you will lose your money.

Support and Resistance:

Support and resistance represent key junctures where the forces of supply and
demand meet. In the financial markets, prices are driven by excessive supply (down)
and demand (up). Supply is synonymous with bearish, bears and selling. Demand is
synonymous with bullish, bulls and buying. These terms are used interchangeably
throughout this and other articles. As demand increases, prices advance and as supply
increases, prices decline. When supply and demand are equal, prices move sideways
as bulls and bears slug it out for control.

What Is Support?

Support is the price level at which demand is thought to be strong enough to
prevent the price from declining further. The logic dictates that as the price declines
towards support and gets cheaper, buyers become more inclined to buy and sellers
become less inclined to sell. By the time the price reaches the support level, it is
believed that demand will overcome supply and prevent the price from falling below
support.

Support does not always hold and a break below support signals that the bears
have won out over the bulls. A decline below support indicates a new willingness to
sell and/or a lack of incentive to buy. Support breaks and new lows signal that sellers
have reduced their expectations and are willing sell at even lower prices. In addition,
buyers could not be coerced into buying until prices declined below support or below
the previous low. Once support is broken, another support level will have to be
established at a lower level.

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Where Is Support Established?

Support levels are usually below the current price, but it is not uncommon for
a security to trade at or near support. Technical analysis is not an exact science and it
is sometimes difficult to set exact support levels. In addition, price movements can be
volatile and dip below support briefly. Sometimes it does not seem logical to consider
a support level broken if the price closes 1/8 below the established support level. For
this reason, some traders and investors establish support zones.

What Is Resistance?

Resistance is the price level at which selling is thought to be strong enough to
prevent the price from rising further. The logic dictates that as the price advances
towards resistance, sellers become more inclined to sell and buyers become less
inclined to buy. By the time the price reaches the resistance level, it is believed that
supply will overcome demand and prevent the price from rising above resistance.

Resistance does not always hold and a break above resistance signals that the
bulls have won out over the bears. A break above resistance shows a new willingness
to buy and/or a lack of incentive to sell. Resistance breaks and new highs indicate
buyers have increased their expectations and are willing to buy at even higher prices.
In addition, sellers could not be coerced into selling until prices rose above resistance
or above the previous high. Once resistance is broken, another resistance level will
have to be established at a higher level.

Where Is Resistance Established?

Resistance levels are usually above the current price, but it is not uncommon
for a security to trade at or near resistance. In addition, price movements can be
volatile and rise above resistance briefly. Sometimes it does not seem logical to
consider a resistance level broken if the price closes 1/8 above the established
resistance level. For this reason, some traders and investors establish resistance zones.

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So, Here, Identification of key support and resistance levels is an essential
ingredient to successful technical analysis. Even though it is sometimes difficult to
establish exact support and resistance levels, being aware of their existence and
location can greatly enhance analysis and forecasting abilities. If a security is
approaching an important support level, it can serve as an alert to be extra vigilant in
looking for signs of increased buying pressure and a potential reversal. If a security is
approaching a resistance level, it can act as an alert to look for signs of increased
selling pressure and potential reversal. If a support or resistance level is broken, it
signals that the relationship between supply and demand has changed. A resistance
breakout signals that demand (bulls) has gained the upper hand and a support break
signals that supply (bears) has won the battle.

Price Oscillator:

The Price Oscillator displays the difference between two moving averages of a
security's price. The difference between the moving averages can be expressed in
either points or percentages.

The Price Oscillator is almost identical to the MACD, except that the Price
Oscillator can use any two user-specified moving averages. (The MACD always uses
12 and 26-day moving averages, and always expresses the difference in points.)

Interpretation:
Moving average analysis typically generates buy signals when a short-term
moving average (or the security's price) rises above a longer-term moving average.
Conversely, sell signals are generated when a shorter-term moving average (or the
security's price) falls below a longer-term moving average. The Price Oscillator
illustrates the cyclical and often profitable signals generated by these one or two
moving average systems.

Price Rate-Of-Change:

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The Price Rate-of-Change ("ROC") indicator displays the difference between
the current price and the price x-time periods ago. The difference can be displayed in
either points or as a percentage. The Momentum indicator displays the same
information, but expresses it as a ratio.

Interpretation:
It is a well-recognized phenomenon that security prices surge ahead and
retract in a cyclical wave-like motion. This cyclical action is the result of the
changing expectations as bulls and bears struggle to control prices.

The ROC displays the wave-like motion in an oscillator format by measuring
the amount that prices have changed over a given time period. As prices increase, the
ROC rises; as prices fall, the ROC falls. The greater the change in prices, the greater
the change in the ROC.

The time period used to calculate the ROC may range from 1-day (which
results in a volatile chart showing the daily price change) to 200-days (or longer).
The most popular time periods are the 12- and 25-day ROC for short to intermediate-
term trading. These time periods were popularized by Gerald Appel and Fred
Hitschler in their book, Stock Market Trading Systems.

The 12-day ROC is an excellent short- to intermediate-term
overbought/oversold indicator. The higher the ROC, the more overbought the
security; the lower the ROC, the more likely a rally. However, as with all
overbought/oversold indicators, it is prudent to wait for the market to begin to correct
(i.e., turn up or down) before placing your trade. A market that appears overbought
may remain overbought for some time. In fact, extremely overbought/oversold
readings usually imply a continuation of the current trend.

The 12-day ROC tends to be very cyclical, oscillating back and forth in a
fairly regular cycle. Often, price changes can be anticipated by studying the previous
cycles of the ROC and relating the previous cycles to the current market

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Relative Strength Index (RSI):

The Relative Strength Index ("RSI") is a popular oscillator. It was first
introduced by Welles Wilder in an article in Commodities (now known as Futures)
Magazine in June, 1978.

The name "Relative Strength Index" is slightly misleading as the Relative
Strength Index does not compare the relative strength of two securities, but rather the
internal strength of a single security. A more appropriate name might be "Internal
Strength Index."

Interpretation:
When Wilder introduced the Relative Strength Index, he recommended using
a 14-day Relative Strength Index. Since then, the 9-day and 25-day Relative Strength
Indexs have also gained popularity. The fewer days used to calculate the Relative
Strength Index, the more volatile the indicator.

