PREFACE As a part of M.B.A. curriculum I have to do summer training in the corporate world for 8 weeks as partial fulfillment of degree and based on that I have to prepare project report on it. So there is great importance for me of this valuable training as I have to get real world learning experience. Fortunately, I got opportunities to have my training at Anagram Securities ltd. And I came into touch with corporate world. And learnt basic concepts ofsecurities market. Whatever I learnt I have also tried to apply it in my project report and for that I selected topic “A FUNDAMENTAL STOCKANANLYSIS”and I ha ve tried to unders tand it pr oper ly wi th pr ac ti cal examples. With this I have also included topics about organization and its activities, products, market analysis etc.where I have done our training so ourobjectives of this report and training are as followings. Objectives: • To learn basic concepts of stock market.. • To find out competition in stock broking industry through competitoranalysis • To understand the basics of fundamental stock analysis. • And finally through this training to come to know about the corporate environment. • And to get maximum out of training and apply it practically in my report. 1
As a part of M.B.A. curriculum I have to do summer training in the corporateworld for 8 weeks as partial fulfillment of degree and based on that I have toprepare project report on it. So there is great importance for me of thisvaluable training as I have to get real world learning experience.
Fortunately, I got opportunities to have my training at Anagram Securities ltd.And I came into touch with corporate world. And learnt basic concepts of securities market. Whatever I learnt I have also tried to apply it in my project
report and for that I selected topic “A FUNDAMENTAL STOCK ANANLYSIS” and I have tried to understand it properly with practicalexamples. With this I have also included topics about organization and itsactivities, products, market analysis etc.where I have done our training so our objectives of this report and training are as followings.
Objectives:
• To learn basic concepts of stock market..
• To find out competition in stock broking industry through competitor analysis
• To understand the basics of fundamental stock analysis.
• And finally through this training to come to know about the corporateenvironment.
• And to get maximum out of training and apply it practically in myreport.
An acknowledgement is something which is overlooked by many, but it formsintegral part of my project and is only means through which I couldcommunicate my thanks to all those who have extended their help withselflessness in an untiring manner.
I very much thankful to our Institute (GRIMS) for giving us an opportunity of doing my summer project at Anagram. I heartily thankful to our Director
Dr.R.S.Shah and Prof. Pankaj Patel for providing me guidance in this project.
I would like to express my gratitude to my company guide Mr. Keyur Shahand HR Manager to giving me opportunity to have my summer project in thiswell known company. I am also very thankful to Mr. Rakshit Bhatt,Mrs.Chiragi Patel, without all of them this project would have not beenpossible. It was nice learning experience to have with them.
Last but not least I am thankful to all of those who have directly or indirectlyhelped me to make this project a great journey in the ocean of knowledge. Iam again very much thankful to all these persons.
Anagram Securities Ltd established in 1993-94 owned by LalbhaiGroup. Anagram is in business of commodities, stock trading, mutual funds,insurance and IPO etc. And providing basket of Products to satisfy customer’sneeds. Anagram has strong brand name, effective research department, andstrong RMS system and having active management team, mancom next Teamall these strengths have helped to Anagram to expand very fast in this industry.As securities markets have created more opportunities.
Sensex touched 15000 mark all-around cheers but there is essence of uncertainity and risk in investors mind. Whether his stock would give him tomaximum return or not, sometimes it becomes very difficult for investors topredict the share price of the particular company in this very volatile market. Itraises questions in investor’s mind that at what price I should buy? When tosell it... hold? So now investors are in dilemma but now a days Brokers,analyst, have started stock Analysis to get some insight so there are two typesof analysis.
1. Technical Analysis
2. Fundamental Analysis
Technical analysis is the study of historic price movements of securitiesand trading volumes. Technical analysts believe that prices of the securitiesare determined largely by forces of demand and supply. Share prices move inpatterns which are easily identifiable. Crucial insights into these patterns canbe obtained by keeping track of price charts, leading to predictions that a stock price may move up or down. The belief is that by knowing the past, future
While Fundamental analysis is the practice of evaluating a company’sstock price by comparing base elements in the company’s balance sheets aswell as general market factors. The main principle of fundamental analysis isto find profitable companies to invest in by comparing revenues, sales,management, etc. Fundamentals include earnings report, dividends, sales,inventories, profit margins, P/E ratio, market share, etc. And it is three Phaseanalysis of Economy, Industry and Company itself. So all three factors affectthe stock movement and performance of the company as I have here preparedfundamental analysis of SBI and ICICI Bank. To understand the conceptThourghly.
