1.1 INTRODUCTION

FUNDAMENTAL ANALYSIS

Fundamental Analysis is really a logical and a systematic approach to estimating the future dividends and share price. It is based on the economic premise that shares price is determined by a number of fundamental factors relating to the economy, industry and company. Hence, the economy fundamentals, industry fundamentals and company fundamentals have to be considered while analysing a security for investment purpose. Fundamental Analysis is in other words a detailed analysis of the fundamental factors affecting the performance of the company. Each of the shares is assumed to have an economic worth based on its present and future earning capacity. This is called its intrinsic value or fundamental value. The purpose of fundamental analysis is to evaluate the present and future -earning capacity of the share based on the economy, industry and company fundamentals and there by assess the intrinsic value of the share with the prevailing market price to arrive at an investment decision. If the market price of the share is lower than the intrinsic value, as the investor is decide to buy the share as it is under priced. The price of such share is expected to move up in future to match with its intrinsic value. On the contrary, when the market price of the share is higher than its intrinsic value, it is perceived to be over priced the market price of such share is expected to come down in the future and hence the investor would decide to sell such a share. Fundamental Analysis thus provides an analytical framework for investment decision-making. This analytical framework is known as E-I-C framework (Economy-Industry-Company Analysis).

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The fundamental approach calls up on the investor to make his buy or sell decision on the basis of a detailed analysis of the information about the company, industry to which the company belongs, and economy. This results in informed in-vesting. For this the fundamental Analysis makes use of EIC framework of analysis. Fundamental Analysis involves three steps: 1. Economy Analysis 2. Industry Analysis 3. Company Analysis

1. ECONOMY ANALYSIS The performance of the company depends on the performance of the economy. If the economy is booming, incomes rise and demand for goods will increase, the industries and companies in general tend to be prosperous. On the other hand, if the economy is in recession, the performance of companies will be generally bad.

Investors are considered with those variables in the economy, which affect the performance of the company in which they tend to invest. A study of these economic variables would give an idea about future corporate earnings and payment of dividend and interest to investors.

2. INDUSTRY ANALYSIS An investor ultimately invests his money in the securities of one or more specific companies. Each company can be characterized as belonging to an industry. The performance of the companies would therefore, be influenced by the fortunes of the industry to which it belongs. For this reason an analyst has to undertake an industry analysis so as to study the fundamental factors affecting the performance of different industries.

At any stage of economy, there are some industries, which are fast growing and others are stagnating or declining. If an industry is growing the companies within the industries may also be prosperous. The performance of the companies will depend, among other things, upon the state of industry to which they belong. Industry analysis refers to the evaluation of the relative strength and weakness of particular industries.

3. COMPANY ANALYSIS It is the final stage of fundamental analysis. The economy analysis helps the investor a broad outline of the prospects of the growth in the economy. The industry analysis helps the investor to select the industry in which investment would be rewarding. Now he has to decide the company in which he should invest his money. Company Analysis provides the answer to this question. It deals with the estimation of return and risk of individual shares. This calls for information. Many pieces of information influence investment decisions. Information regarding companies can be broadly classified into two broad categories: Internal & External. Internal information consists of data and events made public by companies concerning their operations. The internal information sources include annual reports to shareholders, public and private statements of officers of the company, the companys financial statements etc. External sources of information are those generated independently outside the company. These prepared by investment services and the financial press. Also, a company analysis looks into thegoods and servicesproffered by the company. If the company is involved in manufacturing activities, the analysis studies the products produced by the company and also analyses the demand and quality of these products. Conversely, if it is a service business, the investor studies the services put forward.

How to do a company analysis

It is essential for a company analysis to be comprehensive to obtainstrategicinsight. Being a thorough evaluation of an organization, the company analysis provides insight to rationalize processes and make revenue potentials better.The process of conducting a company analysis involves the following steps:

The primarystepis to determine the type of analysis which would work best for your company.

Research well about the methods for analysis. In order to perform a company analysis, it is important to understand the expected outcome for doing so. The analysis should provide answer about what is done right and wrong on the basis of a thorough evaluation. It is, therefore, important6 to make the right choice for theanalysis method.. The next step involves implementing the selected method for conducting the financial analysis. It is important for the analysis to includeinternal factors affecting the business.

As a next step, all the major findings should be supported by use ofstatistics.

The final step involves reviewing the results. The weaknesses are thenattemptedto be corrected. The company analysis is used in concluding issues and determining the possible solutions. The company analysis is conducted to provide a picture of the company at a specific time, thus providing thebest way of enhancing a company, internally as well as externally.

Start With the Balance SheetLike your own financial position, a company's financial position is defined by its assets and liabilities. A company's financial position also includes shareholder equity. All this information is presented to shareholders in the balance sheet.