The Relative Strength Index is a price-following oscillator that ranges between
0 and 100. A popular method of analyzing the Relative Strength Index is to look for a
divergence in which the security is making a new high, but the Relative Strength
Index is failing to surpass its previous high. This divergence is an indication of an
impending reversal. When the Relative Strength Index then turns down and falls
below its most recent trough, it is said to have completed a "failure swing." The
failure swing is considered a confirmation of the impending reversal.

In Mr. Wilder's book, he discusses five uses of the Relative Strength Index:

1. Tops and Bottoms. The Relative Strength Index usually tops above 70 and
bottoms below 30. It usually forms these tops and bottoms before the
underlying price chart.
2. Chart Formations. The Relative Strength Index often forms chart patterns
such as head and shoulders or triangles that may or may not be visible on the
price chart.

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3. Failure Swings (also known as support or resistance penetrations or
breakouts). This is where the Relative Strength Index surpasses a previous
high (peak) or falls below a recent low (trough).
4. Support and Resistance. The Relative Strength Index shows, sometimes
more clearly than price themselves, levels of support and resistance.
5. Divergences. As discussed above, divergences occur when the price makes a
new high (or low) that is not confirmed by a new high (or low) in the Relative
Strength Index. Prices usually correct and move in the direction of the
Relative Strength Index.

Trend lines:

In the preceding section, we saw how support and resistance levels can be
penetrated by a change in investor expectations (which results in shifts of the
supply/demand lines). This type of a change is often abrupt and "news based."

In this section, we'll review "trends." A trend represents a consistent change
in prices (i.e., a change in investor expectations). Trends differ from
support/resistance levels in that trends represent change, whereas support/resistance
levels represent barriers to change.

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As shown in the following chart, a rising trend is defined by successively
higher low-prices. A rising trend can be thought of as a rising support level--the bulls
are in control and are pushing prices higher.

As shown in the next chart, a falling trend is defined by successively lower
high-prices. A falling trend can be thought of as a falling resistance level--the bears
are in control and are pushing prices lower.

The Bar Chart:

The Bar chart is one of the most popular types of charts used in technical
analysis. As illustrated on the left, the top of the vertical line indicates the highest
price at which a security traded during the day, and the bottom represents the lowest
price. The closing price is displayed on the right side of the bar and the opening price
is shown on the left side of the bar. A single bar like the one to the left represents one
day of trading.

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The chart below is an example of a bar chart for AT&T (T):

The advantage of using a bar chart over a straight-line graph is that it shows
the high, low, open and close for each particular day.

Candle sticks Charting:

Candlestick charts have been around for hundreds of years. They are often
referred to as "Japanese candles" because the Japanese would use them to analyze the
price of rice contracts.
Similar to a bar chart, candlestick charts also display the open, close, daily
high and daily low. The difference is the use of color to show if the stock went up or
down over the day.

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The chart below is an example of a candlestick chart for AT&T (T).
Green bars indicate the stock price rose, red indicates a decline:

Investors seem to have a "love/hate" relationship with candlestick
charts. People either love them and use them frequently or they are
completely turned off by them. There are several patterns to look for with
candlestick charts - here are a few of the popular ones and what they mean.

This is a bullish pattern - the stock opened at (or near) its low and
closed near its high

.

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The opposite of the pattern above, this is a bearish pattern. It
indicates that the stock opened at (or near) its high and dropped
substantially to close near its low.

Known as "the hammer", this is a bullish pattern only if it occurs
after the stock price has dropped for several days. A small body along
with a large range identifies a hammer. This pattern indicates that a
reversal in the downtrend is in the works.

Known as a "star”. For the most part, stars typically indicate a
reversal and or indecision. There is a possibility that after seeing a
star there will be a reversal or change in the current trend.

Point and Figure Chart:

The point & figure (P&F) chart is somewhat rare. In fact, most charting
services do not even offer it. This chart plots day-to-day increases and declines in
price: increases are represented by a rising stack of "X"s, while decreases are
represented by a declining stack of "O"s. This type of chart was traditionally used for
intraday charting (a stock chart for just one day), mainly because it can be long and
tedious to create a P&F chart manually over a longer period of time.

The idea behind P&F charts is that they help you to filter out less significant
price movements and to focus on the most important trends. Below is an example of a
P&F chart for AT&T (T):

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POPULAR CHARTING PATTERNS:

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Technical analysts often use proven successful price patterns from great stocks
as tools to find new great stocks. Let's look at a few examples

• Cup and Handle - This is a pattern on a bar chart that can be as short as seven
weeks and as long as 65 weeks. The cup is in the shape of a "U". The handle
has a slight downward drift. The right-hand side of the pattern has low trading
volume. As the stock comes up to test the old highs, the stock will incur
selling pressure by the people who bought at or near the old high. This selling
pressure will make the stock price trade sideways with a tendency towards a
downtrend for anywhere from four days to four weeks, then it will take off.

This pattern looks like a pot with a handle. It is one of the easier
patterns to detect; and investors have made a lot of money using it.

• Head and Shoulders - This is a chart formation resembling an "M" in which a
stock's price:

- Rises to a peak and then declines, then
- Rises above the former peak and again declines, and then
- rises again but not to the second peak and again declines.
The first and third peaks are shoulders, and the second peak forms the
head. This pattern is considered a very bearish indicator.

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• Double Bottom - This pattern resembles a "W" and occurs when a stock price
drops to a similar price level twice within a few weeks or months. You should
buy when the price passes the highest point in the handle. In a perfect double
bottom, the second decline should normally go slightly lower than the first
decline to create a shakeout of jittery investors. The middle point of the "W"
should not go into new high ground. This is a very Bullish indicator.

The belief is that, after two drops in the stock price, the jittery investors
will be out and the long-term investors will still be holding on.

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Importance of project

1. The project gives thorough knowledge of fundamental and technical analysis
2. In this project report the Engineering sector is analyzed by considering budget
and demand and supply of the industry.
3. In the project report the 2 companies have selected and analyzed the
company’s future market price by two distinct theories.
4. Reader of this project comes to know the expected future market prices and
can invest into the scripts.
5. This gives the full information of calculation of intrinsic value.

