Fundamental Approach in Equity Investment

Fundamental approach Welingkar Institute

“Fundamental approach
In
Equity Investments”

Name: Ms. Sheetal Surendra Bhilare

Admission no. : DPGD/OC10/0477

Specialization : Finance

Prin. L.N.Welingkar Institute of Management Development & Research

Submission year: Aug 2012

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ACKNOWLEDGEMENT
Apart from the efforts of me, the success of any project depends largely on the
encouragement and guidelines of many others. I take this opportunity to express my gratitude to
the people who have been instrumental in the successful completion of this project.

I would like to show my greatest appreciation to Mr. Deepak Doddamani (Financial
Consultant) who guided me throughout the project.I would also like to thank Mr. Rahul Mahadik
(Analyst) & Mr. Jitesh Bhilare (Manager) who gave their crucial inputs on the subject. I can’t
say thank you enough for their tremendous support and help. Without encouragement and
guidance of them, this project would not have materialized.

My thanks and appreciations also go to my colleague in developing the project and people who
have willingly helped me out with their abilities. Guidance and support received from all the
members who contributed and who are contributing to this project, was vital for the success of
the project. I am grateful for their constant support and help.

I would like to express my gratitude towards my parents & my friends for their kind co-operation
and encouragement which help me in completion of this project.

Above all I would like to thank my faculties at Welingkar Institute and our Director Shri. Mandal
for giving me a chance to work on the project of my interest and guiding me throughout the
journey.

Ms. Sheetal Surendra Bhilare

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CERTIFICATE FROM THE GUIDE

This is to certify that the project work titled “Fundamental approach” in Equity Investment

Is a bonafide work carried out by Ms. Sheetal Surendra Bhilare

(Admission No.) DPGD/OC10/0477

A candidate for the/Post Graduate Diploma examination of the Welingkar Institute of
Management

Under my guidance and direction.

SIGNATURE OF GUIDE:

NAME: Deepak Doddamani

DESIGNATION: Founder & CEO, Ashwamedh Financial Services

ADDRESS: B-401, Sindhu Garden, Y.K.Nagar, Virar (W)

STAMP/SEAL OF THE ORGANIZATION:

DATE: 10.08.2012

PLACE: Thane

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Contents
1) INTRODUCTION 7
1.1) OBJECTIVES OF STUDY 7
1.1.1) PRIMARY OBJECTIVES 7
1.1.2) SECONDARY OBJECTIVES 7
1.2) NEED FOR STUDY 8
1.3) SCOPE OF THE STUDY 8
1.4) REASEARCH METHODOLOGY 8
1.4.1) TYPE OF RESEARCH 8
1.4.2) SOURCE OF DATA 8
1.4.3) TOOLS FOR ANALYSIS 8
2) BACKGROUND 10
2.1) MACRO ECONOMIC FACTORS IN INDIA 10
2.1.1) MONETARY POLICY 10
2.1.2) GDP GROWTH RATE 10
2.1.3) INFLATION 11
2.1.4) BALANCE OF PAYMENT 11
2.1.5) FINANCIAL MARKET 12
2.1.6) SERVICE SECTOR ANALYSIS 13
2.2) BANKING SECTOR IN INDIA 15
2.2.1) EVOLUTION OF BANKING SECTOR IN INDIA 15
2.2.2) STRUCTURE OF BANKING SECTOR IN INDIA 17
2.2.3) SWOT ANALYSIS OF BANKING SECTOR 19
2.2.4) VISION OF BANKING SECTOR IN INDIA 21
2.2.5) RISK INVOLVED IN BANKING SECTOR IN INDIA 21
2.2.6) PERFORMANCE OF BANKING SECTOR IN INDIA 22
2.3) COMPANY ANALYSIS 23
2.3.1) UCO BANK 23
2.3.2) UNION BANK OF INDIA 25
2.3.3) BANK OF INDIA 27
3) METHODOLOGY 31
3.1) LITERATURE REVIEW 31

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3.1.1) INVESTMENT 31
3.1.2) ANALYSIS OF STOCKS 32
3.1.3) INTRODUCTION TO FUNDAMENTAL ANALYSIS 33
3.1.4) TWO APPROACHES OF FUNDAMENTAL ANALYSIS 33
3.1.5) STEPS INVOLVED IN FUNDAMENTAL ANALYSIS 34
3.1.6) QUALITATIVE & QUANTITATIVE METHODS OF FUNDAMENTAL ANALYSIS: 34
3.1.7) QUALITATIVE FACTORS OF THE INDUSTRY 35
3.1.8) QUALITATIVE FACTORS OF THE COMPANY 36
3.1.9) QUANTITATIVE ANALYSIS OF THE COMPANY 37
3.1.10) USES OF FUNDAMENTAL ANALYSIS: 41
3.1.11) CRITICISMS OF FUNDAMENTAL ANALYSIS 42
3.2) DATA & OBSERVATIONS 43
3.2.1) QUALITATIVE ANALYSIS: 44
3.2.2) Quantitative Analysis 49
3.2.3) RATIO ANALYSIS 53
3.3) ANALYSIS AND INTERPRETATIONS 55
3.3.1) ANALYSIS AND INTERPRETATION OF RATIO ANALYSIS 55
3.3.2) ANALYSIS AND INTERPRETATION OF KEY FINANCIALS 59
3.4) FINDINGS & SUGGESTIONS: 62
4) CONCLUSIONS & RECOMMENDATIONS 65
4.1) CONCLUSIONS 65
4.2) RECOMMENDATIONS 65
5) LIMITATIONS 67
BIBLIOGRAPHY 68

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INTRODUCTION

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INTRODUCTION

1) INTRODUCTION

India is a developing country. Nowadays many people are interested to invest in financial
markets especially on equities to get high returns, and to save tax in honest way. Equities are
playing a major role in contribution of capital to the business from the beginning.
Since the introduction of shares concept, large numbers of investors are showing interest to
invest in stock market. Investment in Capital Markets is quite confusing. It is very important to
understand that without gaining basic knowledge about ‘Share Market’ investors should not take
risk of investments in highly unpredictable and volatile market. Which stocks to buy? Which to
hold? And which stocks to sell? The decision making process of investor is based on some solid
facts, some historical data, some predictions, some gut feelings and some tips from experts.

Every one of us have some ‘financial goals’ and understanding of ‘necessity of
investments’. In an industry plagued with skepticism and a stock market increasingly difficult to
predict and contend with, if one looks hard enough there may still be a genuine aid for
the Day Trader and Short Term Investor. The price of a security represents a consensus. It is the
price at which one person agrees to buy and another agrees to sell. Time plays crucial role in
investment decisions. At what price to enter and at what price to exit from any company, stock is
as important decision as which stocks to buy. Long position should be taken when we expect
share price to go high and in bear situation we short the equity. Human have some inherent
tendencies like greed, fear, restlessness which also affect our BUY-SELL decisions.
Diversification of portfolio is important to reduce risk. Hence sector wise understanding of
market is also crucial aspect of selecting stocks. Analysis of stocks can be classified as
fundamental analysis and technical analysis. In this project fundamental study has be studied in
detail.

1.1) OBJECTIVES OF STUDY
1.1.1) PRIMARY OBJECTIVES

To study the concept of Fundamental approach in equity investment

1.1.2) SECONDARY OBJECTIVES

To study the concept of fundamental analysis and the steps involved in same.
To do the fundamental analysis of some of the public sector banking stocks.

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1.2) NEED FOR STUDY

Valuation of equities is generally not understood properly by investors. Most of the investors
have herd mentality and rely completely on TV channels, Expert Tips for their investment
related decisions. They enter or exit from particular stock at wrong value and incur huge losses.
To avoid such situations we need to understand the fundamentals of the companies of interest.
This is valuable a company with good fundamentals performs better in long run.

1.3) SCOPE OF THE STUDY

The analysis is made by taking into consideration three companies under banking sectors.
The scope of the study is limited for a period of financial year 2011 -2012.
The scope is limited to only the fundamental analysis of the chosen stocks.

1.4) REASEARCH METHODOLOGY

Research is an art of systematic investigation. The primary purpose of research is discovering,
interpretation and development of method.

1.4.1) TYPE OF RESEARCH

Descriptive research methodology is used for this study. Theoretical study followed by
Observation and analysis is done on the selected stocks. Random sampling is used to select the
stocks from public sector banking space.

1.4.2) SOURCE OF DATA

No primary source of data collection is used. Only Secondary source of data is used. Trader
Terminal, Broker websites, Equity Research related websites, articles, books etc. used for the
Data collection.