Let's suppose that we are examining the financial statements of fictitious publicly listed retailer, The Outlet, to evaluate its financial position. To do this, we examine the company's annual report, which can often be downloaded from a company's website. The standard format for the balance sheet is assets, followed by liabilities, then shareholder equity. Current Assets and Liabilities: Assets and liabilities are broken into current and non-current items. Current assets or liabilities are those with an expected life of less than 12 months. For example, suppose that the inventories that The Outlet reported as of January 31, 2010, are expected to be sold within the following year, whereupon the level of inventory will fall and the amount of cash will rise. Like most other retailers, The Outlet's inventory represents a big proportion of its current assets, and so should be carefully examined. Since inventory requires a real investment of precious capital, companies will try to minimize the value of inventory for a given level of sales, or maximize the level of sales for a given level of inventory. So, if The Outlet sees a 20% fall in inventory value together with a 23% jump in sales over the prior year, this is a sign they are managing their inventory relatively well. This reduction makes a positive contribution to the company's operating cash flows. Current liabilities are the obligations the company has to pay within the coming year, and include existing (or accrued) obligations to suppliers, employees, the tax office and providers of short-term finance. Companies try to manage cash flow to ensure that funds are available to meet these short-term liabilities as they come due. The Current RatioThe current ratio - which is total current assets divided by total current liabilities - is commonly used by analysts to assess the ability of a company to meet its short-term obligations. An acceptable current ratio varies across industries, but should not be so low that it suggests impending insolvency, or so high that it indicates an unnecessary build-up in cash, receivables or inventory. Like any form of ratio analysis, the evaluation of a company's current ratio should take place in relation to the past.

Non-Current Assets and Liabilities Non-current assets or liabilities are those with lives expected to extend beyond the next year. For a company like The Outlet, its biggest non-current asset is likely to be the property, plant and equipment the company needs to run its business. Long-term liabilities might be related to obligations under property, plant and equipment leasing contracts, along with other borrowings. Financial Position: Book Value If we subtract total liabilities from assets, we are left with shareholder equity. Essentially, this is the book value, or accounting value, of the shareholders' stake in the company. It is principally made up of the capital contributed by shareholders over time and profits earned and retained by the company, including that portion of the any profit not paid to shareholders as a dividendMarket-to-Book Multiple: By comparing the company's market value to its book value, investors can in part determine whether a stock is under- or over-priced. The market-to-book multiple, while it does have shortcomings, remains a key tool for value investors Extensive academic evidence shows that companies with low market-to-book stocks perform better than those with high multiples. This makes sense since a low market-to-book multiple shows that the company has a strong financial position in relation to its price tag.

The Income Statement The income statement is basically the first financial statement you will come across in an annual report or quarterly Securities And Exchange Commission (SEC) filing. It also contains the numbers most often discussed when a company announces its results - numbers such as revenue, earnings and earnings per share. Basically, the income statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain time period. When it comes to analysing 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 as an investor signal Revenue, also commonly known as sales, is generally the most straightforward part of the income statement. Often, there is just a single number that represents all the money a company brought in during a specific time period, although big companies sometimes break down revenue by business segment or geography. The best way for a company to improve profitability is by increasing sales revenue. For instance, Starbucks Coffee has aggressive long-term sales growth goals that include a distribution system of 20,000 stores worldwide. Consistent sales growth has been a strong driver of Starbucks' profitability. The best revenue are those that continue year in and year out. Temporary increases, such as those that might result from a short-term promotion, are less valuable and should garner a lower price-to-earnings multiple for a company. There are many kinds of expenses, but the two most common are the cost of goods sold (COGS) and selling, general and administrative expenses (SG&A). Cost of goods sold is the expense most directly involved in creating revenue. It represents the costs of producing or purchasing the goods or services sold by the company. For example, if Wal-Mart pays a supplier $4 for a box of soap, which it sells to customers for $5. When it is sold, Wal-Mart's cost of good sold for the box of soap would be $4.

