FUNDAMENTAL ANALYSIS

FINANCIAL TERMS

1. ADR: American Depository Receipt. It is an instrument traded at U.S. exchanges a fixed number of
shares of a foreign company that is traded in the foreign country. The ADR route enables companies to
raise funds in the U.S. financial markets.
2. Asset Management Company ( AMC ): A company set up for floating and managing schemes of a
Mutual Fund.
3. Balance of payments: A statement that contains details of all the economic transactions of a country
with the rest of the world, for a given time period, usually one year. The statement has two parts: the
Current Account & the Capital Account.
4. Bond: A long term debt instrument on which the issuer pays interest periodically, known as ‘Coupon’.
Bonds are secured by COLLATERAL in the form of immovable property. While generally, bonds have a
definite MATURITY,.
5. Book Value: It is the amount of NET ASSETS that would be available per EQUITY SHARE, after a
company pays off all LIABILITIES including PREFERENCE SHARES from the sale of proceeds of all its
ASSETS liquidated at BALANCE SHEET values.
6. Budget: A financial plan that projects receipts and payments of an entity covering a specific period of
time, usually one year. Its primary purpose is to achieve financial control. Budgets could be
distinguished on the basis of time span, function and flexibility.
7. Call Money: A term used for funds borrowed and lent by banks for overnight use. This is a market
which banks access in shortfall in funds and the interest rate is determined by supply and demand
conditions.
8. Cash Reserve Ratio ( CRR ) : A legal obligation on all Scheduled Commercial Banks excluding
Regional rural Banks to maintain certain reserves ion the form of cash with Reserve Bank of India. The
reserves, to be maintained over a fortnight, are computed as a percentage of a bank’s net demand and
time liabilities.
9. Central Bank: The premier bank in a country that discharges the responsibilities of issuing currency,
managing MONEY SUPPLY by appropriate measures in order to maintain price stability and economic
growth. In India Reserve Bank of India (RBI) is the Central Bank.
10. Certificate of Deposit (CD): A negotiable interest bearing debt instrument of Specific Maturity issued
by banks. A CD represents the title to a TIME DEPOSIT with a bank, but is a liquid instrument since it
can be traded in the SECONDARY MARKET. It is a money market
11. Commercial Paper (CP): A short term, unsecured PROMISSORY NOTE issued by BLUE CHIP
companies. Like other MONEY MARKET instrument, it is issued at a DISOCUNT on the FACE VALUE
and is freely marketable.
12. Correction: A reaction in stock prices that reverses an excessive rise or decline posted earlier.
13. Credit rating: The exercise of assessing the credit record, integrity and capability of a prospective
borrower to meet debt obligations. Credit rating relates to companies, individuals and even countries.
14. Debentures: A debt security issued by companies, having a certain MATURITY and bearing a stated
COUPON RATE. Debentures may be unsecured or secured by ASSETS such as land and buildings of
the issuing company. Debenture holder have a prior claim on the earnings ( Coupon ) and assets in the
event of liquidation, as compared to Preference and equity shareholders.
15. D: E Ratio: This ratio is used to analyze FINANCIAL LEVERAGE. It is a structural ratio that gauges the
level of debt financing and is worked out by dividing total debt, short term and long term by Net Worth.
16. Demutualization: The process of separation of ownership, trading rights and management of stock
exchanges, previously operating as a mutual set-up. The objective of separating the right to trade from
ownership and management is to lessen conflict of interest among trading members and thereby
enhance investor protection.
17. Depository: A system of computerized book-entry of securities. This arrangement enables a transfer of
shares through a mere book-entry rather than the physical movement of certificates. This is because the
scrips are ‘dematerialized’ under the system.
18. Direct Taxes: Taxes whose impact and incidence are on the same person. The taxes levied on income,
and wealth tax are instances of direct taxes.
19. Dividend: The payment made by a company to its shareholders. Legal and financial considerations
have a bearing on the level of dividend to be paid. For instance, dividends may be paid out of profits
alone; so also a growing company needs funds to finance its expansion and hence may pay only
modest dividend.
20. EPS: The net profits of a company expressed on per share basis. It is arrived at by dividing the figure of
profits after taxes and DIVIDENDS paid on PREFERENCE SHARES, if any, by the number of equity
shares outstanding.
21. Equity Share: A security that represents ownership interest in a company. It is issued to those who
have contributed capital in setting up an enterprise. Apart from Public Issue, equity shares may originate
through an issue of Bonus Shares, Convertible Securities, Warrants, GDRs, etc.
22. Escrow: Cash, securities or other valuable instruments that are held by a third party to ensure that the
obligations under a contract are discharged. The escrow mechanism is a technique of mitigating the risk
to lenders and it is used typically in infrastructure projects such as power, roads or telecom.
23. Face Value: The nominal value of a security. The face value helps to know the share of ownership in a
company.
24. Financial Institutions: A non-banking financial intermediary carrying on any of the activities specified in
the relevant section of the RBI Act. These activities include lending , investing in shares and other
securities, HIRE PURCHASE, insurance.
25. Fixed Exchange rate: The exchange rate of a currency which is pegged to a predetermined value of
another currency or to gold.