1.4.3) TOOLS FOR ANALYSIS

Fundamental Analysis tools like:
Ratio Analysis
Trend Analysis
Valuation Methods used

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BACKGROUND

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BACKGROUND
2) BACKGROUND

2.1) MACRO ECONOMIC FACTORS IN INDIA
2.1.1) MONETARY POLICY

The RBI has raised the key policy rates for 13 times since March, 2010. The policy stance of
the Reserve Bank of India was focused towards maintaining an interest rate environment to
moderate inflation and anchor inflation expectations during May-October 2011 and thereafter
shifted towards responding to increasing downside risks to growth during the year.

In line with the policy stance, Repo rate was hiked by a cumulative 175 bps during April-
October 2011 to 8.5% and thereafter repo rate was kept unchanged till March 2012. As on
March, 2012 under the Liquidity Adjustment Facility the Repo, Reverse Repo and Marginal
Standing Facility rates were 8.5 %, 7.5 % and 9.5 %, respectively.

The RBI also undertook certain proactive measures to address liquidity deficit situation such as
Open Market Operation (OMO) and reduction in CRR. RBI has reduced the CRR from 6% to
4.75% in the year 2011-12 in two installments of 50 bps (Dec., 2011) and 75 bps (Jan., 2012).
RBI slashed the Cash Reserve Ratio (CRR) by a cumulative 125 bps during January-March
2012 in two steps to address tight liquidity conditions and spur credit growth.

2.1.2) GDP GROWTH RATE

Gross Domestic Product (GDP) growth rate provides an aggregated measure of changes in
value of the goods and services produced by an economy.

India's annual economic growth slumped in the January-March quarter to a nine-year low of
5.3 %.This is the slowest GDP growth in last 9 years and much lower than 9.2% GDP growth
rate in the same quarter last year. With this poor quarterly growth rate, GDP growth for FY2011-
12 dropped to just 6.5% compared to 8.4% in the previous financial year of 2010-11.

The main reason behind this dismal number was the dismal growth in manufacturing and
agricultural sectors.

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1) In the fourth quarter, growth in manufacturing sector dropped to just -0.3% compared to
0.6% in third quarter and 7.3% in the same quarter last year

2) Growth in in agricultural sector dropped to just 1.7% compared to 2.8% in third quarter and
7.5% in the same quarter last year.

3) Mining sector growth stood at 4.3% in the fourth quarter compared to -2.8% growth in the
third quarter and 0.6% in the same quarter last year.

4) Also the service sector stood at 10% in the fourth quarter as well, unchanged from the third
quarter growth rate.

With high inflation and steep depreciation of the domestic currency Indian economy is certainly
under pressure.

2.1.3) INFLATION

Inflation rate refers to a general rise in prices measured against a standard level of purchasing
power. High inflation generally signifies that too much money is chasing too few goods,
essentially implying that the demand for goods and services is much higher than the supply,
resulting in a surge in the prices of goods and services.

The average inflation of India in year 2012 till now is 8.38.The WPI based inflation rate in
India was recorded at 7.55 percent in May of 2012.Among the major developing nations of the
world, India is right on top in the inflation charts, with an average inflation of close to 7 per cent
estimated during the seven years from 2005-12.

Inflation continues to stay above the comfort zone despite the fact that the Reserve Bank of India
(RBI) has been the most aggressive Asian central bank.

But inflation in India has been a persistent problem, clearly the result of an overheating
economy. Massive investments to ease the supply side problem are needed to sort out the
problem of inflation

2.1.4) BALANCE OF PAYMENT

Balance of Payment: A record of all transactions made between one particular country and all
other countries during a specified period of time.

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BOP compares the dollar difference of the amount of exports and imports, including all financial
exports and imports. A negative balance of payments means that more money is flowing out of
the country than coming in, and vice versa.

India's BoP experienced a significant stress as trade deficit widened and capital inflows fell far
short of financing requirement resulting in significant drawdown of foreign exchange reserves.
There is a possibility that we may not attract sufficient inflows to take care of current account
deficit, which is likely to keep the BoP under pressure.
The RBI notes in its press release of June 29 on developments in India’s balance of payment: “In
2011-12, the CAD rose to US$ 78.2 billion (alarming 4.2 %of GDP) from US$ 46.0 billion (2.7
per cent of GDP) in 2010-11, largely reflecting higher trade deficit on account of subdued
external demand and relatively inelastic imports of POL and gold & silver.” India will remain
exposed to slowdown in capital inflows — which triggers problems on the BoP front — unless
the government initiates major policy action to cut its spending.
The balance of payments could be in better shape in the current year if the current account deficit
narrows and net capital inflows remain robust, but one can never tell given the state of the global
economy.

2.1.5) FINANCIAL MARKET

A. Liquidity Conditions: During the year 2011-12, liquidity was throughout in deficit mode.
Average net injection of liquidity under LAF increased from around 0.5 trillion during April-
September 2011 to around 1.6 trillion during March 2012.

The tight liquidity conditions were caused partly due to foreign exchange intervention of RBI
to arrest sharp depreciation of rupee between end-July and mid-December of 2011 and
increasing divergence between deposits & credit growth and large build up of Government cash
balances with the Reserve Bank of India.

To address tight liquidity conditions, RBI conducted Open Market Operations (OMOs) of
around 1.3 trillion during November 2011 and March 2012 and lowered cash reserve ratio by
125 bps during January-March 2012, injecting primary liquidity of around 0.8 trillion.

B. Debt Market: The gross market borrowing programme of the Government was revised from
initially estimated 4.17 trillion (net 3.43 trillion) to 5.1 trillion (net 4.36 trillion) for 2011-12, on
account of shortfall in other sources of financing fiscal deficit, particularly small savings and
higher levels of expenditure outgo of the Government.

The benchmark 10 year G-Sec yields hardened during April-May 2011 on account of rising
commodity prices including crude oil, and aggravated inflation concerns and hike of interest rate
by RBI. Thereafter, G-Sec yield moderated and remained range bound till September 2011 on

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account of moderation in crude oil prices and flight to safety due to increased uncertainty about
the resolution of sovereign debt crisis in the Euro Zone. G-Sec yields hardened between end-
September to November 2011 and reached to the high of 8.97% on account of increased
government borrowing program for the second half of the year, policy rate hikes and persistent
liquidity tightness.

The G-Sec yields moderated during December 2011 to mid-February on account of
moderation in inflation, OMOs conducted by RBI and on expectation of easing of policy rates by
RBI. However, G-Sec yield hardened to 8.63% by end-March 2012 following Union Budget
announcement of a higher than anticipated market borrowing program of the Government and
consequent issuance of auction calendar for dated securities.

C. Forex Market: The currency market was under pressure during the period April-December
2011 due to slowdown in capital inflows reflecting global uncertainty. Indian rupee depreciated
by 14.1% to 50.87/USD as at end-March 2012 over the closing of previous financial year, on
account of trade imbalances and rising current account deficit. The Indian rupee depreciated
sharply by around 19% between end-July 2011 and mid-December 2011.

To prevent sharp depreciation of Indian rupee, Reserve Bank of India took steep measures
including withdrawal of facility of rebooking of cancelled forward contracts, reducing net
overnight open position limit of authorized dealers and curbing speculative activities in the forex
market. In December 2011, RBI also decided to deregulate interest rates on Non-Resident
(External) Rupee (NRE) Deposits and Ordinary Non-Resident (NRO) Deposit Accounts.

D. Equity Market: Equity markets in India continued to slide and remained volatile during FY
2011-12. BSE Sensex fell by 10.5% as at end-March 2012 over the closing of previous financial
year on account of various factors including high levels of inflation, interest rates, rising fiscal
deficit, rating downgrades of sovereign debts & financial institutions, flight to safety and fall in
global indices.

2.1.6) SERVICE SECTOR ANALYSIS

The growth of service industry in India was hampered until 1990 by factors like excessive
control on interest rates, money rates etc. further there were controls on share prices by controller
of capital issues. There were no credit rating and research agencies. There was strict control on
foreign exchange and restrictions on foreign investment. This has undergone a sea change after
economic liberalization in 1990.

Service Industry in India has grown by more than 44% from 1991 to 2012. In the diagram below
Sales growth of different sectors (compared to previous) has been plotted. Please note that the
2012-2013 values used for plotting have been estimated in CMIE data.

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Today the importance of financial service sector is gaining momentum all over the world. In
these days of complex finance, people expect a financial service company to play a very dynamic
role not only as a provider of finance but also as a departmental store of finance. With the
injection of economic liberation policy into the economy and the opening of the economy to
multinationals, the free market concept has assumed much significance. As a result, the clients –
both corporate and individuals are exposed to the phenomena of volatility and uncertainty and
hence they expect the financial service company to innovate new services so as to meet their
varied requirements.