Next, costs involved in operating the business are SG&A. This category includes marketing, salaries, utility bills, technology expenses and other general costs associated with running a business. SG&A also includes depreciation and amortization. Companies must include the cost of replacing worn out assets. Remember, some corporate expenses, such as research and development (R&D) at technology companies, are crucial to future growth and should not be cut, even though doing so may make for a better-looking earnings report. Finally, there are financial costs, notably taxes and interest payments, which need to be considered. Profits = Revenue - Expenses 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. Returning to Wal-Mart again, the gross profit from the sale of the soap would have been $1 ($5 sales price less $4 cost of goods sold = $1 gross profit). Companies with high gross margins will have a lot of money left over to spend on other business operations, such as R&D or marketing. So be on the lookout for downward trends in the gross margin rate over time. This is a telltale sign of future problems facing the bottom line. When cost of goods sold rises rapidly, they are likely to lower gross profit margins - unless, of course, the company can pass these costs onto customers in the form of higher prices. Operating profit is equal to revenues minus the cost of sales and SG&A. This number represents the profit a company made from its actual operations, and excludes certain expenses and revenues that may not be related to its central operations. High operating margins can mean the company has effective control of costs, or that sales are increasing faster than operating costs. Operating profit also gives investors an opportunity to do profit-margin comparisons between companies that do not issue a separate disclosure of their cost of goods sold figures (which are needed to do gross margin analysis). Operating profit measures how much cash the business throws off, and some consider it a more reliable measure of profitability since it is harder to manipulate with accounting tricks than net earnings. Net income generally represents the company's profit after all expenses, including financial expenses, have been paid. This number is often called the "bottom line" and is generally the figure people refer to when they use the word "profit" or "earnings". When a company has a high profit margin, it usually means that it also has one or more advantages over its competition. Companies with high net profit margins have a bigger cushion to protect themselves during the hard times. Companies with low profit margins can get wiped out in a downturn. And companies with profit margins reflecting a competitive advantage is able to improve their market share during the hard times - leaving them even better positioned when things improve again.

The Cash Flow Statement

Thecash flow statementshows how much cash comes in and goes out of theover thequarteror the year. At that sounds lot like theincome statementin that it records financial performanceover a specified period.

What distinguishes the two isaccrual accounting, which is found on theAccrual accounting requires companies to recordrevenuesandexpenseswhen transactions occur, not when casis exchanged. At the same time, the income statement, on the other hand, often includes non-cash revenues which the statement of cash flows does not include.

Cash Flow Statement Considerations:

Savvy investors are attracted to companies that produce plenty offree 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:

Ideally, investors would like to see that the company can pay for the investing figure out of operations without having to rely on outside financing to do so. A company's ability to pay for its own operations and growth signals to investors that it has very strong fundamentals.

OBJECTIVES OF THE STUDY

To do Fundamental Analysis of CONSTRUCTION SECTOR To compute the intrinsic values. To determine the market price of the share is overpriced or under priced on the basis of intrinsic values.

2.1 SCOPE OF THE STUDY It gives a brief introduction of stock brokers and stock exchanges and it also tries to familiarize the indices SENSEX and shows the importance of these studies. It also gives us a detailed insight about the Ventura capital Ltd, its origin and growth, what is the network behind the system for its effective working etc. It explains fundamental analysis of the major companies in the Construction sector.

2.3 LIMITATIONS OF THE STUDY

The research is based information collected from the past data. The intrinsic value of the company is determined by the profit, which the company earns over a period of time and it is directly related to both in internal and external factors, which are out of once control. The market price of the company is determined by the trading, which goes on in the secondary market, and it is mostly influenced by emotions of individual, which is also out of once control.

2.4 REVIEW OF LITERATURE

As mentioned earlier, the history of fundamental analysis as a trading mechanism began with Benjamin Graham in 1928. Graham published his first book, Security Analysis in 1934. This book defined the framework of Value Investment and is now in its fifth edition. Since that time, a great deal of research focused on specific fundamental measures as key determinants of a securities future price confirmed that data on firm size could be used to create portfolios that earn excess returns. Reinganum A significant contribution of the fundamental models is that they provide for the calculation of a number of financial ratios. These ratios are then used to assess the financial health of a company, and to compare directly to the ratios for different companies, which found that stocks with a high book to-market value yielded higher long-term returns. There is a long established tradition of attempting to use these fundamental ratios as predictors of a companys future share price. Rosenbergetal

Focused on high book to market securities, and shows that the mean return earned by a high book-to-market investor can be right shifted by at least 7.5% annually. He also studied a number of different fundamental ratios and criteria with similar outcomes, and notes that returns are concentrated in small and medium size companies, companies with low share turnover, and firms with low analyst following

Piotroski

3.1 COMPANY PROFILE

Ventura Securities Ltd. (Ventura) commenced operations in 1994 as a stock broking house. Over the past two decades, we have grown into a group of companies that provides a complete array of financial products and services.

Through a large network of sub-brokers, we offer our clients the opportunity to invest and trade in equity and equity derivatives, commodities, mutual funds, fixed income products and currency futures.

We also directly facilitate clients who wish to trade in equity online via our in-house, customized and ready to use software Pointer which enables seamless processes and flawless execution. We adhere to a well-defined risk management system and settlement mechanism thereby conducting fully compliant operations.

Beyond investment avenues, the Ventura Group is constantly committed to providing investors with access to timely and relevant research and data to ensure an informed and fruitful investment experience.

OurMission

To build true relationships and strive towards customer delight, through constant innovation on a strong foundation of dedicated and trained resources.