26. Floating Exchange rate: The exchange rate of a currency that is allowed to float, either within a narrow
specified band around a reference rate, or totally freely according to market forces.
27. FCCB: An unsecured debt instrument denominated in a foreign currency and issued by an Indian
Company which is convertible into shares or in some cases into GDRs at a predetermined rate. That is,
the conversion price and the exchange rate are fixed.
28. GDR: An acronym for Global Depository Receipt, It is an instrument denominated in foreign currency
that enables foreign investors to trade in securities of alien companies not listed at their exchanges.
29. Govt. Securities: These are long term debt securities of varying maturities extending up to 30 years
issued by the central and state governments as well as municipal corporations, electricity boards certain
financial institutions like IDBI and NABARD and other bodies.
30. GDP: This is a comprehensive measure of the economic activity that takes place in a country during a
certain period. It is a total value of final goods and services produced in an economy in a year.
31. Indirect Taxes: These are taxes levied on goods and services which enter into the basket of
consumption or use by individuals or organizations, such as sales tax and Excise duty.
32. Inflation: The phenomenon of rising prices of goods and services in general. It can come about due to
a scarcity of supplies in relation to demand; this is known as ‘demand pull inflation’.
33. LIBOR: An abbreviation for London Inter Bank Offer Rate, which is an average of the interest rates at
which leading international banks are prepared to offer term EURODOLLAR DEPOSITS to each other.
34. Listing: The grant of approval for dealing in certain security at a stock exchange. Consequently,
companies must pay their respective exchanges, an annual listing fee which is linked to the paid up
capital.
35. Market Capitalization: The value of equity shares outstanding at prevailing market prices. Number of
shares X Market price of each share.
36. Merchant Banker: An intermediary who provides various financial services, other than lending money
such as managing PUBLIC ISSUE, UNDERWRITING new issues, arranging Loan and giving advice on
Portfolio management., financial restructuring, mergers and acquisitions.
37. Money Market: The segment of financial markets wherein financial instruments having maturities of
less than one year are traded, e.g. T-Bills, CPs.
38. Mutual Funds: An organization that mobilizes the surpluses of savers and invests the same in different
securities.
39. National Index: AN index of 100 stocks quoted nationwide on different exchanges is computed by the
Statistics Department of the Bombay Stock Exchange: hence it is called as BSE National Index.
40. NBFC: A financial intermediary that is engaged in certain financing activities other than banking. These
activities are specified in Non Banking Financial Companies ( Reserve Bank ) Directions. They include
 equipment leasing, HIRE PURCHASE, housing finance, NIDHIS, CHIT FUNDS, PRIMARY DEALERS
and investments in financial securities.
41. NPA: A credit facility which ceases to generate income for a bank. In April 2001, it was decided that a
loan should be classified as non-performing if the interest and / or installments of principal remain
overdue for a period of over 90 days.
42. Paid up Capital: The amounts actually paid by shareholders and also credited as paid up.
43. Premium: The term usually refers to the increment of price over the FACE VALUE of a security or over
the market price generally quoted.
44. P/E ratio: The market price of a share divided by EARNINGS PER SHARE. This number is also known
as the “Multiple’, is often used by investors and analysts to determine the upward potential of a share by
comparing it multiplier to that of the particular industry as a whole.
45. Private equity funds: The fund belonging to private investors that typically invests in the equity of
upcoming companies by a negotiated deal.
46. Private placement: The sale, by a company, of its securities to one or few FINANCIAL INSTITUIONS
through a process of direct negotiations or to a limited number of individual investors.
47. Proxy: A document that facilitates the transfer of shareholder’s right to vote in favor of another person
why may represent and vote on his/her behalf at a general meeting of the company.
48. Public issue: An invitation to the public at large subscribe to shares or other securities of a company. A
public issue entails numerous tasks such as organizing the syndicate of UNDERWRITERS, BROKERS,
preparation of the prospectus and fulfillment of several formalities.
49. Rally: A brisk rise in stocks prices after a decline. The term connotes a short surge in prices, rather than
a sustained rise in the market.
50. Record date: The date on which an investor’s name must appear in the Register of members I order to
receive DIVIDENDS, RIGHTS OR BONUS SHARES as the case may be.
51. Redemption: The repayment of an obligation such as DEBENTURES or redeemable Preference share.
The redemption usually takes place at Maturity; however in some cases it could be earlier.
52. Secondary Market: The segment of FINANCIAL MARKETS in which securities that have already been
issued are traded. Thus the secondary market comprises security exchanges and also transactions
taking place elsewhere.
53. Sensitive Index: A statistical measure of the prices of 30 selected stocks traded on Bombay Stock
Exchange. The method of compilation is similar to the one used in Standard & Poor’s Indices, USA.
54. Stock Split: Adjustment effected in the FACE VALUE of shares and the number of shares outstanding,
such that no change occurs in the total paid up capital.
55. T-Bill: A short term debt instrument of the government of India. This security bears no Default Risk and
has degree of Liquidity and low Interest Rate Risk.
56. Underwriter: It means to contractually guarantee subscription to shares or other securities. An
underwriting arrangement serves as a backup in the event of inadequate subscription to a PUBLIC
ISSUE.
 57. VaR: A measure of risk that indicates the maximum amount at stake, that is, the maximum loss that an
entity such as a bank could incur on its exposures at a point in time, determined at a certain confidence
level.
58. Venture Capital: The long term financial assistance to projects being set up to introduce new
products/inventions/innovations or to employ or commercialize new technologies. Thus, Venture capital
entails high risk but has the promise of attractive returns.
59. Warrant: An instrument issued by a company that carries a right to buy a specified number of shares at
a stated price form the company within a stipulated period.
60. Yield: The return earned on an investment, usually expressed as a percentage.

• ASSET CLASSES

Asset class is a sort of investment, which includes bonds, stocks, real estate, or cash. Asset class
can alternatively be defined as the collection of securities demonstrating similar behaviors based on
same policies and regulations. The three primary asset classes are bonds (or fixed income), equities
(or stocks) and cash equivalents(or money market instruments). Some other asset class includes
natural resources, foreign currency, stocks, treasured metals, luxury items, automobiles etc.

Bank Fixed Deposits

Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of
money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of
interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity
period. There is great flexibility in maturity period and it ranges from 7days to 10 years. The interest is
compounded annually and is added to the principal amount.

• Postal Services

India possesses the largest postal network in the world with 155,000 post offices spread all over the
country as on March 31, 2001. Post Office Recurring Deposit Account, Post Office Time Deposit
Account. Post office time deposit account is just like the bank fixed deposit account. These time
deposits are meant for those investors who want to deposit a lump sum for a fixed period. The amount
can be deposited for 1year, 2year, 3year, and 5years

National Savings Certificate

National Savings Certificate, popularly known as NSC, is a time-tested tax saving instrument that
combines adequate returns with high safety. Period of maturity of a certificate is six years. Interest
accrued on the certificates every year is liable to income tax but deemed to have been reinvested.

Public Provident Fund

 Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also serves
as a retirement planning tool for many of those who do not have any structured pension plan covering
them. The account matures for closure after 15 years. Premature withdrawal is permissible every year
after completion of 5 years from the end of the year of opening the account.

Interest at the rate notified by the Central Government from time to time, is calculated and credited to
the accounts at the end of each financial year. Presently, the rate of interest is 8% per annum.

Income Tax rebate is available "on the deposits made", under Section 88 of Income Tax Act, as
amended from time to time. Interest credited every year is tax-free

• Government Bonds

These are issued by governments across the world to raise money for public spending. Basically you
lend money to a government and it aims to pay you back on a set maturity date. Government bond
prices move up and down with market conditions and are often seen as a less risky investment option
when markets are volatile, although this isn't true all of the time.

• Corporate Bonds

These are issued by large companies to raise money for different purposes. Compared with
government bonds, they usually carry a higher rate of interest as they are more susceptible than the
government to the economy. And like government bonds, prices move up and down with market
conditions. Corporate bonds are normally considered to be riskier than government bonds. This is
because companies can only stay in business as long as they're profitable, while governments have a
ready source of funds through taxes. If a company cannot pay back the loan, you could lose all your
money.