However, the financial service sector has to face many challenges in its attempt to fulfill
the ever growing financial demands of the economy. The economic liberalization has brought in
a complete transformation in the Indian financial services industry.

The present scenario is characterized by financial innovation and financial creativity.

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2.2) BANKING SECTOR IN INDIA

Indian banking system has shown tremendous growth in past few decades. Right from the
adaptation of plastic money to the era of internet banking the evolution of banks has been very
rapid and customer centric. The banks have tried to improve service in each and every aspect of
banking from phone banking to net banking. Also various other investment related products etc.
has been introduced by banks. The post-independence history of Indian banking system is
glorious. In 1948, the Reserve Bank of India, India's central banking authority, was nationalized,
and it became an institution owned by the Government of India. In 1949, the Banking
Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate,
control, and inspect the banks in India." The Banking Regulation Act also provided that no new
bank or branch of an existing bank may be opened without a license from the RBI, and no two
banks could have common directors.

In the early 1990s the then Narsimha Rao government embarked on a policy of liberalization and
gave licenses to a small number of private banks, which came to be known as New Generation
tech-savvy banks, which included banks such as Global Trust Bank (the first of such new
generation banks to be set up) which later amalgamated with Oriental Bank of Commerce, UTI
Bank (now re-named as Axis Bank), ICICI Bank and HDFC Bank.

The growing competition and the race to provide best services helped Indian Banking system to
be one of the best in the world. Even the recession of 2008 could not hit Indian Banks adversely.
In 2012, when European Economies are facing crisis; Indian banks are alert enough to play
defensive mode. The fundamentally strong banks and very effective central bank of country has
helped Indian Economy to weather all the storms.

2.2.1) EVOLUTION OF BANKING SECTOR IN INDIA

The Indian banking industry has its foundations in the 18th century, and has had a varied
evolutionary experience since then. The initial banks in India were primarily traders’ banks
engaged only in financing activities. Banking industry in the pre-independence era developed
with the Presidency Banks, which were transformed into the Imperial Bank of India and
subsequently into the State Bank of India. The initial days of the industry saw a majority private
ownership and a highly volatile work environment. Major strides towards public ownership and
accountability were made with nationalization in 1969 and 1980 which transformed the face of
banking in India. The industry in recent times has recognized the importance of private and
foreign players in a competitive scenario and has moved towards greater liberalization.

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The entire evolution can be classified into four distinct phases:

 Phase I- Pre-Nationalization Phase (prior to 1955)
 Phase II- Era of Nationalization and Consolidation (1955-1990)
 Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial
Liberalization (1990-2004)
 Phase IV- Period of Increased Liberalization (2004 onwards)

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2.2.2) STRUCTURE OF BANKING SECTOR IN INDIA

Currently the Indian banking industry has a diverse structure. The present structure of the
Indian banking industry has been analyzed on the basis of its organized status, business as well
as product segmentation

The Indian banking can be broadly categorized into nationalized (government owned),
private banks and specialized banking institutions. The Reserve Bank of India acts as
centralized body monitoring any discrepancies and shortcoming in the system.

The banking institutions in the organized sector, commercial banks are the oldest institutions,
some of them having their genesis in the nineteenth century. Initially they were set up in large
numbers, mostly as corporate bodies with shareholding with private individuals. Banks operating
in India fall under different sub categories on the basis of their ownership and control over
management;

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I. Public Sector Banks

Public Sector Banks emerged in India in three stages. First the conversion of the then existing
Imperial Bank of India into State Bank of India in 1955, followed by the taking over of the seven
associated banks as its subsidiary. Second the nationalization of 14 major commercial banks in
1969 and last the nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitute
the Public Sector Banks.

II. New Private Sector Banks

After the nationalization of the major banks in the private sector in 1969 and 1980, no new bank
could be setup in India for about two decades, though there was no legal bar to that effect. The
Narasimham Committee on financial sector reforms recommended the establishment of new
banks of India. RBI thereafter issued guidelines for setting up of new private sector banks in
India in January 1993. These guidelines aim at ensuring that new banks are financially viable
and technologically up to date from the start. They have to work in a professional manner, so as
to improve the image of commercial banking system and to win the confidence of the public.
Eight private sector banks have been established including banks sector by financially
institutions like IDBI, ICICI, and UTI etc.

III. Local Area Banks

Such Banks can be established as public limited companies in the private sector and can be
promoted by individuals, companies, trusts and societies. The minimum paid up capital of such
banks would be 5 crores with promoters contribution at least Rs. 2 crores. They are to be set up
in district towns and the area of their operations would be limited to a maximum of 3 districts.

IV. Foreign Banks

Foreign commercial banks are the branches in India of the joint stock banks incorporated
abroad. Many foreign banks like ABN AMRO, HSBC have really good business set up in India.
Mostly services like NRE, NRO accounts, Forign Exchange etc. are provided by these banks.

The commercial banking structure in India consists of:
V. Scheduled Commercial Banks in India

Non-scheduled and Scheduled Banks in India constitute those banks which have been included
in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only
those banks in this schedule which satisfy the criteria laid down vide section42 (6) a) of the Act.
"Scheduled banks in India" means the State Bank of India constituted under the State Bank of
India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary
Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under

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section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40
of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank
of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of
the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

VI. Cooperative Banks

Besides the commercial banks, there exists in India another set of banking institutions called
cooperative credit institutions. These have been made in existence in India since long. They
undertake the business of banking both in urban and rural areas on the principle of cooperation.
They have served a useful role in spreading the banking habit throughout the country. Yet, there
financial position is not sound and a majority of cooperative banks has yet to achieve financial
viability on a sustainable basis.

The cooperative banks have been set up under various Cooperative Societies Acts enacted by
State Governments. Hence the State Governments regulate these banks. In 1966, need was felt to
regulate their activities to ensure their soundness and to protect the interests of depositors
According to the RBI in March 2009, number of all Scheduled Commercial Banks (SCBs) was
171 of which, 86 were Regional Rural Banks and the number of Non-Scheduled Commercial
Banks including Local Area Banks stood at 5. Taking into account all banks in India, there are
overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks
made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff
and 60.3 per cent of all automated teller machines (ATMs).

2.2.3) SWOT ANALYSIS OF BANKING SECTOR

STRENGTH
 Indian banks have compared favorably on growth, asset quality and profitability with
other regional banks over the last few years.
 Policy makers have made some notable changes in policy and regulation to help
strengthen the sector. These changes include strengthening prudential norms, enhancing
the payments system and integrating regulations between commercial and co-operative
banks.
 Bank lending has been a significant driver of GDP growth and employment. Extensive
reach: the vast networking & growing number of branches & ATMs. Indian banking
system has reached even to the remote corners of the country.

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 In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region.

WEAKNESS
 Public Sector Banks need to fundamentally strengthen institutional skill levels especially
in sales and marketing, service operations, risk management and the overall
organizational performance ethic & strengthen human capital.
 Old private sector banks also have the need to fundamentally strengthen skill levels.
 The cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies.
 Structural weaknesses such as a fragmented industry structure, restrictions on capital
availability and deployment, lack of institutional support infrastructure, restrictive labour
laws, weak corporate governance and ineffective regulations beyond Scheduled
Commercial Banks (SCBs), unless industry utilities and service bureaus.
 Refusal to dilute stake in PSU banks:
 The government has refused to dilute its stake in PSU banks below 51% thus choking the
headroom available to these banks for raining equity capital.
 Impediments in sect oral reforms: Opposition from Left and resultant cautious approach
from the North Block in terms of approving merger of PSU banks may hamper their
growth prospects in the medium term.

OPPORTUNITY
 The market is seeing discontinuous growth driven by new products and services that
include opportunities in credit cards, consumer finance and wealth management on the
retail side, and in fee-based income and investment banking on the wholesale banking
side. These require new skills in sales & marketing, credit and operations.
 With increased interest in India, competition from foreign banks will only intensify.
 Given the demographic shifts resulting from changes in age profile and household
income, consumers will increasingly demand enhanced institutional capabilities and
service levels from banks.
 New private banks could reach the next level of their growth in the Indian banking sector
by continuing to innovate and develop differentiated business models to profitably serve
segments like the rural/low income and affluent/HNI segments; actively adopting
acquisitions as a means to grow and reaching the next level of performance in their
service platforms. Attracting, developing and retaining more leadership capacity

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 Foreign banks committed to making a play in India will need to adopt alternative
approaches to win the “race for the customer” and build a value-creating customer
franchise in advance of regulations potentially opening up post 2009.
 Reach in rural India for the private sector and foreign banks.
 Liberalization of ECB norms:
 The government also liberalized the ECB norms to permit financial sector entities
engaged in infrastructure funding to raise ECBs. This enabled banks and financial
institutions, which were earlier not permitted to raise such funds, explore this route for
raising cheaper funds in the overseas markets.
 Hybrid capital:
 In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise
perpetual bonds and other hybrid capital securities to shore up their capital. If the new
instruments find takers, it would help PSU banks, left with little headroom for raising
equity.