DIRECTOR Sajid Malice-promoter of Ventura and DirectorA chartered accountant by qualification, Sajid Mallik is also the Promoter and Managing Director of Genesys International, a company with focus on GIS mapping and engineering designing services, listed on the NSE and BSE.

The Ventura Credo :Building and valuing true partnerships: When it comes to our business partners, we see our success reflected in their progress. We have facilitated them all the way with technology and marketing strategies and in turn have been rewarded with their performance and loyalty.'Think and it's there' approach: We envisage all our clients' diverse needs - ranging from financial planning to wealth management - well in advance and provide them with resources, tools and solutions to fulfill them.Constant innovation: Change for the better has become a way of life at Ventura. Innovations have always been customer centric which has been amply reflected in the upgradation of systems to facilitate our network partners.Team Ventura: Our dedicated and well trained people represent the pillar of strength and success at Ventura. Each of our members has internalized our mission and are constantly striving to build on

PHILOSOPHY AND POLICY:

Business philosophy Ethical Practices & Transparency In All Dealings. Customer interest above own interest; always deliver what promise, effective cost management. Quality assurance policy Venture broking committed to being the Leader in providing World Class Products & Services which exceed the expectations of its customers achieved by teamwork and a process of continues improvement Motto Companies motto is to make customer smile - To have complete harmony between Quality-in-Process and continues improvement to deliver exceptional service that will delight Its Customers and Clients. CRM Policy Customer is king Customer is the most important visitor on our premises, he is not dependent On us but we are dependent on him, he is not an interruption in our work, but is the purpose of it, we are not doing him a favour by serving, he is doing us a favour by giving us an opportunity to do so.

SERVICES: E-Broking They offers several user-friendly services for customers to manage their stock portfolios, including online capabilities linked to an information database to help customers confidently invest. Its e-broking services are specially designed for the net-savvy traders and investors who prefer operating from their home or office through the internet. Commodities : Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are one of the best options. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Commodities are easy to understand and are based on the fundamentals of demand and supply. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, prices in commodities futures have been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option PMS (Portfolio Management Services) Successful investing in Capital Markets demands ever more time and expertise. Investment Management is an art and a science in itself. Professional Investment Management Services are no longer the privilege of only large institutional investors. Portfolio Management Services (PMS) is one such service that is fast gaining eminence as an investment avenue of choice for High Net worth Investors.

PMS is a sophisticated investment vehicle that offers a range of specialized investment strategies to capitalize on opportunities in the market. The Portfolio Management Service combined with competent fund management, dedicated research and technology, Investment advisory :To derive optimum returns from equity as an asset class requires professional guidance and advice. Professional assistance will always be beneficial in wealth creation. Investment decisions without expert advice would be like treating ailment without the help of a doctor. Mutual Fund:The Mutual Fund distribution and advisory division offers customers the opportunity to diversify their investment portfolio. By offering a choice of investment schemes from all major mutual fund providers Angel have taken its 100% retail-focused philosophy a step further. Mutual Fund offers options catering to investors with varying risk-return profiles. It also help investors to choose the best mutual fund, based on their investment needs. IPO (Initial Public Offer) Broking offers all majors IPOs to their customer. Its research desk also provides advice and all the details of issuing company.

3.2 Theoretical aspect of stock Exchange

A broker is an intermediary who arranges to buy and sell securities on behalf of clients (buyer and seller). According to Rule 2 (e) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, a Stockbroker means a member of a recognized stock exchange. No stockbroker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of Registration granted by SEBI. A stockbroker applies for registration to SEBI through a stock exchange or stock Exchanges of which he or she is admitted as a member. SEBI may grant a Certificate to a stock-broker [as per SEBI (Stock Brokers and Sub-Brokers Rules.1992] subject to the conditions that: a) He holds the membership of any stock exchange; b) He shall abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member; c) In case of any change in the status and constitution, he shall obtain prior Permission of SEBI to continue to buy, sell or deal in securities in any stock Exchange; d) He shall pay the amount of fees for registration in the prescribed manner; and e) He shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep SEBI Informed about the number, nature and other particulars of the complaints. While considering the application of an entity for grant of registration as a stock-broker, SEBI shall take into account the following namely, whether the Stock broker applicant -a) is eligible to be admitted as a member of a stock exchange; b) Has the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his activities; c) Has any past experience in the business of buying, selling or dealing in Securities.