• Shares

Shares are also known as equities. Owning shares in a company means you own a part of it. It also
means you can receive a share of the company's profits through dividends. You also have a share in
the value of the company's assets, through its share price.

• Mutual Funds

Mutual Fund is an instrument of investing money. A mutual fund is a group of investors operating
through a fund manager to purchase a diverse portfolio of stocks or bonds. Therefore, keeping large
amounts of money in bank is not a wise option, as in real terms the value of money decreases over a
period of time.

• Property
 As an investment asset class, property usually means investing in commercial property such as:
offices; retail developments; and leisure and industrial developments.

A major attraction of property investment is that the success of the venture depends on professional
property management. Successful maintenance, refurbishment, repairs and tenancy arrangements
can all add value. Both the rental income and capital value of a property can be enhanced in this way.

CLASSIFICATION OF CAPITAL MARKET

CAPITAL MARKET

DEBT MARKET STOCK MARKET

DEBENTURES PRIMARY MKT

CONVERTIBLE DEBENTURES IPO (INITIAL PUB OFFER)

NON CONVERTIBLE DEBENTURES CALL MONEY MKT

BONDS

GOVERNMENT BONDS SECONDARY MKT

CORPORATE BONDS SHARES

FCCB (FOREIGN CURRENCY CONVERTIBLE BONDS) WARRANTS

G-SEC ( GOVT SECURITIES )

T- BILLS ( TREASURY BILLS )

CPs ( COMMERICAL PAPERS )

 CDs ( CERTIFICATE OF DEPOSITS )

IPO (INTIAL PUBLIC OFFERINGS)

Initial Public Offerings (IPO)

A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An
Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with
long or indefinite maturity for the company.
What is Book Building?
SEBI guidelines defines Book Building as "a process undertaken by which a demand for the securities proposed to be issued
by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum
of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer
document".
Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where,
during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to
the floor price. The offer price is determined after the bid closing date.
As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in the following manner:

1. 100% of the net offer to the public through book building process
2. 75% of the net offer to the public through book building process and 25% at the price determined through book
building. The Fixed Price portion is conducted like a normal public issue after the Book Built portion, during which
the issue price is determined.

The concept of Book Building is relatively new in India. However it is a common practice in most developed countries.
Difference between Book Building Issue and Fixed Price Issue
In Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered at a fixed
price in case of a public issue. In case of Book Building, the demand can be known everyday as the book is built. But in case
of the public issue the demand is known at the close of the issue.

Book Building at NSE

The NSE has set up nation-wide network for trading whereby members can trade remotely from their offices located all over
the country. The NSE trading network spans various cities and towns across India.
NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully
automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their
offices through a sophisticated telecommunication network.
Book Building through the NSE system offers several advantages:

The NSE system offers a nation wide bidding facility in securities

 • It provides a fair, efficient & transparent method for collecting bids using latest electronic trading systems

• Costs involved in the issue are far less than those in a normal IPO

The IPO market timings are from 10.00 a.m. to 5.00 p.m. On the last day of the IPO, the session timings can be further
extended on specific request by the Book Running Lead Manager.

INDICES
Market Capitalization

The value of equity shares outstanding at prevailing market prices.

Market Capitalization : No. of shares x Market price of each share.

Free Float Market Cap: No. of shares traded in the market x Market price.

National Index: An index of 100 stocks quoted nationwide on different stock exchanges such as those n
Bombay, Delhi & Kolkatta, which is computed by the statistics Department of the Bombay Stock Exchange;
hence it is called the BSE National Index ( BSENI ). The index was developed as a more representative PROXY

Of the stock market since the SENSITIVE INDEX consists on only 30 stocks quoted on the BSE; these 30 figure
among the 100 comprising the National Index.

For calculating the market value of any component share, the price of the share outstanding and hence, t he
index expresses as:

Aggregate market value of all the stocks in the sample / Average market value during the base period

The base period if 1983 – 84. Adjustments are made to the weight and the base year average if a company
included in index issues BONUS SHARES, RIGHTS ETC.
A welcome development has been recent contribution of 500 stock index by CRISIL. Its base value is 1000 and
its composition captures a high degree of MARKET CAPITALIZATION, industry representation, trading
frequency and other criteria.

SENSEX - The Barometer of Indian Capital Markets

For the premier stock exchange that pioneered the securities transaction business in India, over a century of
experience is a proud achievement. A lot has changed since 1875 when 318 persons by paying a then princely
amount of Re. 1, became members of what today is called Bombay Stock Exchange Limited (BSE).

Over the decades, the stock market in the country has passed through good and bad periods. The journey in the
20th century has not been an easy one. Till the decade of eighties, there was no measure or scale that could
precisely measure the various ups and downs in the Indian stock market. BSE, in 1986, came out with a Stock
Index-SENSEX- that subsequently became the barometer of the Indian stock market.

The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index
(Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta,
Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from October 14, 1996
and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE.

Introduction

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30

component stocks representing large, well-established and financially sound companies across key sectors. The
base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and
international markets through print as well as electronic media. It is scientifically designed and is based on
globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being calculated
on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is
a widely followed index construction methodology on which majority of global equity indices are based; all major
index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties,
the stock market witnessed heightened activity in terms of various bull and bear runs. In the late nineties, the
Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the
investors. SENSEX has captured all these happenings in the most judicious manner. One can identify the
booms and busts of the Indian equity market through SENSEX. 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
become one of the most prominent brands in the country.

Index Specification:

Base Year 1978-79

Base Index 100
Value
Date of Launch 01-01-1986
Method of Launched on full market capitalization method and effective September 01, 2003, calculation
calculation method shifted to free-float market capitalization.
Number of 30
scrips

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at
any point of time reflects the free-float market value of 30 component stocks relative to a base period. The
market capitalization of a company is determined by multiplying the price of its stock by the number of shares
issued by the company. This market capitalization is further multiplied by the free-float factor to determine the
free-float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the
notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market capitalization of 30
companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base
period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index
adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index
scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX on a
continuous basis.

Understanding Free-float Methodology

Concept

Free-float methodology refers to an index construction methodology that takes into consideration only the free-
float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in
the index. Free-float market capitalization takes into consideration only those shares issued by the company that
are readily available for trading in the market. It generally excludes promoters' holding, government holding,
strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In
other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily
available shares in the market.

Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology.

Major advantages of Free-float Methodology

• A Free-float index reflects the market trends more rationally as it takes into consideration only
those shares that are available for trading in the market.

• Free-float Methodology makes the index more broad-based by reducing the concentration of top
few companies in Index.