BSPATIL 27


Objective of the study

Main objective:

To know the future movement of selected companies shares through fundamental and
technical analysis.

Sub objectives
o To predict the future price of the selected companies shares.
o To study the strategies to be adopted by the retail investors based on the technical
and fundamental analysis.
o To know the floor and cap price of the stock.
o To analyze individual company scrips by considering the factors relating to the
economy, industry and the respective company.
o To predict investor positions (Buy, sell & hold) based on historical price trends
and the likely company prospects.

Data collecting methodology
The data collected for the study is secondary data. The data I have used for the study
is
1. Historical shares value of the stocks collected from ICICI DIRECT.COM.
2. The balance sheet and Income statement got from companies web site.
3. Some of the information about the industry is collected from other financial
web site.

BSPATIL 28


THE MEASUREMENT TECHNIQUE
The following techniques are used for the study.
1. Simple moving average.
5. Exponential moving average (EMA)
6. The relative strength index (RSI)
7. Value anchor.

LIMITATIONS OF THE STUDY:

1. The study is limited only to these 2 sectors and 4 companies.
2. Here, an attempt is made to predict the future movement stock. It contains an
element of guess work
3. Here, I have used only 3 Technical tools to predict the movement of Scrips

BSPATIL 29


Technical analysis of selected sector socks is as fallows
Here you can see the charts of BHEL, L&T and NIFTY which is designed
(derived) by MS Excel sheet. For calculating of RSI, SMA and EMA 2 years
historical closing prices are used. The respective formulas of SMA, EMA and RSI is
as follows

SMA (Simple Moving Average)

A simple moving average is formed by computing the average (mean) price of a
security over a specified number of periods. While it is possible to create moving
averages from the Open, the High, and the Low data points, most moving averages
are created using the closing price. For example: a 5-day simple moving average is
calculated by adding the closing prices for the last 5 days and dividing the total by 5.

Ex: if the closing prices are as follows: 10, 11, 12, 13, 14, 17, 12……………

10+11+12+13+14=60

(60/5)=12

Here 12 is a first moving average obtained from the given closing prices, next moving
average can be calculated by deducting first cl price i.e 10 and adding next cl. Price i.e 17 and
again dividing it by 5.

Exponential Moving Average (EMA)

In order to reduce the lag in SMA, technicians often use EMA. EMA's reduce the lag by
applying more weight to recent prices relative to older prices. The weighting applied to the
most recent price depends on the specified period of the moving average. The shorter the
EMA's period, the more weight that will be applied to the most recent price. For example: a
10-period EMA weighs the most recent price 18.18% while a 20-period EMA weighs the
most recent price 9.52%. As such, it will react quicker to recent price changes than a SMA.
Here's the calculation formula

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EMA (current) = ((price (current)-EMA (prev)) x multiplier+ EMA(prev)

Where, Multiplier – 2/n+1

n- Number of days for which EMA is calculated

If we take the same example of SMA 5 day EMA is calculated as follows.

EMA= (12-11) X 0.666 + 11 = 11.66

Where multiplier = 2/ (5 +1) = 0.666

For next EMA 11.66 acts as previous EMA and so on

Relative Strength Index.
Ans: Developed by J. Welles Wilder and introduced in his 1978 book, New Concepts
in Technical Trading Systems, the Relative Strength Index is an extremely useful and
popular momentum oscillator.
Calculation

BSPATIL 31


BHEL Company Charts

BSPATIL 32


1. Short term moving averages of BHEL Company.

Short term Moving averages of BHEL

3,500.00
3,000.00 trendline violation

2,500.00
adjested
2,000.00 10 days ema
resistan
1,500.00 ce 40 days ema
1,000.00 sell signals 10 days sma

500.00 Buy signals
support

0.00
7/1/2006

9/1/2006

11/1/2006

1/1/2007

3/1/2007

5/1/2007

3/1/2008
1/1/2008
3/1/2006

5/1/2006

7/1/2007

9/1/2007

11/1/2007

2. Long-term moving averages of BHEL Company.

BSPATIL 33


Long term moving averages for BHEL

3,500.00
3,000.00 Trend violation

2,500.00 adjested
2,000.00 25 days EMA
1,500.00 sell 125 days ema
1,000.00 25 days sma
500.00 Buy for long term
0.00
7/1/2006
9/1/2006

3/1/2007
5/1/2007
7/1/2007

1/1/2008
3/1/2008
3/1/2006
5/1/2006

1/1/2007

9/1/2007
11/1/2006

11/1/2007
Interpretation for short term moving averages:

1. The above chart of BHEL is of short term analysis say for example 15 days to
60 days.
2. The above chart shows support and resistance level which is shown by arrow
mark above.
3. The chart shows the buying and selling signals which is shown in red green
and red arrow marks and circle is the point which specifies the exact price to
buy or sell the stock.
4. And from above chart one can see the trend line violation which is shown by
black arrow mark.

Interpretation for long term moving averages:
1. As we can see from the above chart the buy and sell levels are Rs 1130 and
Rs. 2100.
2. In the long term chart also we can see a trend violation at the stage of jan
2008.

BSPATIL 34


3. Here in long term moving average chart one can see that the 25 days SMA
going upwards and 125 days EMA coming downwards. So if in future the 25
days SMA goes upwards and crosses the 125 days EMA then again the bull
run rally start.

Target price for BHEL according to Technical charts:
1. At the beginning of the chart the support level is around Rs. 900 in the month
of June 2006 and resistance level is at Rs. 1100 in the month of August 2006.
2. after its resistance in august 2006 at Rs 1100 the stock has under gone for
consolidation for 2 months
3. After breaking its resistance of Rs. 1100 the stock again under gone for
consolidation up to Feb 2007.
4. On Fab 2007 the stock had resistance of Rs. 1200 and fell down in march id
for Rs. 1000 there for the new support become Rs. 1000 and resistance again
Rs. 1200.
5. On April 2007 end it crossed its resistance and started rally.
6. In the month of July 2007 it achieved 52 weeks high and created a new
resistance of Rs. 1800 and new support become Rs. 1700
7. The stock was on its life time high of Rs. 2870 on November 2007.
8. In the November 2007 the stock had resistance of Rs. 2900 and support was
Rs. 2100 in the year 2007 of October.
9. In the month of Jan 2008 it has broken its previous support and started a
bearish run.
10. In the month of Dec mid 2007 the stock violated its trend line.
11. the present support is 1850 and previous resistance is 2200
Short term target

Target prices for BHEL
Support- 1800
Resistance- 2150
Target price- 2150-1800=350

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There for = 350 + 2150= 2500
Long term target
Support- 1850
Resistance- 2800
There for = 950 + 2800= 3750

BSPATIL 36


3. 14 days RSI OF BHEL COMPANY

Interpretation:
1. Here we can see that the stock has gone for correction over a period and the
present RSI is around 50 and which is very attractive.
2. From the above chart we can say that the stock is under consolidation and it is
a best time to enter into this script at present market price.

