Summer Training Report

On

Equity Analysis of Infrastructure Firms

Under the Supervision of:

Mr. Naresh Gogia

Submitted By:

Gulzar Siraj

Contact no.: 07417274446

E-Mail: sirajgulzar@gmail.com

Equity Analysis of Infrastructure Firms

ABSTRACT

The time one talks about stock market, another word also clicks and that is risk.

People have lost their millions in this stock market. This project has been initiated

for the purpose of acquainting me, gaining in depth knowledge of all the issues

concerning about finding out the potential firms to invest through shares by

Fundamental & Technical Analysis of Shares.

This work is a detailed study of stock market and stocks. It’s about the ways in

which investors can invest in stock market. I have tried to explain the entire stock

market trading in detail with the help of live examples. All these calculations

give a better insight to my work. This risk arises due to number of reasons, which

I have tried to put across. The focus in this project is on Equity Analysis of five

different firms from infrastructure Industry, viz. GMR, DLF, UNITECH,

RIIL, and JP ASSOCIATE. The entire work has not been done till date.

Application of these ways to analyze stocks is yet to be done, it’s in progress.

The project deals with Equity Analysis work which is, includes both

fundamental analysis and technical analysis. I have used MACD, Williams

R%, Relative Strength Index, EMA and WMA for technical Analysis and

Discounted Cash Flow Technique for Fundamental Analysis.

At the same time I am trying to analyze some top notch companies to make sure

that the companies selected for investing money are really worth to invest in a

large amount. All this has been done with the help of Annual report, Quarterly

results and daily news.

A comprehensive study is proposed with the following objectives.

1. To evaluate the performance of selected equity shares in terms of risk and future

returns.

2. To evaluate the shares pattern on the basis of technical analysis.

3. To help suggest investment decision by suggesting buying and selling signals.

For my understanding I referred to a book Fundamental and Technical Analysis

of Equity Shares. This was that book that actually helps me understanding the

analysis Part. For all the data collection www.moneycontrol.com, NSE’s site

www.nseindia.com and www.icharts.in proved to be a great help for me. It helps

me track all the historic information about companies and to track the current

trends of the market and stocks.

TABLE OF CONTENTS

CHAPTER DESCRIPTION PAGE NO.

ACKNOWLEDGEMENT

I. INTRODUCTION 1 Introduction 2

Introduction of Stock Market 4

Understanding of Stock Market Risk 13

II. COMPANY PROFILE 15

Company Profile 16

Vision & Approach 18

Product and Services 19

Achievements by SMC 21

III. REVIW OF LITERATURE 23

IV. RESEARCH METHODOLOGY 26

Research Objectives 27

Research Design 28

Data Collection Method 28

Sampling Technique 28

V. THEORITICAL BACKGROUND OF EQUITY ANALYSIS 29

Equity Analysis Tools 30

Fundamental Analysis 31

Technical Analysis 39

VI. ANALYSIS AND INTERPRETATION 54

Virtual Future Trading 55

Virtual Option Trading 63

Technical Analysis of Shares by Charts 66

Fundamental Analysis of Shares 81

VII. CONCLUSION & SUGGESTIONS 104

Conclusion 110

Suggestion & Recommendation 113

Limitation 114

REFERENCES & BIBLIOGRAPHY 115

ANNEXURES 118

COMPANY PROFILE

ABOUT SMC GLOABL SECURITIES

It's one of the leading firms in financial services in India. It basically deals in Mutual Fund,

Fixed Deposit Schemes, Capital Gain Bonds, GOI Taxable Bonds, NABARD Bonds and Life

and General Insurance. I am working for SMC Global Securities Limited which is one of the

leading companies of financial services. So I would like you to have a look at the profile of the

company

Review of Literature of Equity Research

1. Abnormal Returns to a Fundamental Analysis Strategy, by Jeffery S.

Abarbanell and Brian J. Bushee American Accounting Association.

2. Short-sellers, fundamental analysis, and stock returns by Patricia M.

Dechow, Amy P. Hutton, Lisa Meulbroek and Richard G. Sloan.

3. Fundamental Analysis of aggregate interlock by Joost C. Walraven, (Sr.

Research Engr., Univ. of Technology, Delft, The Netherlands).

4. Contextual Fundamental Analysis Through the Prediction of Extreme

Returns, by Messod D. Beneish, Charles M. C. Lee and Robin L. Tarpley.

RESEARCH METHODOLOGY

RESEARCH OBJECTIVES

The present study includes different strategy of derivatives used in present scenario. In

order to appraise the equity shares I have conducted a study of five different companies.