• A Free-float index aids both active and passive investing styles. It aids active managers by
enabling them to benchmark their fund returns vis-Ã -vis an investible index. This enables an apple-
to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a
perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive
managers as it enables them to track the index with the least tracking error.

• Free-float Methodology improves index flexibility in terms of including any stock from the
universe of listed stocks. This improves market coverage and sector coverage of the index. For
example, under a Full-market capitalization methodology, companies with large market capitalization
and low free-float cannot generally be included in the Index because they tend to distort the index by
having an undue influence on the index movement. However, under the Free-float Methodology, since
only the free-float market capitalization of each company is considered for index calculation, it
becomes possible to include such closely-held companies in the index while at the same time
preventing their undue influence on the index movement.

• Globally, the Free-float Methodology of index construction is considered to be an industry best

practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same.
MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002.
The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track
Indian equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to
the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.
Definition of Free-float

Shareholding of investors that would not, in the normal course come into the open market for trading are treated
as 'Controlling/ Strategic Holdings' and hence not included in free-float. Specifically, the following categories of
holding are generally excluded from the definition of Free-float:

• Shares held by founders/directors/ acquirers which has control element

• Shares held by persons/ bodies with "Controlling Interest"

• Shares held by Government as promoter/acquirer

• Holdings through the FDI Route

• Strategic stakes by private corporate bodies/ individuals

• Equity held by associate/group companies (cross-holdings)

• Equity held by Employee Welfare Trusts

• Locked-in shares and shares which would not be sold in the open market in normal course.

The remaining shareholders fall under the Free-float category.

S & P CNX NIFTY

S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a
variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.

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 India's first specialised company focused upon the index as a core product.
IISL has a Marketing and licensing agreement with Standard & Poor's (S&P), who are world leaders in index
services.

• The total traded value for the last six months of all Nifty stocks is approximately 65.68% of the traded
value of all stocks on the NSE
• Nifty stocks represent about 65.34% of the total market capitalization as on Mar 31, 2009.
• India Index Services & Products Ltd. (IISL)
• India Index Services & Products Ltd. (IISL) is a joint venture between the National Stock Exchange of
India Ltd. (NSE) and CRISIL Ltd. (formerly the Credit Rating Information Services of India Limited). IISL
has been formed with the objective of providing a variety of indices and index related services and
products for the capital markets.
 IISL has a licensing and marketing agreement with Standard and Poor's (S&P), the world's leading
provider of investible equity indices, for co-branding IISL's equity indices.

• Products & Services

• IISL offers a wide range of products and services which are key support tools for the equity markets. We
provide reliable, accurate and valuable data on indices and index related services to cater to the needs
of various segments of users. Our speciality is indices based on Indian equity markets, which may be
used for benchmarking, trading or research.
• Financial products on IISL Indices
IISL maintains, develops, compiles and disseminates entire gamut of equity indices. Licensing is
mandatory for tracking the performance of an IISL Index. Licensing is also required for use of the
name of IISL or S&P CNX or CNX or any IISL Index. Fees for licensing would vary according to the
type of the product and the period.

CNX ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE and
CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE . The S&P prefix belongs to the US-based
Standard & Poor's Financial Information Services.

CNX indices are useful for fund managers, corporates, brokers and all such enterprises connected with
investments in the equity markets. These indices can be used for tracking the markets, understanding
the performance of a company vis-a-vis the market, determining how an investors portfolio is performing
as compared to the market, trading derivative products and most importantly for development of index
based funds by mutual funds.

Customized Indices

IISL undertakes development & maintenance of customized indices for clients for tracking the
performance of the client portfolio of stocks vis-à-vis objectively defined benchmarks, or for
benchmarking NAV performance to customized indices. The customized indices can be sub-sets of
existing indices or a completely new index viz. Sector Indices, Individual Business Group Indices,
Industry Indices etc. Charges for this service vary depending on the activity performed by IISL.

Consulting

IISL provides consulting services in areas of Index Funds, Exchange-traded-fund, derivatives, Index
options, alerting for rebalancing for index funds etc. This is a paid service.
 What is the basic idea in an index?
Every stock price moves for two possible reasons: news about the company (e.g. a product launch, or
the closure of a factory, etc.) or news about the country (e.g. nuclear bombs, or a budget
announcement, etc.). The job of an index is to purely capture the second part, the movements of the
stock market as a whole (i.e. news about the country). This is achieved by averaging. Each stock
contains a mixture of these two elements - stock news and index news. When we take an average of
returns on many stocks, the individual stock news tends to cancel out. On any one day, there would be
good stock-specific news for a few companies and bad stock-specific news for others. In a good index,
these will cancel out, and the only thing left will be news that is common to all stocks. The news that is
common to all stocks is news about India. That is what the index will capture.

• What is the portfolio interpretation of index movements?

It is easy to create a portfolio, which will reliably get the same returns as the index. i.e. if the index goes
up by 4%, this portfolio will also go up by 4%. Suppose an index is made of two stocks, one with a
market cap of Rs.1000 crore and another with a market cap of Rs.3000 crore. Then the index portfolio
will assign a weight of 25% to the first and 75% weight to the second. If we form a portfolio of the two
stocks, with a weight of 25% on the first and 75% on the second, then the portfolio returns will equal the
index returns. So if you want to buy Rs.1 lakh of this two-stock index, you would buy Rs.25,000 of the
first and Rs.75,000 of the second; this portfolio would exactly mimic the two-stock index. A stock market
index is hence just like other price indices in showing what is happening on the overall indices -- the
wholesale price index is a comparable example. In addition, the stock market index is attainable as a
portfolio.

• Why are indices important?

Traditionally, indices have been used as information sources. By looking at an index we know how the
market is faring. This information aspect also figures in myriad applications of stock market indices in
economic research. This is particularly valuable when an index reflects highly up to date information (a
central issue which is discussed in detail ahead) and the portfolio of an investor contains illiquid
securities - in this case, the index is a lead indicator of how the overall portfolio will fare.

In recent years, indices have come to the fore owing to direct applications in finance, in the form of
index funds and index derivatives. Index funds are funds which passively `invest in the index'. Index
derivatives allow people to cheaply alter their risk exposure to an index (this is called hedging) and to
implement forecasts about index movements (this is called speculation). Hedging using index
derivatives has become a central part of risk management in the modern economy. These applications
 are now a multi-trillion dollar industry worldwide, and they are critically linked up to market indices.

Finally, indices serve as a benchmark for measuring the performance of fund managers. An all-equity
fund should obtain returns like the overall stock market index. A 50:50 debt:equity fund should obtain
returns close to those obtained by an investment of 50% in the index and 50% in fixed income. A well-
specified relationship between an investor and a fund manager should explicitly define the benchmark
against which the fund manager will be compared, and in what fashion.