SBI and ICICI are major players and Competitors in the industry, havedone well in terms of Business Expansion, both have found out newopportunities and diversified their business as demand for loans, financialproducts is increasing and both banks have been increased profit, deposits etc.So their fundamentals are very strong and intact. With support of the growingeconomy we hope that stock market would take it positively. And stock wouldgive return to its shareholder in long terms.
From the company analysis of ICICI and SBI both have good financialposition, good P/E Ratio, Return on Equity, Return on Assets, good marketshare in their respective areas.
And I have also done the Competitive Analysis of the major players atthe Ahmedabad. From this analysis I can provide the information regardingthe competitors schemes run in the market and give the suggestion to
It is globally recognized that the growth of the economy depends to alarge extent globally on the growth of the Securities Market as it provides thevehicle for raising resources and managing risks. Today, the wheels of theeconomy cannot move without the Securities Market. Indeed, it is a modernmarvel for accomplishing astonishing numbers in terms of economic growth.Further, today’s Securities Markets are absolutely different from what theywere 10 years ago or will be in the next 10 years. They would remain in
transition. There would be ups and downs. Many would succeed and manywould vanish along the transformation journey.
[B] Participants:-
The securities market has essentially three categories of participants viz.the issuer of securities, investors in securities and the intermediaries. Theissuers are the borrowers or deficit savers, who issue securities to raise funds.The investors, who are surplus savers, deploy their savings by subscribing tothese securities. The intermediaries are the agents who match the needs of
users and suppliers of funds for a commission. These intermediaries pack andunpack securities to help both the issuers and investors to achieve their respective goals.
[C] Market Segments:
The securities market has two interdependent segments: 1. Primary market:
The primary market is the channel for creation of new securities. Thesesecurities are issued by public limited companies or by government agencies.In the primary market, the resources are mobilized either through the publicissue or through private placement route.
The secondary market enables participants who hold securities to adjusttheir holdings in response to changes in their assessment of risks and returns.The secondary market operates through two mediums, namely. Over-the-counter (OTC) market - OTC markets are informal markets where trades arenegotiated. Exchange-traded market the stock exchange is a marketplacewhere industrial securities like equity shares, preference shares, debenturesand bonds of listed public limited companies and the governments are traded.
[D] National Stock Exchange
The National Stock Exchange (NSE) is India's leading stock exchangecovering various cities and towns across the country. The National Stock Exchange of India (NSE) was incorporated in November 1992 as a tax-payingcompany. It is recognized under Securities Contracts (Regulation) Act, 1956in 1993 as a stock exchange.
[E] Bombay Stock Exchange
Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a
rich heritage. Popularly known as "BSE", it was established as "The NativeShare & Stock Brokers Association" in 1875. It is the first stock exchange inthe country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.
index options, stock futures and stock options.• One of the fastest growing markets in the equity derivatives.
• About 10000 Trading Terminals in around 400 cities.
• Consolidation of Regional Stock Exchanges.
• Approximately 20 million Investors
[G] Regulatory Framework
A brief about these legislations are as given below:
1. SEBI Act, 1992:
The SEBI Act, 1992 was enacted to empower SEBI with statutorypowers for (a) Protecting the interests of investors in securities,(b) Promotingthe development of the securities market, and (c) Regulating the securitiesmarket.
2. Securities Contracts (Regulation) Act, 1956:
It provides for direct and indirect control of virtually all aspects of thesecurities trading including the running of stock exchanges with an aim toprevent undesirable transactions in securities.
The Depositories Act 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed,accuracy and security.
4. Companies Act, 1956:
It deals with issue, allotment and transfer of securities and variousaspects relating to company management. It also regulates underwriting, theuse of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information.
[H] Reforms In Indian Securities Market
During the last decade, there have been substantial regulatory,structural, institutional and operational changes in the securities industry.These have been carried out with the objective of improving marketefficiency, enhancing transparency, preventing unfair trade practices andbringing the Indian market up to international standards. The followingparagraphs list the principal reform measures undertaken in the last decade.
1. DIP Guidelines:
The guidelines aim to secure fuller disclosure of relevant informationabout the issuer and the nature of the securities to be issued.
2. Screen Based Trading:
In this system a member can punch into the computer quantities of securities and the prices at which he desires to transact and the transactionis executed as soon as it finds a matching sale or buy order from a counter
party. Hence it cuts down on time and cost.