A comprehensive study is proposed with the following objectives.

EQUITY ANALYSIS

The objective of the equity analysis is to determine what stock to buy and at what price and for

that investor may use one method out of two available methods or he can use both the methods at

the same time.

Fundamental analysis maintains that markets may misprice a security in the short run but that

the "correct" price will eventually be reached. Profits can be made by trading the mispriced

security and then waiting for the market to recognize its "mistake" and re-price the security.

Technical analysis (also called Chart analysis) is the study of market action, using price charts,

to forecast future price direction.

Analysis & Interpretation

Technical Analysis by Charts

Basic terms which are used for the purpose of Technical Analysis are:

EMA: Exponential Moving Average

WMA: Weighted Moving Average

MACD: Moving Average Convergence and Divergence (Faster Moving average)

(Red Line)

EXP: Slower Moving Average (Blue Line)

RSI: Relative Strength Index

EMA (Close, 20): 20 days EMA

Williams’ R%: 14Days

DLF India Ltd:

Interpretation:

DLF has already crossed down the EMA & WMA level. Prices are looking for a new

support and resistance level.

New Support Level Price: 287.8 – 286.9

New Resistance Level Price: 300.0 – 305.8

MACD: Currently red line is at 1.426 is above the blue line which is at 0.678 and

creating a gap of 0.748 which is known as Positive Divergence.

Williams’ %R it is currently at a level of -7.342, which itself indicate positivity in stock

price.

RSI (14) is currently at level of 59.89 and moving from 30 marks to 70 marks.

Currently the EMV is indicating 12.62, which is greater than zero, hence giving strong

buy signal.

If DLF’s RSI touches the level of 70 marks it would probably the best time to sell the

DLF’s share.

Rating of Companies on the basis of Technical Analysis

Company Name

Rating Meter

Short Term

Medium Term

GMR Infrastructure Limited

JP Associate Limited

Unitech Limited

Reliance Industrial Infrastructure limited

DLF India Ltd.

FUNDAMENTAL ANALYSIS

Company’s Basic Information:

** Stock name given are of NSE and are different for BSE.

* VaR and ELR are of specific date and changes on daily basis.

Report Card:

Data Source: SMC Global Securities Ltd. Data Source: www.money.rediff.com

Security Name Security Code** Face

Value Series ISIN Code

Security Margin/VAR Margin*

Extreme Loss *

Applicable Margin

Rate

GMR Infrastructure Limited GMRINFRA 1 EQ INE776C0103

9 7.5 5 12.5

Reliance Industrial Infrastructure Limited

RIIL 10 EQ INE046A0101

5 9.2 5 14.2

Jaiprakash Associates Limited JPASSOCIAT 2 EQ INE455F01025 7.5 5 14.24

DLF Limited DLF 2 EQ INE271C0102

3 7.72 5 12.72

Unitech Limited UNITECH 2 EQ INE694A0102

0 9.24 5 14.24

GMR Ltd. Unitech Ltd. DLF Ltd. JP Associate RIIL

Annual results in brief Mar ' 10 Mar ' 10 Mar ' 10 Mar ' 10 Mar ' 10

Sales 169.36 1,937.50 2,401.29 10,316.04 51.16

Adjusted PBDIT 69.33 - - - 31.06

Adjusted PBT -2.51 - - - 24.93

Net profit / loss 13.45 544.3 769.61 1,708.36 21.98

EPS (Rs) 0.04 2.23 4.53 8.04 14.55

P/E Ratio 1532.50 37.05 70.77 16.24 64.47

Equity dividend 0 10 100 54 35

Total debt/equity 0.44 2.69 0.77 2.1 -

Market Cap. : 23860.63(Cr) 20614.03(Cr) 54418.85(Cr) 27694.89(Cr) 1416.38(Cr)

Face Value 1 2 2 2 10

FUNDAMENTAL ANALYSIS:

DLF INDIA LTD:

Report Card of DLF Ltd. (Cr)

Annual results in brief Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Average

Sales 2,401.29 2,827.90 5,532.84 1,133.48 291.65 2437.432

Adjusted PBDIT - 2,769.48 3,632.72 986.11 498.17 1971.62

Adjusted PBT - 1,807.69 3,117.59 620.42 348.12 1473.455

Net profit / loss 769.61 1,547.77 2,574.59 406.91 26.7 1065.116

EPS (Rs) 4.53 9.12 15.1 2.66 15.21 9.324

P/E Ratio 70.77 35.15 21.23 120.53 21.08 34.384

Equity dividend% 100 100 100 100 100 -

Total debt/equity 0.77 0.74 10.37 4.67 1.65 -

Market Cap. : 54418.85 - - - - -

Face Value 2 - - - - -

Market Price 320.6 - - - - - Data Source: SMC Global Securities Ltd. Source: Self Generated

STEP 1: Beta Value

Calculation of Beta Value is done using MS Excel:

I. Calculation of 1 year returns of DLF: by dividing current close price by previous close price and

then subtract the value from 1(one).