• How does the S&P CNX Nifty work?

S&P CNX Nifty is based upon solid economic research. A trillion calculations were expended to evolve
the rules inside the S&P CNX Nifty index. The results of this work are remarkably simple: (a) the correct
size to use is 50, (b) stocks considered for the S&P CNX Nifty must be liquid by the `impact cost'
criterion, (c) the largest 50 stocks that meet the criterion go into the index. S&P CNX Nifty is a contrast
to the adhoc methods that have gone into index construction in the preceding years, where indices were
made out of intuition and lacked a scientific basis. The research that led up to S&P CNX Nifty is well-
respected internationally as a pioneering effort in better understanding how to make a stock market
index.
• How did the S&P CNX Nifty come about?
Equities trading at NSE began in November 1994. By late 1995, NSE became India's largest equity
market and was looking for a market index to utilise this unique information source. NSE also wanted to
have a vehicle for the futures and options market. NSE approached the economists Dr. Ajay Shah and
Dr. Susan Thomas, ( then at Centre for Monitoring Indian Economy Pvt. Ltd.- CMIE (www.cmie.com)
and now at Indira Gandhi Institute of Development Research (IGIDR - www.igidr.ac.in), to conduct
research on methods in index construction. This work was funded by the USAID FIRE project
(www.usaid.gov) and led to the S&P CNX Nifty. Some of their research is visible over the Internet at
www.igidr.ac.in/~ajayshah

• Where does IISL come in?

In 1998, NSE and CRISIL launched a joint venture named IISL to focus on index management. This
pools the index development efforts of CRISIL and NSE into a coordinated whole, India's first
specialised company focussed upon the index as a core product. Today, the S&P CNX Nifty is owned
and operated by IISL. It is a global phenomenon where an independent company calculates and
maintains the index.
• Who is Standard & Poor's, and why does their name appear with the S&P CNX Nifty?
S&P owns the most important index in the world, the S&P 500 index, which is the foundation of the
largest index funds and most liquid index futures markets in the world.
When S&P came to India to look at market indices, they focussed upon the S&P CNX Nifty as opposed
to alternative indices. They now stand behind the S&P CNX Nifty, as is evidenced by the name "S&P
CNX Nifty" This is a unique occasion; S&P has never endorsed a market index before.

• What does 'CNX' in S&P CNX Nifty stand for?

CNX stands for CRISIL NSE Indices. CNX ensures common branding of indices, to reflect the identities
of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE and X
stands for Exchange or Index. The S&P prefix belongs to the US-based Standard & Poor's Financial
Information Services.

• What's S&P CNX Defty?

S&P CNX Defty is S&P CNX Nifty, measured in dollars. If the S&P CNX Nifty rises by 2% it means that
the Indian stock market rose by 2%, measured in rupees. If the S&P CNX Defty rises by 2%, it means
that the Indian stock market rose by 2%, measured in dollars.

• What's S&P CNX 500 ?

The S&P CNX 500 is India’s first broadbased benchmark of the Indian capital market. The S&P CNX
500 represents about 86% of total market capitalisation and about 78% of the total turnover on the NSE.
The S&P CNX 500 companies are disaggregated into 72 industries, each of which has an index – The
S&P CNX Industry Index. Industry weightages in the index dynamically reflect the industry weightages
in the market. So for e.g. if the banking sector has a 5% weightage among the universe of stocks on the
NSE, banking stocks in the index would have an approx. representation of 5% in the index. The S&P
CNX 500 is a market capitalisation weighted index. The base date for the index is the calendar year
1994 with the base index value being 1000. Companies in the index are selected based on their market
capitalisation, industry representation, trading interest and financial performance. The index is
calculated and disseminated real-time.

• What's CNX Nifty Junior?

 S&P CNX Nifty is the first rung of the largest, highly liquid stocks in India. CNX Nifty Junior is an index
built out of the next 50 large, liquid stocks in India. It is not as liquid as the S&P CNX Nifty, which implies
that the information in the S&P CNX Nifty Junior is not as noise-free as that of the S&P CNX Nifty. It
may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid
stocks in India. S&P CNX Nifty is the front line blue-chips, large and highly liquid stocks. The CNX Nifty
Junior is the second rung of growth stocks, which are not as established as those in the S&P CNX Nifty.
A stock like Satyam Computers, which recently graduated into the S&P CNX Nifty, was in the CNX Nifty
Junior for a long time prior to this. CNX Nifty Junior can be viewed as an incubator where young growth
stocks are found. As with the S&P CNX Nifty, stocks in the CNX Nifty Junior are filtered for liquidity, so
they are the most liquid of the stocks excluded from the S&P CNX Nifty. Buying and selling the entire
CNX Nifty Junior as a portfolio is feasible. The maintenance of the S&P CNX Nifty and the CNX Nifty
Junior are synchronised so that the two indices will always be disjoint sets; i.e. a stock will never appear
in both indices at the same time. Hence it is always meaningful to pool the S&P CNX Nifty and the CNX
Nifty Junior into a composite 100 stock index or portfolio.

• What is the CNX MidCap?

The medium capitalised segment of the stock market is being increasingly perceived as an attractive
investment segment with high growth potential. The primary objective of the CNX MidCap Index is to
capture the movement and be a benchmark of the midcap segment of the market. The CNX MidCap
Index is a market capitalisation weighted index with its base period of the index being the calendar year
2003 and base value as 1000.The distribution of industries in the CNX MidCap Index represents the
industry distribution in the MidCap segment of the market. All companies are evaluated for trading
interest and financial performance

CHARACTERISTICS OF BLUE CHIP COMPANY

1. A nationally recognized, well-established and financially sound company.

2. Blue-chip companies are known to weather downturns and operate profitably in the face of adverse
economic conditions, which helps to contribute to their long record of stable and reliable growth.
3. The phrase (BLUE CHIP ) refers to a blue poker chip, which is the highest and most valuable piece. A
blue chip stock is classified as the stock of a large company that is an industry leader and provides
consistent, steady investment returns.

4. A blue chip stock is one that is well-established, financially sound, and historically secure, and have a
history of posting earnings and paying dividends, all while continuing to increase profits. While there will
always be some fluctuation in markets

5. Blue chip companies are known for their strong executive management teams that make intelligent
growth decisions, and for their high-quality products and services.

6. The return on blue chip stocks is close to a sure thing, the stocks tend to be very expensive and have a
low dividend yield.

7. It is easy for investors to track these companies and evaluate their advertising and marketing strategies
for themselves. Finally, they are a great tool for teaching kids about the stock market by using brand
names they recognize.