3. Trading Cycle:
The settlement period has been reduced progressively from T+5 to T+3days. Currently T+2 day settlement cycle is being followed
To assist market participants to manage risks better through hedging,speculation and arbitrage, Derivatives trading commenced in June 2000 in theIndian securities market on NSE and BSE only.
5. Depositories Act:
To prevent physical certificates from sneaking into circulation, it hasbeen mandatory that all new securities issued should be compulsorily traded indematerialized form.
6. Risk Management:
With a view to avoid any kind of market failures, the regulator exchanges have developed a comprehensive risk management system, whichis constantly monitored and upgraded. It encompasses capital adequacy of members, adequate margin requirements, limits on exposure and turnover,indemnity insurance, on-line position monitoring and automatic disablement,etc.
7. Investor Protection:
SEBI specifies that the critical data should be disclosed in the specifiedformats regarding all the concerned market participants. The CentralGovernment has established a fund called Investor Education and ProtectionFund (IEPF) in October 2001 for the promotion of awareness amongstinvestors and protection of the interest of investors.
8. Globalization:
Indian companies have been permitted to raise resources from abroadthrough issue of ADRs, GDRs, FCCBs and Ecs.Indian companies arepermitted to list their securities on foreign stock exchanges by sponsoringADR/GDR issues against block shareholding. NRIs and OCBs are allowed toinvest in Indian companies. FIIs have been permitted to invest in all types of securities, including government securities.
Anagram StockBroking is a firm, which is part of the Rs.2000 croreLalbhai Group. Anagram is a member of the National Stock Exchange(registration number INB--230597630). Ever since its foundation in 1993,Anagram Securities has always focused on the needs of the retail client. Lastyear, billings crossed Rs.17000 crore with around 5,000 people making their trades through Anagram. The firm has its roots in Western India especiallyGujarat where it is the biggest player. But it has expanded considerably.
Anagram Stock Broking Ltd, Anagram Securities limited, AnagramComtrade Limited and Enagram Online Limited (Collectively referred as“Anagram”). Anagram Stockbroking Limited is a member of The Bombay
Stock Exchange Limited and a Depository Participant of the NSDL andAnagram Securities limited is a member of National Stock Exchange Limitedand Anagram Comtrade Limited is a member of India's 3 premier commodities Exchanges namely MCX, NCDEX, and NMCE) (TCM – Trading cum Clearing Member).
Moneypore is the brand name of Anagram, which represents theinvestment philosophy of the company. Moneypore is that state of consciousness which enables retail investors to make intelligent decisions.Investors need not be rich to become a resident of Moneypore. All they need isan open mind and a desire to take charge of their financial affairs.
Anagram is a complete service brokerage house offering the entirespectrum of services that an equity investor would need and offer real timeoffline and online trading platform on the BSE & NSE both in cash and F & Osegment. It also offers its clients online access their account and information.
Anagram does no proprietarily trading and manages no mutual funds,nor is it interested in corporate finance. It believes in offering advice that iscompletely untainted with ulterior motives.
Investment Philosophy
The investment philosophy of Anagram focuses primarily onrecommending purchases in financially sound companies at reasonable marketprices. We would also recommend sales of companies which are above thesales price targets or whose business prospects are poor.
Anagram recognizes that every individual is unique in terms of hisinvestment time horizon, investment objectives, personal financial situations,
level of interest and inclination in the investment decision taking process andlast but not the least, his risk taking ability. Whilst it is hard to beat the level of absolute customization and hand holding that a qualified personal financialplanner would provide, we have attempted to individualize, as much aspossible, model portfolios that we believe reflect the individual’s uniqueinvestment profile.
Today, Anagram is one of India's leading corporate broking houses witha very strong network of its own Branches and Franchisees across India. Thefollowing areas give it a unique identity:
• Service: beyond broking
• The differentiator: Research and risk management
With a network of more than 138 odd branches and a clientele of morethan 79,000 Retail investors, Anagram is counted among the top 5 brokeragesin the retail arena.
If the first priority in business is reaching customers, the second iskeeping him satisfied. Anagram, believe in building relationship with itscustomers and provide them with a whole palate of services. The relationshipmanagement encompasses from providing the right investment strategiesbased on needs and risk stances to ensuring timely payouts.