II. Calculating Benchmark Return: Here I have taken Cnx Nifty as benchmark.

III. Calculation of BETA: I have calculated DLF Beta by entering Slope function into MS Excel.

BETA VALUE

1.673492

STEP 2: WACC

Calculation of WACC is done using MS Excel:

Data Source: SMC Global Securities Ltd. Source: Self Generated

Calculation of WACC:

I. Assigning Weights to all the component of Capital Structure of DLF.

II. Making Assumption about the rate of each component.

III. Calculation of the required rate of Return on Equity.

IV. Summation of all the Rates with Risk Free Return.

Calculation of Weighted average Cost of Capital (DLF)

Equity share capital 339.48

Cost of debt 12%

Risk free return 7%

Beta 1.673

Market return 15%

Required rate of return 26.00%

Rate of Retained Earnings `13%

Weight of debt 0.437

Weight of equity 0.015

Weight of Retained Earning 0.547

weighted average cost of capital 19.75%

STEP 3: Intrinsic Value

Calculation of Intrinsic value is done using MS Excel:

Data Source: SMC Global Securities Ltd. Source: Self Generated

Calculation of Intrinsic Value:

1. Finding out the Internal Growth Rate of the Firm.

Average N/P Ratio

Average Annual Growth Rate

2. Assumptions for Depreciation and other Write offs.

10% Annual Increment (forecasted)

3. Summation of All Projected Cash Flows to calculate the Net Projected Cash Flow of a Particular

Year.

4. Calculation of Present Value of Projected Cash Flows on the basis of WACC (19.75%).

5. Fair Marketing Capitalization.

6. Intrinsic Value of Stock

Discounted cash flow Projections of Company financials DLF INDIA LIMITED

Periods 10E 11E 12E 13E 14E

Growth in Net Profit 32.04% 14.00% 20.12% 28.91% 41.55%

Net Profits 769.61 877.37 1053.89 1358.60 1923.07

Depreciation 126.06 138.67 152.53 167.79 184.56

Other write offs 37.86 34.07 30.67 27.60 24.84

Net Change In working capital 0 0 0 0 0

Free cash Flows 933.53 1050.11 1237.09 1553.99 2132.47

Discount Rate 19.75%

Discounted Cash Flow (Fair Market Capitalization) 59033.91

Stocks Intrinsic Value 347.79

No. of Shares Outstanding 169.74

Interpretation

DLF current sales have been declined by 15%, but its Operating Ratio has increased by 16%,

which tells that the company has successfully controlling its operations.

The Company’s Earnings per Share at the end of

Mar, 2010 is 4.53, which is the best among all the five companies after

Jaiprakash Associate who has 8.04.

P/E Ratio comes to 70.77 that give an idea about the earning capacity to its market price.

The company has declaring 100% dividend throughout 5 years.

The Debt/Equity Ratio of the firm 0.077 which is far below the standards, it implies that the firm

could not be able to take the benefits of leverage in the long run.

The Beta Value of DLF Stocks is 1.673, which is above than the Market Return.

The Difference between the Market Price of the share and its Intrinsic Value is 27.19, which

tells that Market Price is still 8.48% down from its Intrinsic Value.

BUY SELL HOLD

Suggestions & Recommendations

Discounted Cash Flow Technique should be used in doing the Fundamental Analysis.

While doing Equity Analysis other variables must also be taken into consideration like

investor’s response, market sentiment and global market conditions.

For the purpose of equity research one must take 8 to 10 companies so that the actual

trend of that sector can be determined and the comparison of the companies can be done

correctly.

Companies should be taken of that sector in which one have good knowledge, for the

purpose of research.

Limitations

Data available for the purpose of research is not sufficient to carry out fundamental

analysis of a company.

Time seems to be one of the biggest limitations.

Some of the research part which have been prepared using excel sheet cannot be added to

this project.

For the Purpose of Equity Analysis I have chosen only 4-5 companies but there are more

20-25 companies in these sectors.

Company was unwilling to divulge information, which was a hindrance for the research

process.