STOCK EXCHANGES IN INDIA Bombay Stock Exchange (BSE) A very common name for all traders in the stock market, BSE, stands for Bombay Stock Exchange. The market not only in the country, but also in Asia. The early days of BSE was known as "The Native Share &Stock Brokers Association." It was established in the year 1875 and became the first stock exchange in the country to be recognized by the government. In 1956, BSE obtained a permanent recognition from the Government of India under the Securities Contracts (Regulation) Act, 1956. In the past and even now, it plays a pivotal role in the development of the country's capital market. This is recognized worldwide and its index, SENSEX, is also tracked worldwide. Earlier it was an Association of Persons (AOP), but now it is a demutualised and corporatized entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

National Stock Exchange (NSE) The National Stock Exchange of India (NSE) was incorporated in November 1992 as a tax-paying company. It is recognized under Securities Contracts (Regulation) Act, 1956 in 1993 as a stock exchange. In June 1994, it commenced operations in the Wholesale Debt Market (WDM). In November, the same year, the Capital Market (Equities) segment commenced operations and the Derivatives segment in June 2000.

Regional Stock Exchanges (RSE) There are 23 stock exchanges in India. Among them two are national level stock exchanges namely Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE). The rest 21 are Regional Stock Exchanges (RSE).

4.1 RESEARCH METHODOLOGY

A research design is the arrangement of conditions for collection and analysis and data in a manner that aims to combine relevance to the research purpose with economy in the procedure. It provides the source and type of information, approach used for gathering and analysing data, time and cost relevant for the research study.

SAMPLING METHOD

The researcher has used the non-profitability convenience sampling. This sampling method involves purposive or deliberate selection of particular unit of the universe for constituting a sample, which represents the universe. Using the BSE SENSEX 3 companies were selected from the CONSTRUCTION SECTOR.

METHOD OF DATA COLLECTION

The study basically used secondary data. Secondary data means that data that already available. Generally speaking secondary data is collected fromOrganization or agencies, which have already been processed when the researcher utilizes secondary data he/she has to look into various source from where he can obtain them. The process of secondary data collection and analysis is called desk research. Secondary data provides economy in time and cost it is easily available and unbiased. Secondary data may either be published data or unpublished data.

4.2 TOOLS USED FOR ANALYSIS

1. PAY OUT RATIO

Pay-out ratio is calculated to find the extent to which earnings per share have been retained in the business. It is an important ratio because ploughing back of profits enables a company to grow and pay more dividends in future. Pay-out ratio = Dividend per share / Earnings per share.

2. RETURN ON EQUITY

Return on equity capital, which is the relationship between profits of a company and its equity capital. This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits, which can be made available to pay dividend to them. Return on equity = Profit after tax / Net worth

3. PRICE EARNING RATIO

Price earnings ratio is the ratio between market price per equity share and earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether or not to buy share in a particular company. Price earnings ratio = Market price / EPS

4. LONG TERM GROWTH RATE

Long-term growth rate is the relationship between average retention ratio and average return on equity. This ratio is help to find the long term growth rate of the share. Long term growth rate = Average retention ratio * Average ROE

4. PROJECTED EPS

This ratio is calculated by current year earning per share in to one plus growth rate. Projected EPS = Current year EPS (1 + Growth rate)

5. INTRINSIC VALUE

Each of the shares is assumed to have an economic worth based on its present and future earning capacity, this is called intrinsic value. Intrinsic value is the relation between projected earnings per share and normalized average profit earnings ratio. Intrinsic value = Projected EPS * Normalized average PE ratio

INDUSTRY ANALYSIS

CONSTRUCTION INDUSTRY IN INDIA

INTRODUCTION TheConstruction industryof Indiais an important indicator of the development as it creates investment opportunities across various related sectors. The construction industry has contributed an estimated6708billion to the national GDP in 2011-12 (a share of around 8%).The industry is fragmented, with a handful of major companies involved in the construction activities across all segments; medium sized companies specializing in niche activities activities; and small and medium contractors who work on the subcontractor basis and carry out the work in the field. In 2011, there were slightly over 500 construction equipment manufacturing companies in all of India.The sector islabour-intensiveand, including indirect jobs, provides employment to more than 35 million people.

India is on the verge of witnessing a sustained growth in infrastructure build up. The construction industry has been witness to a strong growth wave powered by large spends on housing, road, ports, water supply, rail transport and airport development. While the construction sector's growth has fallen as compared to the pre-2008 period, it has picked up in the recent past. Its share as a percentage of GDP has increased considerably as compared to the last decade. To put things in perspective, the total investment in infrastructure - which in this case includes roads, railways, ports, airports, electricity, telecommunications, oil gas pipelines and irrigation - is estimated to have increased from 5.7% of GDP in 2007 to around 8.0% by 2012. The Planning Commission of India has proposed an investment of around US$ 1 trillion in the Twelfth five-year plan (2012-2017), which is double of that in the Eleventh five-year plan.