THREATS
 Threat of stability of the system: failure of some weak banks has often threatened the
stability of the system.
 Rise in inflation figures which would lead to increase in interest rates.
 Increase in the number of foreign players would pose a threat to the Public Sector Bank
as well as the private players.

2.2.4) VISION OF BANKING SECTOR IN INDIA

The banking scenario in India has already gained all the momentum, with the domestic and
international banks gathering pace. The focus of all banks in India has shifted their approach to
become cost-effective. To survive in the long run, it is essential to focus on cost saving. To
maximize profits.

2.2.5) RISK INVOLVED IN BANKING SECTOR IN INDIA

There are lots of different types of risks in banking. These include a credit risk, market risk,
liquidity risk, operational risk, reputational risk, volatility risk, settlement risk, profit risk and
systemic risk. Each of these types has other risk types included in their category.

Firstly we have a credit risk, which is the risk of an investor, who has lent money to the
borrower, who does not make the return payments as originally agreed. There are a number of
circumstances where a credit risk may arise such as a consumer or a business missing payments
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on a mortgage or any other type of loan, a business or consumer who does not pay an invoice
when it is due, a business who does pay an employee's wages when they are due and many
others.

Secondly we have a market risk, which is the risk that an investment or trading portfolio will
decrease in value due to change in the market. This risk can also be related to a volatility risk
which is the risk of a portfolio price change due to changes in the volatility of any risk factor.

Thirdly, a liquidity risk is the risk that an asset or security cannot be traded quickly enough after
receiving it so that the value drops.

The two types of liquidity risk include asset liquidity and funding liquidity.

An operational risk is the risk that comes from the execution of a company's business functions.
This category can also include fraud risks, physical risks, legal risks and environmental risks.

A reputation risk is, as suggested by the name, a risk which endangers the reputation of a well
respected company.

2.2.6) PERFORMANCE OF BANKING SECTOR IN INDIA

The banking industry in India seems to be unaffected from the global financial crises in Euro
zone. India seems to be on the strong fundamental base and seems to be well insulated from the
financial turbulence emerging from the western economies. The strong economic growth in the
past, low defaulter ratio, absence of complex financial products, regular intervention by central
bank, proactive adjustment of monetary policy and so called close banking culture has favored
the banking industry in India in recent global financial turmoil.

Money Supply: The growth in money supply which was 17% at the beginning of the financial
year 2011-12 moderated during the course of the year to about 13% by end-March 2012.The
slower growth in money supply was primarily on account of tightness in primary liquidity, lower
credit demand during most part of the year, slackening pace of economic activity and
deceleration in inflation from December 2011.

Credit Growth: The Reserve bank of India scaled down the projection for non-food credit
growth for the year 2011-12 from 18.0% to 16.0% in January 2012. The overall slowdown in
credit growth was on account of rising interest rate environment, deteriorating asset quality of
public sector banks and risk aversion of banks as corporate profitability was adversely affected in
2011-12.
Interest rate & NPA: Interest rate on Savings Deposits was initially raised from 3.50% to 4.0%
and later it was deregulated. One of the important developments for banks during FY2011-12

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was the introduction of system-driven identification of NPAs resulting in increase in banks’
NPAs and consequent provisioning, which impacted the profitability significantly.

The increase in Savings Deposits rate and deregulation of Savings Deposits rate coupled with
increase in Term Deposits rate by banks as a result of rise in policy rates by RBI added to the
cost pressure affecting NIM. Profitability of banks was severely impacted on account of lower
NIM and higher NPA provisioning. In spite of capital infusion by the Government, most of the
Public Sector Banks faced challenges on capital front during FY2011-12.

Although there will no impact on the Indian banking system similar to that in west but the
banks in India will adopt for more of defensive approach in credit disbursal in coming period. In
order to safe guard their interest; banks will follow stringent norms for credit disbursal. There
will be more focus on analyzing borrower financial health rather than capability.

2.3) COMPANY ANALYSIS

2.3.1) UCO BANK

Introduction

UCO Bank, formerly United Commercial Bank, established in 1943 in Kolkata is one of the
oldest and major commercial bank of India.

Overview
It has 2206 service units spread across India
It also operates in Hong Kong and Singapore
Operate Foreign Exchange dealings in more than 50 cities of India.

History

Ghanshyam Das Birla; one of the eminent Industrialist during Quit India Movement 1942,
had conceived the Idea of Organizing a commercial bank with Indian Capital & Management
and The United Commercial Bank Limited was incorporated to give shape to that Idea.

Management
Chairman & Managing Director: Shri. Arun Kaul
Executive Director: Shri. N. R. Badrinarayanan, Shri. S. Chandrashekharan

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Vision Statement
To emerge as the most trusted, admired and sought after world class financial institution and to
be the most preferred destination for every customer and investor and a place of pride for its
employees.

Mission Statement
To be a top class bank to achieve sustained growth of business and profitability, fulfilling socio-
economic obligations, excellence in customer service, through up gradation of skills of staff and
their effective participation making use of state-of art technology.

Branding

Tagline: Honors your trust

USP: Commitment to Customers

STP

Segment: Individual and Industrial Banking

Target group: Urban Sector

Positioning: Complete banking solutions

SWOT Analysis
Strength : 1) Foreign Exchange Operations
2) Diverse Asset Portfolio
3) High proportion of long term liabilities
4) Countrywide Presence
5) Overseas presence & profitable areas of Operations
6) Strong Capital Base
7) A large diversified client base

Weakness: 1) Retail Banking is lesser as compared to other banks
2) Weak Internet banking when compared to large banks of country
3) High non-performing assets

Opportunities: 1) Small enterprise banking
2) More penetration through rural banking

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Threats: 1) Economic breakdown
2) Highly competitive environment
3) Stringent banking norms.

Main Competitors
1) Indian Bank
2) Union Bank of India
3) Dena Bank

2.3.2) UNION BANK OF INDIA

Introduction
Union Bank of India was established on 11th November 1919 with its headquarters in the city of
Bombay now known as Mumbai.
The Head Office building of the Bank in Mumbai was inaugurated by Mahatma Gandhi, the
Father of the nation in the year 1921

Overview
It has 2800 branches spread across India.
It has representative offices in Abu Dhabi, United Arab Emirates, and Shanghai, Peoples
Republic of China, and a branch in Hong Kong.

History
At the time of India's Independence in 1947, UBI still only had four branches - three in Mumbai
and one in Saurashtra, all concentrated in key trade centers. After Independence UBI accelerated
its growth and by the time the government nationalized it in 1969, it had grown to 240 branches
in 28 states. Shortly after nationalization, UBI merged in Belgaum Bank, a private sector bank
established in 1930 that had itself merged in a bank in 1964, the Shri. Jadeya Shankarling Bank.
Then in 1985 UBI merged in Miraj State Bank, which had been established in 1929. In 1999
the Reserve Bank of India requested that UBI acquire Sikkim Bank in a rescue after extensive
irregularities had been discovered at the non-scheduled bank. Sikkim Bank had eight branches
located in the North-east, which was attractive to UBI.

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Management
Chairman & Managing Director: Shri. Debabrata Sarkar
Executive Director: Shri. S.S. Mundra & Shri. Shirish Kumar Jain

Vision Statement
To become the bank of first choice in our chosen areas by building beneficial and lasting
relationships with customers through a process of continuous improvement

Mission Statement
To be a customer centric organization known for its differentiated customer service
To offer a comprehensive range of products to meet all financial needs of customers
To be a top creator of shareholder wealth through focus on profitable growth
To be a young organization leveraging on technology & an experienced workforce
To be the most trusted brand, admired by all stakeholders
To be a leader in the area of Financial Inclusion

Branding
Tagline: Good people to bank with

USP: Innovative banking for social welfare

STP
Segment: Individual and Industry banking

Target: Individuals and corporate

Positioning: Complete Banking solutions

SWOT Analysis
Strength: 1. financial products for agricultural sector
2. Products aligned to Government schemes
3. Emphasis on Customer Satisfaction
4. Online Telebanking facility is available to all
It’s Core Banking Customers individual as well as corporate

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Weakness: 1. Nominal International presence as compared to leading players
2. Advertising is lesser which leads to lower brand presence

Opportunities: 1. Small scale business banking
2. More global penetration through International banking
3. Acquisition of smaller local banks

Threats: 1. Economic crisis
2. Highly competitive environment
3. Stringent Banking Norms

Main Competitors
1. Indian bank
2. Corporation Bank
3. Dena bank

2.3.3) BANK OF INDIA

Introduction
Bank of India is a state-owned commercial bank with headquarters in Mumbai. Government-
owned since nationalization in 1969, It is India's 4th largest PSU bank, after State Bank of
India, Punjab National Bank and Bank of Baroda.