BSPATIL 37


L&T company Charts

BSPATIL 38


1. Short term moving average of L&T Company

Short term moving averages for L&T

5,000.00
4,500.00 Trend line violation
4,000.00
3,500.00 adjested
3,000.00 Up w ord trend line 10 days ema
2,500.00 40 days ema
2,000.00 Sell 10 days sma
1,500.00
1,000.00 Buy
500.00
3/1/2006

5/1/2006

7/1/2006

9/1/2006

1/1/2007

3/1/2007

5/1/2007

7/1/2007

9/1/2007

1/1/2008

3/1/2008
11/1/2006

11/1/2007

2. Long term moving averages of L&T

BSPATIL 39


Long term moving averages of L&T

5,000.00
4,500.00
phase - 3
4,000.00
3,500.00 phase -2
up word break out adjested
3,000.00
phase - 1 25 days ema
2,500.00
125 days ema
2,000.00
25 days sma
1,500.00
1,000.00
500.00 Accumulation
0.00
1/1/2007

3/1/2008
3/1/2006

5/1/2006

7/1/2006

9/1/2006

3/1/2007

5/1/2007

7/1/2007

9/1/2007

1/1/2008
11/1/2006

11/1/2007
Interpretation for short term moving average:
1. The stock is showing upward trend line from Aug 2006 to June 2007.
2. There is a buy signal on March 2007 at Rs. 1500 level.
3. We can see the aggressive Bull Run from May 2007 to Nov 2007 the stock has
almost double on Nov 2007.
4. There is a selling signal when 10 days SMA came below 40 days EMA.
5. From Jan 2008 to March 2008 there is a declining trend line.
6. At the end of 31.3 2008 it seems to be violation of trend line.

Interpretation for long term moving average:
1. The long term moving average of L&T stock is bit attractive which is showing
3 phases of Bull Run.
2. The stock has shown a accumulation for the period from May 2006 to My
2007 and immediately the upward break out happened and the stock started
rally.
Target price for L&T according to Technical charts:

Short term target

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Support- 2800
Resistance- 3650
There for = 850+3650=4450
Long term target
Support- 2800
Resistance- 4300
Target price- 4300-2800=1500
There for = 4300-1500=5800

3. 14 DAYS RSI OF L&T

BSPATIL 41


RSI of L&T Company

1. At present the L&T Company RSI is very reasonable and started rally so one
should see the market condition and invest in the script.
2. The RSI going upward and at present the RSI is around 45 levels.
So one should invest at current market price.

BSPATIL 42


BSPATIL 43


Nifty Charts

1. NIFTY moving averages

Market M.A

6500 wait
6000
5500
5000 Close
4500 SMA 25 day
4000
3500 EMA 25day
3000 sell EMA 100day
2500
2000 Buy
1500
2/1/2006
4/1/2005
6/1/2005
8/1/2005

4/1/2006
6/1/2006
8/1/2006

2/1/2007
4/1/2007
6/1/2007
8/1/2007

2/1/2008
4/1/2008
10/1/2005
12/1/2005

10/1/2006
12/1/2006

10/1/2007
12/1/2007

BSPATIL 44


2. RSI Calculation for Nifty

Analysis: (Short term or intermediate)
1. If we look at 90 day EMA of Nifty chart, for the past one and half year the trend
has been Bullish.
2. From 20th Jan 2008 onwards there has been shift in the trend towards Bearish.
3. The 18day EMA & SMA of Nifty has broken down below 90 day EMA. So this is
one more conclusive evidence for reversal of trend from Bull to Bear.

Immediate Future:
As we can see from the graph it is clear that market is finding support at 4450 to
4600(which is previous resistance for the market). At this level market is likely to
consolidate for the medium time period.

Significance of Future Trend:
In future unless and until market finds required strengths to come to the previous level
i.e. resistance at 5630 – 50, there will be no signs of market turning Bullish.

BSPATIL 45


And if in future market breaks the resistance level i.e. 5630-50 then it will rally up to
6980-7020. (Target)

Long term analysis
1. Market is sentiment driven and swings and hypes in market are so strong that they
prevail even for years that have happened at present.
2. There has been shift in market trend and it has turned bearish though there is no
clear sign of bear trend (it’s a long term correction not exactly bearish) but present
situation is of complete chaos has left market in a state of volatility so we should
wait and see market movement closely.
3. Market’s long term support is at 3118-3130 and next support is at 4500 level so
next rally from that level 4500 is 1380-1400(4500-3110) and we can see some
150-200 points abortive rally has been occurred and has reached 6050.
4. At that level market was waiting for correction. Bad clues from US slow down
had made market to take LT correction and market has turned to be volatile and
has yet to settle down at previous support of 4500.

Short term analysis:

1) Trend short term or intermediate trend for the scrip has been flat. Now
turning in to bearish.
2) Key short term support and resistance levels for the scrip.
As we can see from the 10 day EMA &SMA graph the scrip has established
strong support at 130-140 price band.