From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. Given that the resource constraints of the public sector will continue to limit public investment in infrastructure, - especially backward and rural areas - the PPP based development will be needed wherever feasible. At the same time, reviewing the factors that constrain private investments would be necessary to encourage and speed up the process. The share of private investments is expected to increase to half in the Twelfth five-year plan as compared to the intended 30% for the Eleventh five-year plan.

The real estate industry comprising of construction and development of properties has grown from family based entities with focus on single products and having one market presence into corporate entities with multi-city presence having differentiated products. The industry has witnessed considerable shift from traditional financing methods and limited debt support to an era of structured finance, private equity and public offering.

The construction sector is a major employment driver, being the second largest employer in the country, next only to agriculture. This is because of the chain of backward and forward linkages that the sector has with other sectors of the economy. About 250 ancillary industries such as cement, steel, brick, timber and building material are dependent on the construction industry. A unit increase in expenditure in this sector has a multiplier effect and the capacity to generate income as high as five times.

KEY POINT

SupplyThe past few years has seen a substantial increase in the number of contractors and builders, especially in the housing and road construction segment.

DemandDemand exceeds supply by a large margin. Demand for quality infrastructure construction is mainly emanating from the housing, transportation and urban development segments.

Barriers to entryLow for road and housing construction. However, high working capital requirements can create growth problems for companies with weak financial muscle.

Bargaining power of suppliersLow. Due to the rapid increase in the number of contractors and construction service providers, margins have been stagnant despite strong growth in volumes.

Bargaining power of customersLow. The country still lacks adequate infrastructure facilities and citizens have to pay for using public services.

CompetitionVery high across segments like road construction, housing and urban infrastructure development. Relatively less in airport and port development.

Identifying a construction stock: Do's and don'ts

Theconstruction sectorcan be broadly classified into three sub-segments: Infrastructure (roads, power, ports and urban infrastructure) Real estate and Industrial construction (steel plants, textile plants, refineries, pipeline etc.)

Infrastructure:Thegovernment spendingon infrastructure is the most important demand driver for the construction industry. Since adequate infrastructure is essential for sustained economic growth, infrastructure construction has gained significant importance over the past few years, mainly in the form of development of roads,& sanitation, irrigation and ports projects. In most of the segments of infrastructure construction, the government is focusing onprivate public partnership (PPP) model to achieve faster execution of projects.The basic framework forinvolves constructing projects on BOT (build-operate-transfer) basis, whereby a construction companybuilds and operates a project for a period of say 20 to 30 years (called concession period) and then transfers the project in a well-maintained condition to the government free of cost. During this concession period, the entire toll revenues collected by the construction company belong to it. Then, there is a second type of BOT contract, called as 'annuity contracts', whereby the toll is collected by the government and is then shared (pre-determined) with the construction company that had constructed the project and is operating the same on behalf of the government.Real estate:Demand supply-gap for quality residential housing favourable demographics, rising income levels, availability of financing optionas well as fiscal benefits available on availing of home loan are the key drivers supporting the demand for residential construction. In addition to this, demand for office space from IT/BPO segment is expected to continue due to emergence of India as a preferred outsourcing destination. Also, buoyancy in organised retail is expected to result in huge demand for real estate construction.Industrial:Industrial construction is primarily driven by capacity expansion plans of manufacturing companies, which in turn is dependent upon the aggregate demand in the economy and consequently current capacity utilisation levels. For instance,metalandrefinerycompanies, which have been operating at high utilisations levels, have planned huge capacity expansion going forward, which shall entail large spends on construction activities.