BoI is a founder member of SWIFT (Society for Worldwide Inter Bank Financial
Telecommunications), which facilitates provision of cost-effective financial processing and
communication services. The Bank completed its first one hundred years of operations on 7
September 2006

Overview
It has 4157 branches as on 21/04/2012, including 29 branches outside India, and about 1679
ATMs.

The branches in India are spread over all states/ union territories including specialized branches.
These branches are controlled through 50 Zonal Offices.

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There are 29 branches/ offices (including five representative offices) and 3 Subsidiaries and 1
joint venture abroad.

History
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from
Mumbai. The Bank was under private ownership and control till July 1969 when it was
nationalized along with 13 other banks.
Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees,
the Bank has made a rapid growth over the years and blossomed into a mighty institution with a
strong national presence and sizable international operations.

In business volume, the Bank occupies a premier position among the nationalized banks.

Management
Chairman: Shri. Alok Kumar Mishra
Executive Director: Shri. N. Sheshadri

Vision Statement
"To become the bank of choice for corporates, medium businesses and upmarket retail customers
and to provide cost effective developmental banking for small business, mass market and rural
markets"

Mission Statement
"To provide superior, proactive banking services to niche markets globally, while providing cost-
effective, responsive services to others in our role as a development bank, and in so doing, meet
the requirements of our stakeholders".

Branding
Tagline: Relationships beyond Banking

USP: A bank that gives something extra to its customers

STP
Segment: For people who wish to invest their money in banks

Target group: Families, Corporate

Positioning: Bank that delivers with a human touch

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SWOT Analysis
Strength: 1. A public sector undertaking. Thus, has government backing
2. Increasing profits over the years

3. Pan India presence

4. Founder of SWIFT

(Society for Worldwide Inter Bank Financial Telecommunications)

5. Large employee base

Weakness: 1.Brand valued not as big as SBI or BoB

2. The branches are not modernized in many cities
as compared to leading banks

Opportunities: 1.Venturing into rural areas
2. Installation of more ATMs

3. Use of mobile banking, internet banking on a large scale
Threats: 1. New banking licenses

2. Foreign players
3. Disinvestments

Main Competitors
1. Bank of Maharashtra

2. Bank of Baroda

3. Central Bank

4. State Bank of India

5. ICICI Bank

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METHODOLOGY

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METHODOLOGY
3) METHODOLOGY

3.1) LITERATURE REVIEW

3.1.1) INVESTMENT

In finance, investment is the commitment of funds by buying securities or other monetary or
paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets,
such as gold or collectibles. Valuation is the method for assessing whether a potential investment
is worth its price. Returns on investments will follow the risk-return spectrum.

Types of financial investments include shares, other equity investment, and bonds (including
bonds denominated in foreign currencies). These financial assets are then expected to provide
income or positive future cash flows, and may increase or decrease in value giving the investor
capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive
expected cash flows, and so are not considered assets, or strictly speaking, securities or
investments. Nevertheless, since their cash flows are closely related to (or derived from) those of
specific securities, they are often studied as or treated as investments.

Investments are often made indirectly through intermediaries, such as banks, mutual funds,
pension funds, insurance companies, collective investment schemes, and investment clubs.

Though their legal and procedural details differ, an intermediary generally makes an investment
using money from many individuals, each of whom receives a claim on the intermediary.

Within personal finance, money used to purchase shares, put in a collective investment scheme
or used to buy any asset where there is an element of capital risk is deemed an investment.

Saving within personal finance refers to money put aside, normally on a regular basis. This
distinction is important, as investment risk can cause a capital loss when an investment is
realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation.

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3.1.2) ANALYSIS OF STOCKS

Many investors lose their lots of hard-earned money in share market due to lack of knowledge
about the companies in which they invest. It's very important to pick proper stocks to avoid huge
losses in share market.

Rather than completely depending on stock tips by experts; an investor should himself do some
basic research about the companies in which he/she wants to invest. Therefore it's mandatory to
have a basic knowledge about the major methods of analysis of stocks; so as to pick up the right
stocks of the right sector at right price.

The Two Basic Methodologies Are:
A) Fundamental Analysis
B) Technical Analysis

A) Fundamental Analysis

Fundamental analysis considers financial and economic data that may influence the viability of a
company. The basic of fundamental analysis lies in understanding the business of the company
properly and the industry in which it operates.

The fundamentals of a firm can be analyzed quantitatively as well as qualitatively. Fundamental
analysis helps to decide investors whether to buy or sell a particular stock depending upon its
current market price and the intrinsic value.

It is useful for investors in long run as they can buy shares when they are undervalued and sell
them when they are overpriced depending on the market movements.

B) Technical Analysis

Technical analysis involves a study of past market generated data like prices and volumes to
determine the future direction of price movement. As technical analysis focuses on price and
volume data it is extremely useful for traders and speculators who seek to predict short term
price movements.

A basic concept of technical analysis involves study of trends, relationship between volume and
trend and determination of support and resistance levels.

Investors can use single approach or can use combination of both depending up on his/her risk
appetite, duration of financial goals and investment period.

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3.1.3) INTRODUCTION TO FUNDAMENTAL ANALYSIS

Fundamental Analysis involves examining the economic, financial and other qualitative and
quantitative factors related to a security in order to determine its intrinsic value. It attempts to
study everything that can affect the security's value, including macro economic factors (like the
overall economy and industry conditions) and individually specific factors (like the financial
condition and management of companies).

Fundamental analysis, which is also known as quantitative analysis, involves delving into a
company’s financial statements (such as profit and loss account and balance sheet) in order to
study various financial indicators (such as revenues, earnings, liabilities, expenses and assets).
Such analysis is usually carried out by analysts, brokers and savvy investors.

Many analysts and investors focus on a single number--net income (or earnings)--to evaluate
performance. When investors attempt to forecast the market value of a firm, they frequently rely
on earnings. Many institutional investors, analysts and regulators believe earnings are not as
relevant as they once were.

Due to nonrecurring events, disparities in measuring risk and management's ability to disguise
fundamental earnings problems, other measures beyond net income can assist in predicting
future firm earnings.

3.1.4) TWO APPROACHES OF FUNDAMENTAL ANALYSIS

While carrying out fundamental analysis, investors can use either of the following:

1. Top-down approach: In this approach, an analyst investigates both international and
national economic indicators, such as GDP growth rates, energy prices, inflation and
interest rates.
The search for the best security then trickles down to the analysis of total sales, price
levels and foreign competition in a sector in order to identify the best business in the
sector.

2. Bottom-up approach: In this approach, an analyst starts the search with specific
businesses, irrespective of their industry/region.

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3.1.5) STEPS INVOLVED IN FUNDAMENTAL ANALYSIS

Fundamental analysis is carried out with the aim of predicting the future performance of a
company. It is based on the theory that the market price of a security tends to move towards its
'real value' or 'intrinsic value.' Thus, the intrinsic value of a security being higher than the
security’s market value represents a time to buy. If the value of the security is lower than its
market price, investors should sell it.

The steps involved in fundamental analysis are: Fundamental analysis uses E-I-A Analysis
approach (Economic ----->Industry ------>Company)

Economic Analysis
 Growth rate of GDP
 Balance of trade
 Foreign reserves and exchanges rates
 Government Budget and Deficit
 Price level and Inflation
 Interest rates
 Savings and investments
 Agriculture and Industrial growth parameters
 Infrastructure facilities and arrangements
 Sentiments

Industry Analysis
 Industry life cycle Analysis
 Profit potential of industries

Company Analysis
 Ratio Analysis
 Valuation of firm
 Non financial analysis
 Situational analysis
 Financial analysis

3.1.6) QUALITATIVE & QUANTITATIVE METHODS OF FUNDAMENTAL ANALYSIS:

Qualitative methods concentrates on other aspects of a company, such as the level of integrity
of the board of directors and the management, brand name recognition, patents, and competition.