Price movement; the scrip has undergone major consolidation (sideway
movement) phase. And it seems that the scrip has made abortive attempt to
breach the flat trend and start rally, but in vain and the obvious reason for this
failure is market crash.
In the month Feb 2008 the scrip has broken the key support (130-140) and
turned out to be bearish

BSPATIL 46


Future; as the scrip has already broken the key support, the short term traders
should sell it and the fresh buy signal for the stock is known only when scrip
establishes support.
If in case scrip regains the strength to come back to the level of 130-140,
investors should still wait till it clearly breaches above that level but with
expanding volume.
Trading tactics for short term investors:
As it can be clearly seen from the graph, the stock is purely a trading stock. So
to trade in the scrip one should look for key support and also look for cue from
RSI. If the stock is at support and selling pressure is high i.e. RSI value 30 and
below, it should be bought and sold at high buying pressure i.e. at RSI value
70 & above.
Here the identifying future target price (for the short term) is very difficult as
scrip was undergoing phase of consolidation and has no established resistance
level.

Fundamental analysis of selected sector socks is as fallows

Fundamental analysis

The basic purpose of buying a security is to earn dividends and ultimately sell
it at higher price. An investor therefore is interested in obtaining estimates of future
prices of the share. These in turn will depend upon the performance of the industry to
which the company belongs and the general economic situation of the country. The
multitude of factors affecting a company’s profitability can be broadly classified as:

1. Economic wide factors: these includes the factors like growth rate of the
economy, the rate of inflation, foreign exchange rates etc which affects
profitability of all companies.

BSPATIL 47


2. Industry wide factors: these include factors which are specific to
industry to which the company belongs. For instance the demand supply gap
in the industry, the emergence of substitutes, and changes in government
policies towards industry affects the company belonging to an industry.

3. Company wide factor: these factors are specific to a firm. The firm
specific factors like plant and machinery, the brand image of the product, and
ability of the management to affect the profitability.

Economic wide factors
The following are the some of the important economic factors which influence the
investment of investor over a period of time.

Indian Economy Overview

India's economy is on the fulcrum of an ever increasing growth curve. With
positive indicators such as a stable 8-9 per cent annual growth, rising foreign
exchange reserves, a booming capital market and a rapidly expanding FDI inflows,
India has emerged as the second fastest growing major economy in the world.

The economy has been growing at an average growth rate of 8.8 per cent in
the last four fiscal years (2003-04 to 2006-07), with the 2006-07 growth rate of 9.6
per cent being the highest in the last 18 years. Significantly, the industrial and service

BSPATIL 48


sectors have been contributing a major part of this growth, suggesting the structural
transformation underway in the Indian economy.

For example, industrial and services sectors have logged in a 10.63 and 11.18
per cent growth rate in 2006-07 respectively, against 8.02 per and 11.01 cent in
2005-06. Similarly, manufacturing grew by 8.98 per cent and 12 per cent in 2005-06
and 2006-07 and transport, storage and communication recorded a growth of 14.65
and per cent 16.64 per cent, respectively.

Another significant feature of the growth process has been the consistently
increasing savings and investment rate. While the gross saving rate as a proportion of
GDP has increased from 23.5 per cent in 2001-02 to 34.8 per cent in 2006-07, the
investment rate-reflected as the gross capital formation as a proportion of GDP-has
increased from 22.8 per cent in 2001-02 to 35.9 per cent in 2006-07.

The Current Fiscal Year

The process continues in the current fiscal year. On the back of 9.9 per cent growth in
the first half of 2006-07, GDP grew by 9.1 per cent during April-September 2007.

• While overall industrial production grew by 9 per cent during April-December
2007, importantly capital goods production rose by 20.2 per cent compared to
18.6 per cent during same period in 2006.
• Services grew by 10.5 per cent in April-September 2007, on the back of 11.6
per cent during the corresponding period in 2006-07.
• Manufacturing grew by 9.6 per cent during April-December 2007, on the back
of 12.2 per cent growth during same period in 2006-07.
• Core infrastructure sector continued its growth rate recording 6 per cent
growth in April-November 2007.

BSPATIL 49


• While exports grew by 21.76 per cent during April-December 2007, imports
increased by 25.97 per cent in the same period.
• Money Supply (M3) has grown by a robust 22.8 per cent growth (year-on-
year) as of December 21, 2007 compared to 19.3 per cent last year.
• The annual inflation rate in terms of WPI was 3.5 per cent for the week ended
December 29, 2007 as compared to 5.89 per cent a year ago.
• Fiscal and revenue deficit decreased by 11 per cent and 17.2 per cent,
respectively, during April-November 2007-08 over corresponding period last
year.

With such a robust growth rates, the advance estimates of the Central Statistical
Organization (CSO) expects the economy to grow by 8.7 per cent in 2007-08.

Per Capita Income

Along this significant acceleration in the growth rate of Indian economy, India's per
capita income has increased at a rapid pace, exceeding an earlier forecast made by
Goldman Sachs BRIC report which estimated India's per capita to touch US$ 800 by
2010 and US$ 1149 by 2015.

Per capita income has increased from US$ 460 in 2000-01 to almost double to US$
797 by the end of 2006-07. In 2007-08, India's per capita income is estimated to be
over US$ 825.07, according to the advance estimates of the Central Statistical
Organisation (CSO). Further, India's per capita income is expected to increase to US$
2000 by 2016-17 and US$ 4000 by 2025. This growth rate will, consequently, propel
India into the middle-income category.

Some Highlights

BSPATIL 50


Reflecting the favorable prospect of growth rate of Indian economy, the orders
received Indian companies have increased by a whopping 68.6 per cent to US$ 32.48
billion during January-October 2007 compared to US$ 19.26 billion in the same
period last year.

• India is among the five countries sharing 50 per cent of the world production
(or GDP).
• FDI inflows have jumped by almost three times to US$ 15.7 billion in
2006-07 as against US$ 5.5 billion in 2005-06.
• The aggregate income of the top 500 companies rose by 28.4 per cent in
2006-07 to total US$ 469.51 billion.
• India's National Stock Exchange (NSE) ranks first in the stock futures and
second in index futures trade in the world.
• Twenty Indian firms have made it to the list of Boston Consulting Group's 100
New Global Challenger Giants list.
• According to a study by the McKinsey Global Institute (MGI), India's
consumer market will be the world's fifth largest (from twelfth) in the world
by 2025.
• The number of companies incorporated has increased at an annual average of
55,000 companies in the last two years to 865,000, from 712,000 companies at
the end of 2005.
• Four Indians and seven Indian microfinance companies make it to the Forbes
list of Top10 world's wealthiest CEOs World's Top 50 Microfinance
Institutions, respectively.
• India has the most number of private equity (PE) funds operating amongst the
BRIC markets.
• Mumbai has been ranked tenth among the world's biggest centers of
commerce in terms of the financial flow volumes by a survey compiled by
MasterCard Worldwide.