Balance sheet strength: TheIndian construction industryis witnessing market share gains by bigger players. This means that bigger companies are growing bigger and bigger at the expense of smaller players. As per a survey conducted by CMIE, over the past 10 years, the market share of top 30 construction companies has increased from 50% to 90%. This is primarily due to increasing complexity of projects, stricter technical qualifications, and cumbersome process of forming consortiums for smaller players. We believe that this trend will continue going forward and hence investors need to invest in bigger construction companies that are more likely to win orders based on their pre-qualification status (determined by the balance-sheet strength and experience in handling similar projects).Order book:Order book of a companyhas a direct bearing on its future revenues. Since the construction business is primarily a tender driven business, strong order book provides revenue visibility to the firm. It should, however, be noted that order book only includes cash contracts and not projects allotted on BOT (build-operate-transfer) basis. In case of BOT, returns are in the form of annuity and toll and are generally spread over a period of 15, 20 or 30 years.Execution period: For a construction company, revenue is primarily a function of order book size as well as the execution period. The order book tenure (or the execution period) in turn, is dependent upon the order mix of the company. For instance, transportation projects have a lower gestation period as compared to power and tunnel projects. Hence, a company with higher proportion of low gestations projects in its order book is likely to witness higher conversion rate and a faster growth in revenues.Increased investments in infrastructure and huge capacity addition plans by manufacturing companies have resulted in huge order books for construction companies. We believe that the timely execution of projects in the wake of human resource shortage will be the key challenge for construction companies going forward. Hence, one should be a bit conservative as far as the sales growth is considered.Margin driversOrder mix:Depending upon the nature of projects in hand, the margin profile of the company keeps on fluctuating. Due to the fragmented nature of the industry, project margins are generally dependent upon the level of competition in a particular segment, which in turn is dependent upon the level of expertise required to execute such projects. For instance, power projects involve higher margins as compared to road projects, since the execution of the former involves greater expertise.Construction cost:Since projects are bid on cost estimations, any increase in price of inputs will have a direct impact on the company's profitability. On an average, material costs account for 45% to 50% of the operating cost of a construction company. Unprecedented rise in prices of key inputs like cement and steel might affect margins. Though most of the projects have price-escalation clause for increase in input cost, they are not sufficient to cover the incremental rise in prices. This is mainly due to the linking of the price-escalation clause with the wholesale price index (WPI). Therefore, if the rise in input cost is higher than the rise in WPI, the additional cost will have to be borne by the company. Contractsthat include 'star price' on key materials like cement and steel is also becoming increasingly popular. In such contracts any increase/decrease in prices goes to client's account.Key parameters for selecting a construction stockFor an average investor, size of the order book remains the sole criteria for investing in construction companies. More often than not, their decisions are based on order book to sales ratio of companies with little or no importance attached to the execution time and the margins of the projects. While order book to sales definitely gives an indication of visibility in growth of company's revenues, there are a few more things that investors need to consider before investing in stocks from the sector. These include:Management: Though management is an important criterion for investment across the sectors, we believe that the same assumes greater significance in the construction industry considering the poor discloses standards followed by the companies.Segment presence: As mentioned earlier, the segment(s) in which a company operates has a direct impact on its revenues as well as profitability. Investors should invest in companies, which have expertise to execute diverse projects as also has the required skill-sets to execute projects with greater complexities (as these earn relatively better margins as compared to plain road construction type of projects).Key ratio: Besides looking atorder book to sales ratio,investors should focus onworking capital to sales(considering high gestation period of projects),debt to equity, operating marginsandreturn on capital employedratios. Also, considering the huge amount of funding required for timely executing of projects, investors should also keep a check of the possible dilution in equity going forward.Valuations:We believe that 'Price to earnings (P/E) ratio', is an appropriate metric for valuing construction companies. Besides, investors can also use 'Price to sales ratio (P/S) ratio' for valuation purpose. As we have explained earlier that order book should not be the sole criteria for looking at construction stocks,one should refrain from using some of the frivolous parameters like 'price to order book'. HISTORY OF INDIAN CONSTRUTION INDUSTRY

The period from 1950 to mid 60s witnessed the government playing an active role in the development of these services and most of construction activities during this period were carried out by state owned enterprises and supported by government departments. In thefirst five-year plan, construction of civil works was allotted nearly 50 per cent of the total capital outlay.The first professional consultancy company, National IndustrialDevelopment Corporation(NIDC), was set up in the public sector in 1954. Subsequently, many architectural, design engineering and construction companies were set up in the public sector (Indian RailwaysConstruction Limited (IRCON), National Buildings Construction Corporation (NBCC), Rail India Transportation and Engineering Services (RITES),Engineers India Limited (EIL), etc.) and private sector (M N Dastur and Co., Hindustan Construction Company (HCC), Ansals, etc.).In India Construction has accounted for around 40 per cent of the development investment during the past 50 years. Around 16 per cent of the nation's working population depends on construction for its livelihood. The Indian construction industry employs over 30million people and creates assets worth over200billion.It contributes more than 5 per cent to the nation's GDP and 78 per cent to the grosscapital formation. Totalcapital expenditureof state and central govt. will be touching8,021billion in 2011-12 from1,436billion (1999-2000).The share of the Indian construction sector in total gross capital formation (GCF) came down from 60 per cent in 1970-71 to 34 per cent in 1990-91. Thereafter, it increased to 48 per cent in 1993-94 and stood at 44 per cent in 1999-2000. In the 21 st century, there has been an increase in the share of the construction sector in GDP and capital formation.GDP from Construction atfactor cost(at current prices) increased to1,745.71billion (12.02% of the total GDP ) in 2004-05 from1,162.38billion (10.39% of the total GDP) in 2000-01.The main reason for this is the increasing emphasis on involving the private sector infrastructure development throughpublic-private partnershipsand mechanisms likebuild-operate-transfer(BOT), private sector investment has not reached the expected levels.The Indian construction industry comprises 200 firms in the corporate sector. In addition to these firms, there are about 120,000 class A contractors registered with various government construction bodies. There are thousands of small contractors, which compete for small jobs or work as sub-contractors of prime or other contractors. Total sales of construction industry have reached428854million in 2004 05 from214519million in 2000-01, almost 20% of which is a large contract forBenson & Hedges.