Quantitative methods are conducted through numerical and statistical equations taken from a
company's financial statement, including profits, revenues, assets and liabilities & also analysis
of lots of ratios to examine a company’s financial condition.

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3.1.7) QUALITATIVE FACTORS OF THE INDUSTRY

Each industry has differences in terms of its customer base, market share among firms, industry-
wide growth, competition, regulation and business cycles

Customers

Some companies serve only a handful of customers, while others serve millions. In general, it's a
red flag (a negative) if a business relies on a small number of customers for a large portion of its
sales because the loss of each customer could dramatically affect revenues

Market Share

Understanding a company's present market share can tell volumes about the company's business.
Market share is important because of economies of scale. When the firm is bigger than the rest of
its rivals, it is in a better position to absorb the high fixed costs of a capital-intensive industry.

Industry Growth

One way of examining a company's growth potential is to first examine whether the amount of
customers in the overall market will grow. This is crucial because without new customers, a
company has to steal market share in order to grow.

Competition

Industries that have limited barriers to entry and a large number of competing firms create a
difficult operating environment for firms. One of the biggest risks within a highly competitive
industry is pricing power. This refers to the ability of a supplier to increase prices and pass those
costs on to customers. Companies operating in industries with few alternatives have the ability to
pass on costs to their customers. Analysis of competition is important.

Regulation

Certain industries are heavily regulated due to the importance or severity of the industry's
products and/or services. As important as some of these regulations are to the public, they can
drastically affect the attractiveness of a company for investment purposes. In other industries,
regulation can play a less direct role in affecting industry pricing.

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3.1.8) QUALITATIVE FACTORS OF THE COMPANY

Qualitative factors may include effect on employee morale, schedules and other internal
elements, relationships with and commitments to suppliers, effect on present and future
customers and long-term future effect on profitability.

Business Model

Even before an investor looks at a company's financial statements or does any research, one of
the most important questions that should be asked is: What exactly does the company do? This is
referred to as a company's business model – it's how a company makes money.

Competitive Advantage
Another business consideration for investors is competitive advantage. A company's long-term
success is driven largely by its ability to maintain a competitive advantage - and keep it.

Management

A company relies upon management to steer it towards financial success. Some believe that
management is the most important aspect for investing in a company.

Corporate governance

Good corporate governance is a situation in which a company complies with all of its
governance policies and applicable government regulations in order to look out for the interests
of the company's investors and other stakeholders.

Transparency

This aspect of governance relates to the quality and timeliness of a company's financial
disclosures and operational happenings.

Structure of the board of directors

The combination of inside and outside directors attempts to provide an independent assessment
of management's performance, making sure that the interests of shareholders are represented.

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3.1.9) QUANTITATIVE ANALYSIS OF THE COMPANY

Financial statements are the medium by which a company discloses information concerning its
financial performance. Followers of fundamental analysis use the quantitative information
gleaned from financial statements to make investment decisions. It includes the three most
important financial statements - income statements, balance sheets and cash flow statements –
Following is the brief introduction of each financial statement's specific function, along with
where they can be found.

A) Income Statement

The income statement measures the performance of the company for specific period. The income
statement represents the revenue, profit/loss, expenses of the company due to its business
operations for certain time frame (quarterly or annually). When it comes to analyzing
fundamentals, the income statement lets investors know how well the company’s business is
performing - or, basically, whether or not the company is making money. Generally speaking,
companies ought to be able to bring in more money than they spend or they don’t stay in
business for long. Those companies with low expenses relative to revenue - or high profits
relative to revenue - signal strong fundamentals to investors.

Revenue
Revenue, also commonly known as sales, is generally the most straight forward part of the
income statement. The revenue generated by company is the is the best parameter to measure its
profitability. Company should increase it’s Sales to stay in profit.

Profits
Profit, most simply put, is equal to total revenue minus total expenses. However, there are
several commonly used profit subcategories that tell investors how the company is performing.
Gross profit is calculated as revenue minus cost of sales. Operating profit is equal to revenues
minus the cost of sales and SG & A. Net income generally represents the company's profit after
all expenses, including financial expenses, have been paid.

B) The Balance Sheet

The balance sheet highlights the financial condition of a company and is an integral part of the
financial statements. The balance sheet, also known as the statement of financial condition,
offers a snapshot of a company's health. It tells you how much a company owns (its assets), and
how much it owes (its liabilities).

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Assets, liability and equity are the three main components of the balance sheet. Carefully
analyzed, they can tell investors a lot about a company's fundamentals.

Assets = Liabilities + Shareholder’s Equity

Assets represent the resources that the business owns or controls at a given point in time. This
includes items such as cash, inventory, machinery and buildings. The other side of the equation
represents the total value of the financing the company has used to acquire those assets.
Financing comes as a result of liabilities or equity.

Liabilities represent debt (which of course must be paid back), while equity represents the total
value of money that the owners have contributed to the business - including retained earnings,
which is the profit made in previous years.

C) Cash flow statement

The statement of cash flows represents a record of a business' cash inflows and outflows over a
period of time. Typically, a statement of cash flows focuses on the following cash-related
activities:

 Operating Cash Flow (OCF): Cash generated from day-to-day business operations
 Cash from investing (CFI): Cash used for investing in assets, as well as the proceeds
from the sale of other businesses, equipment or long-term assets
 Cash from financing (CFF): Cash paid or received from the issuing and borrowing of
funds

The cash flow statement is important because it's very difficult for a business to manipulate its
cash situation. Cash flow statement is a conservative measure of a company's performance.

Cash Flow Statement Consideration:

Savvy investors are attracted to companies that produce plenty of free cash flow (FCF). Free
cash flow signals a company's ability to pay debt, pay dividends, buy back stock and facilitate
the growth of business. Free cash flow, which is essentially the excess cash produced by the
company, can be returned to shareholders or invested in new growth opportunities without
hurting the existing operations. The most common method of calculating free cash flow is:

Free Cash Flow = Net Income + Amortization/Depreciation – Changes in Working Capital
– Capital Expenditures

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Ratio analysis

Financial ratios are tools for interpreting financial statements to provide a basis for valuing
securities and appraising financial and management performance. A good financial analyst will
build in financial ratio calculations extensively in a financial modeling exercise to enable robust
analysis financial ratios allow a financial analyst to:

1. Standardize information from financial statements across multiple financial years to
allow comparison of a firm’s performance over time in a financial model.
2. Standardize information from financial statements from different companies to allow
apples to apples comparison between firms of differing size in a financial model.
3. Measure key relationships by relating inputs (costs) with outputs (benefits) and facilitates
comparison of these relationships over time and across firms in a financial model.

In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently,
these are:

Performance ratios

 What return is the company making on its capital investment?
 What are its profit margins?

Working capital ratios

 How quickly are debts paid?
 How many times is inventory turned?

Liquidity ratios

 Can the company continue to pay its liabilities and debts?

Solvency ratios (Longer term)

 What is the level of debt in relation to other assets and to equity?
 Is the level of interest payable out of profits

The calculations produced by the valuation ratios are used to gain some understanding of the
company's value. The ratios are compared on an absolute basis, in which there are threshold
values.

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Valuation

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted
cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often
using the weighted average cost of capital) to arrive at a present value, which is used to evaluate
the potential for investment. If the value arrived at through DCF analysis is higher than the
current cost of the investment, the opportunity may be a good one. DCF is a valuable tool used
by both analysts and everyday investors to estimate a company's value. Calculated as:

DCF Analysis:

There are many variations when it comes to what you can use for your cash flows and discount
rate in a DCF analysis. Discounted cash flow tries to work out the value of a company today,
based on projections of how much money it's going to make in the future. DCF analysis says that
a company is worth all of the cash that it could make available to investors in the future. It is
described as “discounted" cash flow because cash in the future is worth less than cash today
There are several tried and true approaches to discounted cash flow analysis, including the
dividend discount model (DDM) approach and the cash flow to firm approach. In this tutorial,
we will use the free cash flow to equity approach commonly used by Wall Street analysts to
determine the "fair value" of companies.

Using the DCF Method

The forecast period is the time period for which the individual yearly cash flows are input to the
DCF formula. Cash flows after the forecast period can only be represented by a fixed number
such as annual growth rates. There are no fixed rules for determining the duration of the forecast
period.

Cash flow is the difference between the amount of cash flowing in and out a company. Make
sure to consistently include the different types of cash flows.

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3.1.10) USES OF FUNDAMENTAL ANALYSIS:

Long-term Trends

Fundamental analysis is good for long-term investments based on long-term trends, very long-
term. The ability to identify and predict long-term economic, demographic, technological or
consumer trends can benefit patient investors who pick the right industry groups or companies.