Another significant aspect has been the broad-based nature of the growth process.
While new economy industries like Information Technology and biotechnology have

BSPATIL 51


been growing around 30 per cent, significantly old economy sectors like steel have
also been major contributors in the Indian growth process. For example, India has
moved up two places to become the fifth largest steel producer in the world.

And with its manufacturing and service sectors on a searing growth path, Lehman
Brothers Asia estimates India to grow by as much as 10 per cent every year in the
next decade.

1. Growth rate of industrial sector:

The growth of industrial sector is an important contributor to the growth of
national income. The performance and the growth of industry is measured through an
Index of industrial product. The industrial growth rate is further disaggregated into
growth rates of different sectors like electricity basic goods consumer goods and so

Industry

Industry
YoY % change FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
Mining &
Quarrying 1 3.7 0.5 5.8 5.3 4.4 1 5
Electricity 7.3 4 3.1 3.2 5 5.2 5.2 6.5
Manufacturing 7.2 5.4 2.9 6 7.4 9.1 9.1 10.7
IIP 6.6 5.1 2.6 5.8 7 8.4 8.2 9.7

2. Inflation

Inflation prevailing in the economy has considerable impact on the
performance of the companies high rates of inflation upsets business plans, results in
high input costs and hence reduction in profit margins. On the other hand the inflation
erodes purchasing power of buyer and results in reduction in demand for goods. The
demand for consumer goods will particularly be affected adversely.
Inflation is measured by sustainable price index number. The whole sale price
index number is generally used for this purpose.

BSPATIL 52


Year Inflation rate (consumer prices) Rank Percent Change Date of Information
2003 5.40 % 64 2002 est.
2004 3.80 % 92 -29.63 % 2003 est.
2005 4.20 % 134 10.53 % 2004 est.
2006 4.20 % 125 0.00 % 2005 est.
2007 5.30 % 139 26.19 % 2006 est.

3. Interest rates

Interest rates reflect the cost and availability of credit to the companies
operating in the economy. The interest rates and the volume as well as direction of the
credit supply in the economy is influenced by monitory policy of the reserve bank of
India (RBI). If the cheap money policy is pursued the interest rates are likely to be
lower and larger volume of money supply is expected to be there in the economy.

The lower rate of interest implies lower cost of financing the company’s
operations and assures higher profitability, higher the rate of interest higher will be
the costs of manufacturing and sale, which is expected to lead lower profit.

Interest Rates
(% per annum) 2-Apr 3-Apr 4-Apr 5-Apr 6-Apr 6-Dec
Cash Reserve Ratio 5.5 4.8 4.5 5 5 5.3
Bank Rate 6.5 6.3 6 6 6 6
Reverse Repo rate
(Absorption rate) 6 5 4.5 4.8 5.5 6
Repo rate (Injection rate) 8 7 6 6 6.5 7.3
IDBI MT lending rate 12.5 12.5 10.3 10.3 10.3 10.3
PLR of 5 major banks 11.0-12.0 10.8-11.5 10.3-11.0 10.3-10.8 10.3-10.8 11.0-11.5
Deposit rate of 5 major
banks (maturity>1year) 7.0-8.5 5.3-6.2 5.0-5.5 5.3-6.3 6.0-7.0 6.8-8.0
Average call money rate
BSPATIL 3.6-7.5 2.0-5.1 2.1-4.5 3.3-5.5 4.2-6.2
53 5.4-12.0


4. Foreign exchange rates

If company is major exporter or importer its performance and profitability are
likely to be affected considerably by the exchange rates of rupee against other
currencies. A depreciation of rupee against US or other currency will make Indian
products more competitive price wise. In the foreign markets, thereby stimulating
export from India

5. Government budget.

The government budget provides detailed information on each of components
of government spending and revenues. The deficit is essentially the excess of
government spending on revenues. A budget deficit is often incurred for creating
infrastructural facilities in the economy tends to create inflationary pressure. Due to
this there is a strong public opinion against the governments creating of deficit
without expanding the revenue.

6. Savings and investment.

The capital market is channel through which the savings of households are
made available to corporate for investment. Therefor the trends in saving and
investment are significant in studying their impact on capital market.

Savings and Investment
% to GDP at constant
prices FY01 FY02 FY03 FY04 FY05 FY06
By sector
Household Savings 21.3 21.2 22 23.1 23.5 22
Private Corporate Sector 4.5 4.1 3.6 4.1 4.4 4.8
Public Sector -0.9 -1.7 -2 -0.7 1 2.2
By types of assets
Physical Assets 10.7 11 11.2 12.7 12 11.7
Financial Assets 10.5 10.2 10.8 10.4 11.5 10.3

BSPATIL 54


Gross Domestic Savings 24.9 23.6 23.6 26.5 28.9 29.1
Net Capital Inflow 1.1 0.6 0.2 -1.2 -1.6 1
Gross Domestic Investment 24.3 24 24.8 25.3 27.2 30.1
Errors and Omission 1 1.1 -2.1 0.1 1 1.6
Gross Capital Formation 23.3 23.8 22.2 25 27.4 30.2

Industrial analysis
Engineering:

Engineering is a diverse industry with a number of segments. A company from
this sector can be a power equipment manufacturer (like transformers and boilers),
execution specialist or a niche player (like providing environment friendly solutions).
It can be an electrical, non-electrical machinery and static equipment manufacturer
too

The sector is relatively less fragmented at the top, as competencies required
are high. But it is highly fragmented at the lower end (like unbranded transformers for
the retail segment) and is dominated by smaller players. The user industries in broad
terms are power utilities (generation, transmission and distribution), industrial majors
(refining, automotive and textiles), government (public investment) and retail
consumers (pumps and motors).

Order book size determines the performance of the company in the short to
medium-term. In order to bag big contracts, companies need to have a big balance
sheet size and proven execution capabilities. They need huge working capital in order
to execute bigger contracts, as initially they receive only part payment and the
remaining comes as projects get executed.