8. Even blue chips can take a nosedive, as every company makes a mistake at some point in its history.

9. Blue chip stocks are traditionally thought to be a safe investment since the prices do not tend to vary
wildly.

10. To compensate for slower growth, blue chip stocks pay investors dividends at regular intervals. Often,
the amount paid out in dividends increases over time.

11. Blue chip companies are industry leaders, the company is likely to have a long standing record of
successful business.
 12. Most industry leaders have low debts and healthy balance sheets, which leads to consistent
and increased dividends for shareholders.

13. The state of the economy, industry news, and company mergers & acquisitions can all cause
the price of a stock to fall, regardless of how well established the company behind it is.

BLUE CHIP COMPANIES Rs. In Cr

PAID
UP FY 0809
SR. EQUIT NET
NO COMPANY NAME SECTOR Y PROFIT

METALS -
1 HINDALCO INDUSTRIES ALUMINIUM 170.05 2079.44
NALCO ( NATIONAL ALUMINIUM METALS -
2 CO ) ALUMINIUM 644.31 1272.27
3 TATA STEEL METALS - STEEL 730.59 5201.74
4 STERLITE INDUSTRIES METALS - STEEL 141.74 1236.43
SAIL ( STEEL AUTHORITY OF
5 INDIA ) METALS - STEEL 4130.4 6119.17
6 HINDUSTAN ZINC METALS - ZINC 422.53 2727.61
7 ASHOK LEYLAND AUTOMOBILES 133.03 190
8 TATA MOTORS AUTOMOBILES 514.29 1001.26
9 MARUTI AUTOMOBILES 144.46 1218.74
10 MAHINDRA & MAHINDRA AUTOMOBILES 278.82 836.78
11 HERO HONDA AUTOMOBILES 39.94 1281.76
12 BAJAJ AUTO AUTOMOBILES 144.68 656.48
13 STATE BANK OF INDIA BANKS - PSU 634.88 9121.24
14 PUNJAB NATIONAL BANK BANKS - PSU 315.3 3090.88
15 HDFC BANK BANKS - PVT 425.38 2244.95
16 AXIS BANK BANKS - PVT 359.05 1815.36
1113.2
17 ICICI BANK BANKS - PVT 6 3758.13
18 ACC CEMENT 187.68 1212.78
19 AMBUJA CEMENT CEMENT 304.56 1402.27
20 ULTRATECH CEMENT CEMENT 124.49 977.02
21 HCL TECHNOLOGY SOFTWARE 133.97 780.65
22 ORACLE FIN SOFTWARE 41.88 695.71
23 INFOSYST TECH SOFTWARE 286.41 5819
24 TATA CONSULTANCY SERVICES SOFTWARE 97.86 4696.21
25 TECH MAHINDRA SOFTWARE 121.73 986.65
26 WIPRO SOFTWARE 292.99 2973.8
 ELECTRICAL
27 ABB EQUIPM 42.38 547.41
ELECTRICAL
28 BHEL EQUIPM 489.52 3061.05
ELECTRICAL
29 CROMPTON GREAVES EQUIPM 73.31 397.09
ELECTRICAL
30 BHARAT ELECTRONICS EQUIPM 80 808.46
ELECTRICAL
31 SIEMENS EQUIPM 67.44 593.33
ELECTRICAL
32 LARSON & TOUBRO EQUIPM 117.14 3481.66
33 RELIANCE CAPITAL FINANCE & INV 245.63 968.02
34 HDFC FINANCE & INV 284.45 2282.54
2138.8
35 ONGC OIL DRILLING 7 15572.29
OIL DRILLING &
36 RELIANCE INDUSTRIES REFINE 1573.8 15279
1192.3
37 INDIAN OIL CORPN REFINE & OIL MKT 7 2949.55
38 DABUR INDIA FMCG 86.51 373.56
39 HINDUSTAN UNILEVER FMCG 221.01 2496.45
40 PROCTOR & GAMBLE FMCG 32.46 131.41
41 ITC FMCG 377.44 3263.59
42 TATA TEA FMCG 61.84 159.06
43 CIPLA PHARMACEUTICALS 155.45 767.83
44 DR REDDY'S LAB PHARMACEUTICALS 82.23 560.89
45 RANBAXY PHARMACEUTICALS 210.18 -1032.33
46 SUN PHARMA PHARMACEUTICALS 103.56 1265.29
47 WOCKHARDT PHARMACEUTICALS 54.72 -348.75
8245.4
48 NTPC POWER 6 8201.3
49 TATA POWER POWER 221.42 922.2
50 SUZLON POWER 299.66 -469.23
51 RELIANC ENERGY POWER 226.42 1066.54
52 SHIPPING CORPORATION SHIPPING 423.45 940.67
TELECOMMUNICATI 1898.2
53 BHARATI TELEVENTURES ONS 4 7743.84
TELECOMMUNICATI 1032.0
54 RELIANCE COMMUNICATIONS ONS 1 2352.93
TELECOMMUNICATI
55 TATA COMMUNICATIONS ONS 285 515.95
TELECOMMUNICATI
56 IDEA CELLULAR ONS 3100 1008.21
57 GRASIM INDUSTRIES DIVERSIFIED 91.67 1647.96
58 VOLTAS DIVERSIFIED 33.09 252.59
EQUITY ANALYSIS
_______________________________________________________
Name of the company

Address: ( Regd. Off & Factory or Plant )

Sector – ( Type of Business )

Share Holding Pattern % Financial Data (Latest Financial Year Completed )

Promoters % Equity (Paid UP) ------------------------

Institutional Investors % Sales ------------------------

Other Investors % Net Profit ------------------------

General Public % Dividend ------------------------

Share Price ------------------------

Face Value ------------------------

P/E Ratio ------------------------

_________________________________________________________________________________________

Board of Directors:

Chairman: __________________ MD: __________________

ED: __________________ Director: __________________

About the company (Profile)

1. Establishment year & History of the company

2. Products or Types of services of the company

3. Specialized product or Brand in the market

4. Order book position – Present & Future

5. Merger & Acquisition – if any?

6. Expansion plans

7. Domestic Business or Exports?

8. If exports, then how much % from the total sales & to which countries?

9. Diversification

Financial Data

Profit & Loss A/c ( Year – Wise – Latest 4 years )

Mar 08 Mar 07 Mar 06 Mar 05

Sales or (Operating Income)

Other Income

EBIDTA

PBT

PAT

Debt : Equity Ratio

Conclusions:

1. Is there any growth in Top-Line ( Sales ) Y-O-Y?

2. Is there any growth in Bottom –Line (PAT) Y-O-Y?

 3. Type of growth – Organic or Inorganic?

4.