COMPANY ANALYSIS LARSEN AND TOURBO

COMPANY PROFILE L&T Technology Services is a Strategic Business Unit of Larsen & Toubro, a USD 13.5 billion- Indian multinational engineering, technology, manufacturing and construction conglomerate. We are backed by 75 years of engineering excellence of our parent company. Our corporate heritage has given us many inherent advantages that we translate into tangible benefits for our clients. We are the Global Delivery Partners for engineering services

1. With deep capability across Complete Engineering Lifecycle2. Listed 9th among the world's Most Innovative Companies by Forbes3. Ranked 4th by Newsweek in the list of Greenest Industrial Companies4. Rated in the Leadership zone by Zinnov for the second year in a row in the Industrial Automation segment amongst the top Engineering Service Providers Service Offerings:Our end-to-end service offerings include product design, analysis, prototyping & testing, embedded system design, manufacturing engineering, plant & construction engineering, asset information management and engineering process support using cutting-edge CAD / CAM / CAE technology in various domains. Innovative element at L&T Technology Services has led to our successful partnership with clients to co author 70 patents in the engineering space.Value Proposition Backed by 75 years of engineering excellence, L&T Technology Services delivers strong engineering pedigree that helps us engage very closely with our customers to provide end to end solutions spanning all stages of a product lifecycle providing:

Global footprint in US, Europe and Asia, including designated consultant in each of these geographies. Flexible Operating Models. Ability to engage with customers in large and critical engineering programs.

HISTORY The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry. Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity. EARLY DAYS Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark, would not have dreamt, as they were learning about India in history classes that they would, one day, create history in that land. In 1938, the two friends decided to forgo the comforts of working in Europe, and started their own operation in India. All they had was a dream. And the courage to dare their first office in Mumbai (Bombay) was so small that only one of the partners could use the office at a time! In the early years, they represented Danish manufacturers of dairy equipment for a modest retainer. But with the start of the Second World War in 1939, imports were restricted, compelling them to start a small work-shop to undertake jobs and provide service facilities. Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to stand on their own feet and innovate. They started manufacturing dairy equipment indigenously. These products proved to be a success, and L&T came to be recognised as a reliable fabricator with high standards. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started two repair and fabrication shops - the Company had begun to expand. Again, the sudden internment of German engineers (because of the War) who were to put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of installation - an area where their capability became well respected. THE JOURNEY In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of foreign collaborations. By 1945, the Company represented British manufacturers of equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and glass. In 1945, L&T signed an agreement with Caterpillar Tractor Company, USA, for marketing earthmoving equipment. At the end of the war, large numbers of war-surplus Caterpillar equipment were available at attractive prices, but the finances required were beyond the capacity of the partners. This prompted them to raise additional equity capital, and on 7th February 1946, Larsen & Toubro Private Limited was born. Independence and the subsequent demand for technology and expertise offered L&T the opportunity to consolidate and expand. Offices were set up in Kolkata (Calcutta), Chennai (Madras) and New Delhi. In 1948, fifty-five acres of undeveloped marsh and jungle was acquired in Powai. Today, Powai stands as a tribute to the vision of the men who transformed this uninhabitable swamp into a manufacturing landmark. PUBLIC LIMITED COMPANY In December 1950, L&T became a Public Company with a paid-up capital of Rs.2 million. The sales turnover in that year was Rs.10.9 million. Prestigious orders executed by the Company during this period included the Amul Dairy at Anand and Blast Furnaces at Rourkela Steel Plant. With the successful completion of these jobs, L&T emerged as the largest erection contractor in the country. In 1956, a major part of the company's Bombay office moved to ICI House in Ballard Estate. A decade later this imposing grey-stone building was purchased by L&T, and renamed as L&T House - its Corporate Office. The sixties saw a significant change at L&T - S. K. Toubro retired from active management in 1962.The sixties were also a decade of rapid growth for the company, and witnessed the formation of many new ventures: UTMAL (set up in 1960), Audco India Limited (1961), Eutectic Welding Alloys (1962) and TENGL (1963).

EXPANDING HORIZONS By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1973 had become one of the Top-25 Indian companies. In 1976, Holck-Larsen was awarded the Magsaysay Award for International Understanding in recognition of his contribution to India's industrial development. He retired as Chairman in 1978. In the decades that followed, the company grew into an engineering major under the guidance of leaders like N. M. Desai, S.R. Subramanian, U. V. Rao, S. D. Kulkarni and A. M. Naik. Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence. For an institution that has grown to legendary proportions, there cannot and must not be an 'end'. Unlike other stories, the L&T saga continues.....