BSPATIL 55


Tariffs that earlier offered protection to Indian capital goods manufacturers,
have been removed. Import duties on a range of equipments have also been reduced.
This coupled with the high cost of capital in India puts Indian manufacturers at a
disadvantage against overseas competition.

Power sector contributes the largest to the engineering companies' revenues.
For instance, ABB and BHEL derive 60% and 72% of their revenues from supplying
equipments to the power sector. And with the government planning to add large
generation capacities in the eleventh (2007-12) five-year plan, the potential seems
huge for the engineering majors. This is because, apart from the investment in
generation capacity buildup, an equivalent amount is likely to be spent in the
transmission and distribution space as well.

Infrastructure is another key area of operation for major Indian engineering
companies. L&T, for example, garners around 30% of its sales from infrastructure
activities like engineering, design and construction of industrial projects and social &
physical projects like housing, hospitals, IT parks, expressways, bridges, ports, and
water & effluent treatment projects.

The high global crude prices on account of growing demand has led to increased
activities in the exploration and development space. This has helped the engineering
companies in this space. More importantly, this segment of the engineering business
has relatively higher margins than infrastructure, owing to more complex tasks
involved.

Key Points

Supply: Abundant supplies available across most segments, except for technology
intensive executions

BSPATIL 56


Demand: Demand growth in this sector is fuelled by expenditure in core sectors such
as power, railways, infrastructure development, private sector investments and the
speed at which the projects are implemented.

Barriers to entry: Barriers to entry are high at upper end of the industry as skilled
manpower and technologies, and ability to fund large projects are a prerequisite

Bargaining power of suppliers: Bargaining power of suppliers is low because of
intense competition. However, in technology driven high-end segments, suppliers
have the upper hand.

Bargaining power of customers: Bargaining power for technology driven segments
is low.

Competition: Majority of the companies compete in terms of pricing, experience in
specific field, product differentiation and timely completion of projects.

Financial Year '07

FY07 proved to be yet another good year for the Indian engineering and
capital goods industry. Strong growth in industrial and manufacturing industries
reflected in the picking up of investment activities in areas like power, infrastructure
and processes. The capital goods index recorded strong growth during the entire year,
though with some blips during the months September and October 2006.

The order books of almost all companies witnessed healthy growth. For
engineering majors like BHEL and L&T, at the end of March 2007, the value of
outstanding orders stood at nearly 3 times and 2 times respective FY07 revenues. In
general, the growth in order book came from both power and industrial businesses.
The companies were able to bag international orders. The topline of the engineering
majors witnessed double-digit growth during the fiscal.

BSPATIL 57


While the industry continued the trend of cost cutting through reducing debt
and restructuring operations and manpower rationalization, rising input costs dented
pared the improvement in profitability. Sharp rise in costs of steel and crude on the
back of buoyant global demand and inadequate supplies, was the biggest dampener to
profit growth

The fiscal also witnessed majors like Suzlon and Crompton Greaves chart out
aggressive acquisitions in the international arena. The major focus area for these
companies was to fill in the niches by way of acquiring new technologies and clients
and having a diversified geographical presence.

Budget 2008-09:

World-class infrastructure has emerged as one of the most important
necessities for unleashing high and sustained growth and alleviation of poverty in any
economy. And with poor infrastructure to support other growth initiatives, the Indian
economy continues to be a laggard when compared to its developing peers. From a
policy perspective, however, there has been a growing consensus that a private-public
partnership is required to remove difficulties concerning the development of
infrastructure in the country. The realisation finally seems to be setting in. This makes
the future of the Indian engineering sector extremely bright. Apart from highway
development and construction and modernisation of airports, the potential for the
sector lies in the oil and gas space, where high global demand has led to increased
action in exploration and production activities. However, scale and execution
capabilities remain the mantras for success

Budget Measures

1. Fourth UMPP at Tilaiya to be awarded shortly; Chhattisgarh, Karnataka,
Maharashtra, Orissa and Tamilnadu urged to bring five more UMPPs to the
bidding stage by extending the required support

BSPATIL 58


2. Rajiv Gandhi Grameen Vidyutikaran Yojana to be continued during the
Eleventh Plan period with a capital subsidy of Rs 280 bn; allocation of Rs 55
bn for FY09.
3. Rs 8 bn to be provided for Accelerated Power Development and Reforms
Project (APDRP) in FY09
4. Proposal to set up a national fund for transmission and distribution (T&D)
reform in the power sector
5. Exemption from 4% additional duty of customs has been withdrawn on power
generation projects (other than mega power projects), transmission, sub
transmission and distribution projects, and specified goods for high voltage
transmission projects
6. Custom duty on project imports reduced from 7.5% to 5%
7. Initiatives like skill development programme and setting up of industrial
training institutes to be taken
8. Defense allocation to be increased by 10%
9. Excise duty being exempted on end-use basis, on refrigeration equipment
(consisting of compressor, condenser units, evaporator, etc) above 2 TR (tonne
refrigeration) utilising power of 50 KW and above
10. Parent company allowed to set-off the dividend received from its subsidiary
company against dividend distributed by the parent company; provided that
the dividend received has suffered DDT and the parent company is not a
subsidiary of another company.

Budget Impact

1. Aggressiveness in allotting UMPPs to prospective bidders expected to be
helpful for engineering companies providing equipments and EPC services for
power plants.
2. Setting up of a national fund for T&D reforms to aid growth prospects of
equipment suppliers and T&D project developers.
3. Removal of exemption from additional customs duty on power generation,
transmission and distribution projects to increase cost for companies importing

BSPATIL 59


such projects, which shall consequently be beneficial for domestic project
developers. However, on the other hand, reduction in custom duty on project
imports to nullify the impact.
4. Initiatives like skill development programme and setting up of industrial
training institutes to reduce talent crunch for engineering companies, which
are reporting high levels of attrition
5. Increase in defense allocation to aid prospect of companies providing defense
equipments and technologies

Company Impact:

1. Allocation of UMPPs to support growth if equipment and service providers
like BHEL, L&T.
2. Greater focus on the T&D front to be beneficial for ABB, Siemens, Crompton
Greaves, Emco, Bharat Bijlee. Also, companies providing T&D project
services like Jyoti Structures and Kalpataru Transmission to benefit.
3. Removal of exemption from additional customs duty on power generation,
transmission and distribution projects to benefit domestic companies i.e
BHEL and L&T.
4. Skill development initiatives to pare pressure of attrition from companies like
L&T and BHEL.
5. Increase in defense allocation to aid prospects of L&T and Bharat Electronics.