Value Spotting

Sound fundamental analysis will help identify companies that represent a good value. Some of
the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and
John Neff are seen as the champions of value investing. Fundamental analysis can help uncover
companies with valuable assets, a strong balance sheet, stable earnings, and staying power.

Business insights

One of the most obvious, but less tangible, rewards of fundamental analysis is the development
of a thorough understanding of the business. After such pains taking research and analysis, an
investor will be familiar with the key revenue and profit drivers behind a company. Earnings and
earnings expectations can be potent drivers of equity prices. Even some technicians will agree to
that. A good understanding can help investors avoid companies that are prone to shortfalls and
identify those that continue to deliver. In addition to understanding the business, fundamental
analysis allows investors to develop an understanding of the key value drivers and companies
within an industry. A stock's price is heavily influenced by its industry group.

Knowing Who's Who

Stocks move as a group. By understanding a company's business, investors can better position
themselves to categorize stocks within their relevant industry group. Business can change rapidly
and with it the revenue mix of a company. This has happened with many of the pure internet
41


retailers, which were not really internet companies, but plain retailers. Knowing a company's
business and being able to place it in a group can make a huge difference in relative valuations

3.1.11) CRITICISMS OF FUNDAMENTAL ANALYSIS

The biggest criticisms of fundamental analysis come primarily from two groups:
proponents of analysis and believers of the efficient market hypothesis.

Technical analysis is the other major form of security analysis. We’re not going to get into too
much detail on the subject. Put simply, technical analysts base their investments (or, more
precisely, their trades) solely on the price and volume movements of securities.

Using charts and a number of other tools, they trade on momentum, not caring about the
fundamentals. While it is possible to use both techniques in combination, one of the basic tenets
of technical analysis is that the market discounts everything.

Accordingly, all news about a company already is priced into a stock, and therefore a stock’s
price movements give more insight than the underlying fundamental factors of the business
itself.

Followers of the efficient market hypothesis, however, are usually in disagreement with both
fundamental and technical analysts. The efficient market hypothesis contends that it is essentially
impossible to produce market-beating returns in the long run, through either fundamental or
technical analysis.

The rationale for this argument is that, since the market efficiently prices all stocks on an
ongoing basis, any opportunities for excess returns derived from fundamental(or technical)
analysis would be almost immediately whittled away by the market’s many participants, making
it impossible for anyone to meaningfully outperform the market over the long term.

Economists such as Burton Malkiel suggest that neither fundamental analysis nor technical
analysis is useful in outperforming the market.

Too many economic indicators and extensive macroeconomic data can confuse novice investors.
The same set of information on macroeconomic indicators can have varied effects on the same
currencies at different times. It is beneficial only for long-term investments.

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3.2) DATA & OBSERVATIONS

PARAMETERS CONSIDERATION

CAR Capital adequacy ratio (Tier 1 and tier 2 capital/ Risk weighted assets) - RBI stipulates
this at > 9%. Indian banks do have 12-14% mostly

FINANCIAL 12 times is the average in the financial institutions
LEVERAGE

NPA Nonperforming assets - Low NPA is good (Say gross <1.5% and net < 0.5%)

PROVISIONAL Provisional expense/Gross NPA – greater the better (say greater than 100%)
COVERAGE RATIO

NIM Net Interest Margin - 3% or more is considered good. 4% is excellent. At least 2% is
needed for reasonable profitability

REVENUE GROWTH Just like any other sector, banks also need good revenue growth

ROE 15 to 20% return on equity is considered good. It is easy to boost returns by leveraging
up the balance sheet or under provisioning. So, ROE should be seen in context of RoA.
RoE is based on the levers – net margins, Asset turnover and financial leverage.

ROA Greater than 1.2% return on assets is considered good. RoA is based on
the levers – net margins, Asset turnover and financial leverage.

EFFICIENCY This is the Cost to income ratio – operating expenses (non-interest
RATIO expenses) as a percentage of income.

43


P/B Price to book ratio is appropriate as book values are marked to market
every quarter (acceptable value). Big banks trade at 2 to 4 times book
value.
The above table shows How to analyze Bank Stocks - Fundamental Analysis of Banks

Notes:

1. In this research, though banks are not in close competition with one another, rather than
doing individual analysis, we are doing relative analysis based on percentage
performance metrics to make investment decision

2. Analysis of selected banks in this research is done in terms of qualitative factors &
quantitative factors to make Buy or Sell decision.

3. In this analysis, we are not covering valuation part of it as it takes exhaustive exercise
followed by very good understanding & experience required in the banking sector to
make near to correct future assumptions. Simply, we will try to use PE multiple for
relative analysis.

4. Analysis of financial statement is done to the basic level considering Profit and Loss
account statements and Balance sheets of Banks from the Annual report of 2012.

5. However wherever comparison was required on YoY basis. Data from Annual report of
2011 is also used.

3.2.1) QUALITATIVE ANALYSIS:

We have already compared some of Qualitative factors about the banks under consideration in
the theory part of Background where we introduced banks under study. Apart from those some of
the other Qualitative factors have been tabulated below.

44


A) Share holding pattern:

UCO BANK

HOLDER’S NAME %

Promoters 65.19

Financial Institutions 14.59

Foreign Institutions 3.57

General Public 12.98

Other Companies 2.82

NB Banks/Mutual funds 0.29

Foreign NRI’S 0.32

Central Government 0.00

Others 0.24

45


Union Bank of India

HOLDER’S NAME %

Promoters 54.35



General Public 8.76





Others 0.00

46


Bank of India

HOLDER’S NAME %

Promoters 62.72



General Public 5.29





Others 0.03

47


B) MANAGEMENT

MANAGEMENT

DESINGNATION UCO BANK UNION BANK BANK OF INDIA

Chief Executive Officer Arun Kaul D Sarkar Alok K Mishra

CEO Arun Kaul D Sarkar Alok K Mishra

Chairman and Managing Arun Kaul D Sarkar Alok K Mishra
director

Director Manoj Kumar Atual Agarwal Harvinder Singh
Gupta

Company Secretary N Purna Chandra Monika Kalia Rajeev Bhatia
Rao

N Purna Chandra Monika Kalia Rajeev Bhatia
Secretary
Rao

Executive Director NR S S Mundra B P Sharma
Badrinarayanan

48


Deputy General Manager P G Joshi A B Dhavale A K Handa

Director Ram Avatar M S Sriram Pramod Bhasin
Sharma

GM (Finance) & Chief R Prabaharam A K Thakur B B Joshi
Financial Officer

Director Pravin Raval B M Sharma K K Nair

Executive Director S Chandrasekharan Suresh Kumar Jain M S Raghavan

SebastainLuckose B M Sharma Neeraj Bhatia
Director
Morris

Director Uma Shankar ChandanSinha P K Panda

3.2.2) Quantitative Analysis

A) Profit & loss A/C

UCO UNION BANK BANK OF INDIA
BANK

INCOME
Sales Turnover 14,974.98 22,383.89 30,352.92

Excise Duty 0.00 0.00 0.00

NET SALES 14,974.98 22,383.89 30,352.92

Other income 0.00 0.00 0.00

TOTAL INCOME 15,381.72 23,422.28 31,364.23

EXPENDITURE
Manufacturing 0.00 0.00 0.00
Expenses

Material Consumed 0.00 0.00 0.00

Personal expenses 1,383.06 2,479.83 3,053.42

49


Selling expenses 24.01 67.40 64.00

Expenses capitalised 0.00 0.00 0.00

Provision made 394.15 975.24 654.41

TOTAL 1,801.22 3,522.47 3,771.83
EXPENDITURE

Operating Profit 1,507.15 2,796.71 3,386.70

EBITDA 1,913.88 3,835.10 4,398.01

Depreciation 78.12 146.45 166.83

Other Write Offs 0.00 0.00 0.00

EBIT 1,835.76 3,688.65 4,231.18
UCO UNION BANK BANK OF INDIA
PROFIT & LOSS BANK
A/C

Interest 10,730.27 14,235.39 20,167.23

EBT 1,441.61 2,713.42 3,576.76

Taxes 333.85 925.62 900.00

Profit & loss for the 1,107.76 1,787.80 2,676.76
year

Non Recurring items 0.91 -0.6 0.75

Other Non cash 0.00 0.78 0.00
adjustments

Other Adjustments 0.00 -0.7 0.00

REPORTED PAT 1,108.67 1,787.14 2,677.52

KEY ITEMS

Preference dividend 0.00 10.54 0.00

50


Equity Dividend 342.19 440.44 465.98

Equity dividend (%) 51.47 80.00 81.10

Share in Issue(lakhs) 6,647.12 5,505.49 5,737.80

EPS – Annualize Rs. 16.68 32.46 46.66

C) Balance sheet

BALANE SHEET
31Mar, 2012

PARTICULARS UCO BANK UNION BANK OF
BANK INDIA

LIABILITIES

Share Capital 2,487.71 661.55 574.12

Reserves & Surplus 5,631.60 12,437.68 19,151.38

Net Worth 8,613.43 14,633.06 20,961.78

Secured Loans 12,901.42 17,909.49 32,114.22

Unsecured Loans 154,003.49 222,868.95 318,216.03

TOTAL LIABILITIES 175,518.34 255,411.49 371,292.04

ASSETS

51


Gross Block 1,670.24 3,720.39 4,628.22

(-) Acc. Depreciation 868.69 1,388.20 1,905.26

Net Block 307.43 798.36 1,487.06

Capital Work in Progress 0.00 3.61 48.64

Investments. 45,771.50 62,363.56 86,753.59

Inventories 0.00 0.00 0.00

Sundry Debtors 0.00 0.00 0.00

Cash And Bank 13,603.68 15,675.14 34,711.25

Loans And Advances 120,321.67 181,836.94 260,299.04

Total Current Assets 133,925.35 197,512.08 295,010.29
BALANCE SHEET 31
MARCH, 2012

Current Liabilities 4,477.32 6,799.95 13,243.43

Provisions 502.73 0.00 0.00

Total Current Liabilities 4,980.05 6,799.95 13,243.43

NET CURRENT ASSETS 128,945.30 190,712.14 281,766.86

Misc. Expenses 0.00 0.00 0.00

TOTAL ASSETS 175,518.34 255,411.49 371,292.04
(A+B+C+D+E)

D) Key Financials

KEY FINANCIALS UCO UNION BANK OF
(31 Mar, 2012) BANK BANK INDIA

Net Interest 2.77 3.21 2.52
Margin(NIM)

CASA Ratio 26.3 31.28 32.8
52


Credit to Deposit 76.30 72.56 74.85
Ratio

Capital Adequacy 12.35 11.85 11.95
Ratio

Cost Income Ratio 42.24 43.15 48.49

ROE 17.60 13.67 13.57

ROA 0.69 0.79 0.72

EPS Ratio 15.02 34.07 48.98

Gross NPA’S 3.48 2.23 2.34

Net NPA’S 1.96 0.91 1.47

3.2.3) RATIO ANALYSIS

RATIO ANALYSIS (31 Mar, 2012)
(Rs. In Cr.)
UCO BANK UNION BANK BANK OF
OF INDIA INDIA
PER SHARE RATIOS

Adjusted E P S (Rs.) 16.67 32.28 46.65

Adjusted Cash EPS (Rs.) 17.84 34.94 49.56

Reported EPS (Rs.) 16.68 32.27 46.66

Reported Cash EPS (Rs.) 17.85 34.93 49.57

Dividend Per Share 3.00 8.00 7.00

Operating Profit Per Share (Rs.) 22.67 50.80 59.02

Book Value (Excl Rev Res) Per Share
94.72 235.91 343.79
(Rs.)

Book Value (Incl Rev Res) Per Share 102.16
263.77 365.33
(Rs.)

53


Net Operating Income Per Share (Rs.) 225.29 406.57 529.00

Free Reserves Per Share (Rs.) 55.40 97.35 193.48

PROFITABILITY RATIOS

Operating Margin (%) 10.06 12.49 11.15

Adjusted Cash Margin (%) 7.70 8.25 9.06

Adjusted Return On Net Worth (%) 17.59 13.68 13.56

Reported Return On Net Worth (%) 17.60 13.67 13.57

Return On long Term Funds (%) 149.91 129.38 120.36

LEVERAGE RATIOS

Long Term Debt / Equity 0.29 0.01 0.00

Owners fund as % of total Source 3.88 5.50 5.83

Fixed Assets Turnover Ratio 8.97 6.06 6.56

LIQUIDITY RATIOS

Current Ratio 0.96 0.58 0.87

Current Ratio (Inc. ST Loans) 0.03 0.02 0.03

Quick Ratio 25.73 28.45 20.79

Fixed Assets Turnover Ratio 8.97 6.06 6.56

PAYOUT RATIOS

Dividend payout Ratio (Net Profit) 35.87 28.90 17.40

Dividend payout Ratio (Cash Profit) 33.51 26.70 16.38

Earning Retention Ratio 64.10 71.11 82.60

54


Cash Earnings Retention Ratio 66.47 73.31 83.62

COVERAGE RATIOS

Adjusted Cash Flow Time Total Debt 129.86 115.22 111.91

Financial Charges Coverage Ratio 0.18 0.27 0.22

Fin. Charges Cov.Ratio (Post Tax) 1.11 1.14 1.14

COMPONENT RATIOS

Selling Cost Component 0.16 0.30 0.21

Exports as percent of Total Sales 0.00 0.00 0.00

Long term assets / Total Assets 0.91 0.94 0.88

3.3) ANALYSIS AND INTERPRETATIONS
3.3.1) ANALYSIS AND INTERPRETATION OF RATIO ANALYSIS

A) NPA (Non Performing Asset Ratio)

The net non-performing asset to loans (advances) ratio is used as a Major of the overall quality
of the bank’s loan book. Net NPA’s are calculated by reducing cumulative valance of provisions
outstanding at a period end form gross NPA’s.

55


B) ROE (Return on Equity Ratio)

The return on equity measures the profitability of equity funds invested in the
Firm. It is regarded as a very important measure it reflects the productivity of the
Ownership (or risk) capital employed in the firm.

56


C) PER (Price Earnings Ratio)

P/E Ratio indicates the price currently being paid in the market for each rupee
Of EPS. It measures the expectation of the investors. A high P/E Ratio may indicate
The possibility of increase in EPS. A low P/E Ratio may indicate that there is no
possibility of any increase in EPS and the investors will be reluctant to invest in such
Shares.

57


PEER COMPARISION

58


3.3.2) ANALYSIS AND INTERPRETATION OF KEY FINANCIALS

59


UCO BANK

 Increase in bank’s deposits by 10.6% in year ending March 2012 period

 Increase in bank’s net interest income by 1.48% in the same period

 Per branch business has increased by 1.93% to 113 crore in the same period

 Per employee business increased by 9.77% to rs. 12.47 crore.

 Book value per share increased by 15.91% to rs.94.72

 Net NPA ratio is 1.96%

 PE ratio is 3.97 and PB ratio is 74

 Bank is focused on inclusive growth & realizes potential of small towns like Tier V &
Tier VI centers and that can be seen from its expanding branches in such areas during
fiscal year 2011-2012

 A move towards being tech savvy bank has begun with basic facilities like E banking,
mobile banking

 Company’s NII (net interest income) margin decreased to 2.77% in 2011-12 from 3.07%
in 2010-11 on account of increased interest outflow

DETAILS FOR QE JUNE 2012 –

 Bank reported QE June 2012 results with 24% jump in net profit over QE June 2011

 Net interest income increased by 29% over QE June 2011

 Net interest margin stood at 2.60% & aims to achieve 3% by this fiscal end

 Net NPA increased to 2.33% over 2.15% in QE June 2011. This was mainly because of
legacy issues the bank faces.

UNION BANK

60




 Net interest margin is 3.21%

 Per branch business has increased by 7.48% to 103.11 crore in the same period



 Net NPA increased by to 1.70% from 1.19%

 PE ratio is 5 and PB ratio is 72


 Bank reported QE June 2012 results with 10.15% jump in net profit over QE June 2011

 Net interest income increased by 14.59% over QE June 2011

 Net interest margin stood at 3.1%

 Net NPA increased to 2.20%

 Bad loans as % of advances increased to 3.76% over 3.01% of QE June 2011

BANK OF INDIA

61




 Per branch business has increased by -3.38% to 1414 crore in the same period



 Net NPA increased by to 1.70% from 1.19%

 PE ratio is 15.23 and PB ratio is 88.39


 Bank reported QE June 2012 results with 71% jump in net profit over QE June 2011

 Net interest income increased by 11% over QE June

 Net interest margin stood at 2.27% 2011 as income expenses increased compared to
interest income

 Net NPA increased to 1.69%

 CASA were 32.04% of aggregate deposits

 Bank’s CASA growth is impressive & it sees good growth there with higher customer
acquisition.

3.4) FINDINGS & SUGGESTIONS:

62

Fundamental Approach in Equity Investment

Fundamental Approach in Equity Investment

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