Case – I

• Growth in Sales & Growth in Net Profit

Case – II

• Growth in Sales & No Growth in Net Profit

Case – III

• No Growth in Sales & Growth in Net Profit

Case – IV

• No Growth in Sales & No Growth in Net Profit

Profit & Loss A/c (Quarterly – Latest 4 Quarters)

Comparison

June 09 June 08 Mar 08 Dec08 Sep 08

Sales or (Operating Income)

Other Income

EBIDTA

PBT

PAT

Conclusions

1. Is there any growth in Top-Line ( Sales ) Q-O-Q?

2. Is there any growth in Bottom –Line (PAT) Q-O-Q?

3. Type of growth – Organic or Inorganic?

Case – I
 • Growth in Sales & Growth in Net Profit

Case – II

• Growth in Sales & No Growth in Net Profit

Case – III

• No Growth in Sales & Growth in Net Profit

Case – IV

• No Growth in Sales & No Growth in Net Profit

Valuation of the Share Price

1. Current valuation of share price on the basis of P/Ex

2. Sector P/Ex

3. Comparison of share price P/E with Sector P/E

4. Find the stock – Undervalued OR Overvalued OR Fairly Priced

5. Abnormal P/Ex: Too high OR Too Low

6. What are the Forward Earnings?

7. Stock Category – Growth Stock / Trading Stock / Dividend Yield Stock

SHARE HOLDING PATTERNS

AS ON 31-3-2009
LARGE CAP COMPANIES
GEN
PAID UP TOTAL NO PROMOTER'S INSTITU OTHER INV PUB TOTAL
SR.
NO COMPANY NAME EQUITY OF SHARES % % % % %
1 RELIANCE INDUSTRIES 1574 Cr 157 Crs 49.03 25.01 15.09 10.87 100
2 ONGC 2138.87 Cr 214 Crs 74.14 12.04 12.03 1.79 100
3 BHARATI TELEVENTURES 1897.91 Cr 190 Crs 67.15 28.10 3.64 1.11 100
4 INFOSYS TECH 286 Cr 57 Crs 16.49 42.59 24.03 16.89 100
5 BHEL 489.52 Cr 49 Crs 67.72 26.18 4.14 1.96 100
6 ABB 42.38 Cr 21 Crs 52.11 33.90 2.53 11.46 100
7 ACC 187.88 Cr 19 Crs 46.21 32.40 5.31 16.08 100
8 WIPRO 293 Cr 146 Crs 79.32 7.92 6.55 6.21 100
HONEYWELL
9 AUTOMATION 8.84 Cr 0.88 Crs 81.24 4.33 1.55 12.88 100
MID CAP COMPANIES
GEN
PAID UP TOTAL NO PROMOTER'S INSTITUTIONAL OTHER INV PUB TOTAL
SR.
NO COMPANY NAME EQUITY OF SHARES % % % % %
1 ERA CONSTRUCTION 23.10 Cr 14 Crs 58.17 6.03 29.04 6.76 100
2 KPIT 15.61 Cr 8 Crs 27.42 21.29 29.90 21.39 100
3 AMARA RAJA BATTERIES 17.08 Cr 8.5 Crs 46.54 15.76 21.79 15.91 100
 4 CEAT TYRES 34.24 Cr 3.4 Crs 48.00 22.60 5.52 23.88 100
5 GWALIOR CHEMICALS 24.68 Cr 2.4 Crs 59.98 23.87 4.35 11.80 100
6 KAMAT HOTELS 13.79 Cr 1.3 Crs 73.02 8.10 5.56 13.32 100
7 KRBL 24.35 Cr 2.4 Crs 56.74 3.39 25.35 14.52 100
SMALL CAP COMPANIES
GEN
PAID UP TOTAL NO PROMOTER'S INSTITUTIONAL OTHER INV PUB TOTAL
SR.
NO COMPANY NAME EQUITY OF SHARES % % % % %
1 BALAJI AMINES 6.48 Cr 0.65 Crs 55.27 0.00 7.42 37.31 100
2 D & H WELDING 5.61 Cr 0.58 Crs 38.16 0.00 18.60 43.24 100
3 DCM 17.38 Cr 1.73 Crs 45.54 17.09 6.78 30.59 100
4 EL FORGE 8.63 Cr 0.86 Crs 34.36 9.81 14.42 41.41 100
5 G G DANDEKAR IND 0.48 Cr 0.47 Crs 50.02 11.91 8.26 29.81 100

GROWTH PATTERNS
FOR SALES & NET PROFIT

(TOP LINE & BOTTOMLINE)

ORGANIC GROWTH
PATTERNS
AVG
GROWTH
SR.
NO. COMPANY NAME RATE % FY 0708 FY 0607 FY 0506 FY 0405

1 RELIANCE INDUSTRIES LTD

SALES 23.94 139269 110886 89124 73164

NET PROFIT 39.48 19458 10908 9069 7572

2 TATA STEEL
 SALES 7.64 19693 19762 17144 15876

NET PROFIT 10.79 4687 4222 3506 3474

3 ONGC

SALES 8.97 60137 56903 48200 46712

NET PROFIT 7.96 16314 15642 14523 12980

4 TATA CHEMICALS

SALES 10.96 4246 4152 3652 3123

NET PROFIT 47.78 949 444 353 340

INORGANIC GROWTH PATTERNS

AVG
GROWTH
SR.
NO. COMPANY NAME RATE % FY 0708 FY 0607 FY 0506 FY 0405

BHARTI
1 TELEVENTURES
SALES 48.33 25703 17794 11228 7903
NET PROFIT 73.85 6244 4033 2012 1210
2 ICICI BANK
SALES 48.89 30788 22994 14306 9409
NET PROFIT 27.60 4157 3110 2540 2005
3 PRAJ INDUSTRIES
SALES 52.47 701 607 267 233
NET PROFIT 111.85 153 86 25 22
4 TULIP TELECOM
SALES 52.88 1216 840 508 342
NET PROFIT 155.90 187 94 49 13

P/E Ratio
The most commonly used valuation metric by investors is the price to earnings ratio or commonly referred to as
the P/E Ratio. Though commonly used, it is also misunderstood for various reasons. Here is an attempt to
simplify this valuation metric.

How is P/E Calculated?

It is calculated by dividing market price of stock by EPS ( Earnings Per Share ). EPS in turn is calculated by
dividing the net profit of the company by the number of shares outstanding.

Net Profit
 EPS = ---------------------------------------

Number of Shares Outstanding

Market Price

P/E Ratio = --------------------------------------

EPS

Lets assume a stock is trading at Rs.100 and its EPS is Rs.20. The P/E multiple is 5 ( 100 upon 20 )

Market Price = P/E multiple by EPS. Stock prices reflect future earnings potential and not past performance.
Discounting the current price with historical EPS is not right way to analyze companies.