Budget over the years:
Budget 2005-06 Budget 2006-07 Budget 2007-08
A special purpose vehicle Estimated outlay for Jawaharlal Hike in corpus of Rural
(SPV) to be launched to Nehru National Urban Renewal Infrastructure
finance infrastructure Mission to be Rs 62.5 bn during Development Fund-XIII
projects that are 2006-07, including a grant and Rajiv Gandhi
financially viable. component of Rs 45.9 bn. Grameen Vidyutikaran
Investment limit for Through this mission, the Yojana (RGGVY)

BSPATIL 60


2005-06 is fixed at Rs government intends to promote
100 bn. establishment of new towns,
preferably focused on a specific
industry (IT) or a specific theme
(education or health).

NHDP-III to be launched Budget support for National Private sector
in FY06 to target selected Highway Development participation in
high density highways Programme (NHDP) enhanced transmission projects and
not forming part of the from Rs 93.2 bn to Rs 99.5 bn in hike in budgetary support
GQ or the N-S, E-W 2006-07. for APDRP
corridor; Rs 14 bn
provided in FY06 to
four-lane 4,000 kms.

BSPATIL 61


Excise duty on A/Cs has Special accelerated road Reduction in customs
been reduced from 24% development programme for the duty on imports of
to 16%. North Eastern region proposed medical equipments from
at an estimated cost of Rs 46.2 12.5% to 7.5%
bn approved with allocation of
Rs 5.5 bn in 2006-07
1,000 kms of access-controlled Increase in allocation to
Expressways to be developed on defense to Rs 960 bn,
the Design, Build, Finance and including Rs 420 bn for
Operate (DBFO) model. capital expenditure
Capital expenditure on defense Concessions under
proposed at Rs 375 bn. section 80IA for
infrastructure facilities
extended to cross country
natural gas distribution
network, including gas
pipeline and storage
facilities integrated to the
network
Peak rate of customs duty on Customs duty on
non-agricultural products has sprinklers and drip
been reduced from 15% to irrigation systems for
12.5% with a few exceptions. agricultural &
horticultural purposes is
reduced from 7.5% to 5%
Exemption to specified goods Concessional customs
for making capital goods for duty of 5% on specified
setting up a unit with an plantation machinery
investment of Rs 50 m or more extended by two years to
withdrawn. April 2009
Resin binders used for Customs duty on food
manufacture of rotor blades for processing machinery
wind operated electricity and parts reduced from
generators exempted from 7.5% to 5%
excise duty.
Under NELP VI, 55 blocks and Dividend distribution tax
area of 355,000 sq kms offered. to be hiked from 12.5%
Investment of Rs 220 bn to 15%
expected in the refinery sector
in the next few years.
Five ultra mega power projects of Additional education cess of
4,000 MW each to be awarded before 1% to fund secondary and
December 31, 2006 higher educa

BSPATIL 62


Key Positives of budget 2008-09:

Power play: Since power utilities are one of the biggest consumers (generation,
transmission and distribution) for engineering companies, reforms introduced in the
power sector like privatisation of SEBs will help in strengthening the order book size.
Huge addition in power generation capacity, in order to meet the demand supply gap
will be a big positive for the sector.

Infrastructure development: The government is focusing on development of
infrastructure like housing, airports, roads and ports. This will be big positive for
engineering and construction companies

Industrial ‘act’: Industrial divisions of engineering companies are likely to benefit
from the increased focus on automation and capacity addition plans drawn by the
India Inc.

Key Negatives of budget 2008-09

Captive competition: Duty free import of T&D equipments by captive power
generation units, if allowed by government, can have some impact on margins of the
T&D majors because of competition

People problem: Engineering companies, across the board, are facing troubled times
retaining key employees. This is due to increased levels of competition for talent from
MNCs, who have deep pockets and thus better paying capabilities. As a result of
increasing levels of attrition, some companies are facing execution issues.

Prospects:

World-class infrastructure has emerged as one of the most important necessities for
unleashing high and sustained growth and alleviation of poverty in any economy. And
with poor infrastructure to support other growth initiatives, the Indian economy

BSPATIL 63


continues to be a laggard when compared to its developing peers. From a policy
perspective, however, there has been a growing consensus that a private-public
partnership is required to remove difficulties concerning the development of
infrastructure in the country. The realisation finally seems to be setting in. This makes
the future of the Indian engineering sector extremely bright. Apart from highway
development and construction and modernisation of airports, the potential for the
sector lies in the oil and gas space, where high global demand has led to increased
action in exploration and production activities. Considering these factors, we expect
the sector to grow strongly into the future. However, scale and execution capabilities
will be the key mantras for success for the engineering companies
Impetus given for growth of infrastructure and core industry in the last two budgets of
the central government is expected to increase capacity utilisation of producers of
coal, cement, iron ore and likely to increase demand for construction and mining
equipments. Industrial growth and capital investment levels have improved and this
will drive the growth in the coming years.
The government's initiative to bring clarity to the power sector reforms is a welcome
sign for the industry. More coordination between the Centre and states for
infrastructure development is a step in the right direction. The Electricity Act 2003
has introduced a lot of reforms in the power sector. The unbundling in the sector will
definitely boost private investment. PSUs like NTPC are expected to almost double
their generation capacity in next few years, which is a good sign for the engineering
companies.
The shift in focus towards reducing T&D losses will further increase the order book
size of the companies operating in this realm. With power generation and distribution
looking up, power equipment companies can look forward to a promising future
Deregulation combined with high global demand for crude has led to a surge in
exploration and production activities in India and globally. Also, there has been a
radical change in the government’s approach to E&P (exploration and production)
activities in the country. This thrust in development of new wells and improvement of
output from old wells promises bright prospects for engineering companies

BSPATIL 64

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