Take hypothetical case. If Tata Steel’s EPS for the next year is expected at RS.50 and the growth in EPS is
around 15%, the market price is calculated by multiplying Rs.50 with 15 times i.e. Rs.750. When determining the
stock price, one does not discount earnings but multiply earnings.

What is the “Right” P/E multiple for a stock?

The answer to this question is not easy. In the previous example, we have assigned multiple of 15 times
because EPS is expected to grow by 15% in the immediate year. Is this right way? Not necessarily. Here, it is
important to understand characteristics of the company.

For a commodity stock like Tata Steel, EPS tends to grow at a faster rate when steel prices recovering or are at
the peak and the EPS is likely to decline at a faster rate during downturns. To qualify this statement, if we look at
EPS growth of Tata Steel from 1994 to 2004, the compounded growth in earnings is 17%. However, the CAGR
growth in the last three years was 193%. So, if one believes that steel demand is likely to trace long term
economic growth and that 15% growth is sustainable, the P/E multiple should be ideally much lower than 15
times. Similarly, the long term growth prospects for software companies could be much higher than
commodities.

Determining the P/E multiple for a stock / sector also depends on:

1. Historical performance – Why does Infosys trade at a higher P/E multiple compared to Satyam?

By historical performance, we mean, focus of the management (without unrelated diversification) ability
to outperform competitors in down / upturns and promise vs performance. This can be gauged if one
looks at the last three to five years annual reports of a company.

2. The sector characteristics – Margin profile, whether it is asset intensive and intensity of competition.
Less asset intensive sectors ( say FMCG ) are considered defensive and therefore, could be trade a
premium to the overall market.
 3. And more importantly, expectations. Take the case of Textile stocks. Expectations of significant growth
opportunities post the 2005 quote regime phase out has resulted in up-gradation of P/E multiple of the
textile sector.

When P/E is not useful?

1. Economic cycle: In FY02, Tata Steel was trading at P/E multiple of 20.5 times its FY02 earnings. Was it
expensive? Based on FY05 expected earnings, Tata Steel is trading at a P/E multiple of 5 times its
earnings ( at Rs.50 ). Is it cheap? If one ignored Tata Steel in FY02 on the basis that it was expensive
stock, the opportunity loss is as much as 350%. Business operate in cycles. During downturn, EPS will
be low but P/E will be inflated and vise versa. At the same time, during expansionary phase, corporate
invest in capacities. In this case, high depreciation costs suppress earnings. P/E in this context, may
mislead investors.

2. Not actively tracked: There are number of companies in the Indian Stock Market that are not actively
tracked by the investors, analysts and institutions.

3. Expectations: On the downside, some stocks may be trading at a significant premium because earnings
are higher. High P/E also does not means a good stock to buy. What if the expectations are unrealistic?

4. Means little a standalone number – P/E, as a standalone number, means little. Besides P/E, it is also
important to look at margins, return on net worth, cash generating ability and consistency in
performance over the years to assign a value to a stock.

5. Market sentiment: During bear phase or when interest in stock is low, valuations could be depressed.
Since equities are considered, less attractive during these periods, valuations are likely to be below
historical average or below earnings growth prospects.

6. To conclude valuations of stocks involves subjectively. A person X may assign a higher P/E to the stock
as compared to person Y depending on the risk profile and growth expectations. In the end, it all boils
down to how the company is likely to perform.

P/E Ratio Across the sectors:

Price Earnings Ratio can vary widely across the sectors and what comprises a low PE Ratio in one sector can
be high PE in another.

What are the reasons for the vast divergence in PE Ratio across the sectors?

The sectors with the lowest P/E offer not only lowest expected growth, but also have low returns on equity
(ROE).

The sectors with the highest P/E offer higher expected growth & higher returns on equity, with more risk.
You have three measures of the P/E Ratio for each company. The P/E based earnings in the most recent
financial year (Current P/E), the P/E based on earnings in the most recent four quarters ( Trailing P/E ) and the
P/E based expected earnings in the next financial year ( forward P/E ). Each measure has its adherents & there
is information in each.

Low Growth & P/E Ratios

One reason for Low P/E Ratio for a stock would be low expected growth. May Low P/E companies are immature
business for which the potential for growth is minimal. If you invest in stocks with Low P/E Ratios, you run the
risk of holding stocks with anemic or even negative growth rates. Therefore, you have to consider whether the
trade off of a Lower P/E Ratio for lower growth works in your favor.

P/E Ratio Relationship

Company Share Price Current P/E Sector P/E

ABC Industries 100 10 15

Example:

Formula

Sector P/E Ratio - Current P/E Ratio

--------------------------------------------------- X 100

Current P/E Ratio

Therefore, Apply to ABC Industries

15 – 10 100 X 50% = 50

---------- X 100 = 50% 100 + 50 = 150

10 Target Price can be 150

 Interpretation of P/E Ratios

1. HIGH P/E

2. LOW P/E

3. ABNORMAL P/E

4. NO P/E
 HIGH P/E

* Company is showing high growth in the business

* Investors are ready to pay high for the earnings of the company.

Scrip Share Price P/E Ratio

L&T 1656 20.7

BHEL 2217 31.3

HDFC BANK 1833 30.9

INFOSYS 2446 22.2

 LOW P/E

* Company is showing low growth in the business

* Investors are not ready to buy the stocks as the future earnings are
expected to be low.

Scrip Share Price P/E Ratio

Allahabad Bank 113 4.8

 Chambal Fertili. 56 8.5

Asian Electronics 46 6.1

GSFC 168 3.6

 ABNORMAL P/E

* Generally after listing the share Profit remains the same & number of
shares increase so, EPS goes down drastically.

* The earnings are very low for the year or a particular quarter.

Scrip Share Price P/E Ratio

Bharat Forge 269 102

GMR INFRA 72 157

JINDAL COTEX 102 66

JAYBHARAT TEL 398 497

 NO P/E

* There are no earnings to the company as on date

* For a specific quarter company has declared loss

Scrip Share Price P/E Ratio

Tata Steel 560 --

Aditya Birla Nuvo 850 --

 Chennai Petro 225 --

Jet Airways 563 --

Dividend Yield %

• Yield is the returns calculated on annualized basis.

• Dividend Yield is the returns from dividend calculated on annualized basis.

Formula

Dividend

------------ X 100 = Dividend Yield %

Share Price

Example: HDFC Pays dividend 200% for Face Value of Rs.10

That means Rs. 20 per share dividend

HDFC Share Price is Rs.3000

Therefore,

20

------- X 100 = 0.66% ( Dividend Yield % )

3000