It proud for the fact that they've maintained a record of prompt payoutsto their customers, winning a reputation for reliability and transparency that isnot too common a currency in this business. And they've done this despite thealarming- and–sudden-slumps that the stock market and the economy havegone through over the last decade.
As far as product range goes, Anagram is steadily building up acomprehensive portfolio of products and services apart from conventionalbroking. High speed anywhere trading through the net, Online depositoryservices, Commodities Trading and retail debt products are increasingly areasof special emphasis for us.
2. Institutional business
While Anagram also has its hand on the pulse of the retail client, it alsounderstands the needs of the demanding institutional clients. A separateinstitutional sales desk services the needs of the select institutions. Anagramsis empanelled with leading Indian institutions and keeps expanding the list.
Information and research is a vital ingredient for success in an industrythat relies on information flows and where the ability of its people tounderstand the markets and foresee trends is what sets a good firm apart.
Research is very important part of Anagram’s business. Its 13-member research team is spread over two locations i.e. Ahmedabad and Mumbai. Wecontribute regularly to the various TV channels, newspapers and other media.
Anagram’s research reports for the institutional clients are exhaustiveand in detail, where as for the retail segment the stress is on timeliness. It has abattery of products that cater to the retail investor. Chinta's Call is its morning
newsletter that takes a trading call on the market and gives you a ringside viewof the overnight national and international events and how they would shapethe day's trading. The ‘Famous Five' on Monday picks 5 investment picks for a medium term horizon.
Anagram’s Research Products:
• Daily market views and stock picks• Sector Update Report
• Company Research Report
•
Weekly Sector Outlook and• International Market Wrap Up.
Risk Management:
Risk management is at the core of our very existence. There is nomargin for any error. With the help of modern technology and some hard nutsin the risk management room it has been able to keep the risks of its businessto the bare minimum. Its comfort to expand geographically comes from thefact that its risk management is clinical. Anagram’s strict adherence to systemsensures that its clients and stakeholders can have their quota of the much-needed peaceful sleep.
Anagram has also invested in the state-of-the-art VPN (Virtual PrivateNetwork) infrastructure that gives a robust system to ease geographicalexpansion and build terminal network across the country. It also enables theentire business applications available cutting across geographical boundaries.
Whether it is the trading engine for our website or the VSATs basedVPN we use for our connectivity or the applications that make our front office,back office and Depository service completely seamless, we have alwayssettled for the best. We have the best of the breed technology partnerscomplemented by some of best brains in IT and connectivity working for us.
Intangible assets:
People, it is often said, are company's biggest resource. This is doublytrue in a service industry like securities business. Its success lies in the factthat it have been able to hire, train and then retain the desired people. Anagramis a 1000 people strong team. The average age of its team is which just theright blend of youth and experience.
Infrastructure:
Office Network across India:
Anagram has at present more than 138 offices across India. Theaddresses of the various offices are given in the enclosed annexure. Besidesthis branch network Anagram has network of Sub-brokers and Franchisees.Anagram has connectivity provided through installed Vsats, lease lines andBharti VPN (Virtual Private Network) through Vsats. The other CTCLinstallations are over 100 at various locations.
Anagram has centralized Back Office, which is based at Ahmedabad.
Back Office handled by Nilesh Dakway based in Mumbai out of Bandra KurlaComplex and supports the Back Office operation to Institutions and othersfrom this place.
Distribution Business:
The Distribution Business offers advisory Services of Investments intoMutual Funds, Primary Market, Life Insurance and other small savingproducts. Anagram currently operate out of 50 locations of the total 138Anagram location and by 31st March 2008 shall cover at least 40 locationsPan India. The distribution service adds up to its broking business and isserviced by experts at each location. Pan India network of 14+own branches200+ franchisees network of 2000+terminals in over 80 cities in India. Andcatering to more than 75000 clientele bases.
To be in the distribution business across whole range of financialproducts and be preferred destination for Retail, MNI’s , HNI’s, PortfolioInvestors & financial institutions investing in Indian stock & Commoditiesmarkets by :
• Providing more focused and client specific products
• Creating customer centric distribution business ensuring completecustomer focus
• Giving personalized services in terms of quality investment advice andreal time review thereof.
Anagram -: “Mission”
“To educate and empower the individual investor to make better investment decisions through quality advice and superior service.”
Currently, Anagram Securities and Stock broking is offering followingproduct bouquet to people who wish to deal in stock market.
Offline:
Anagram offer a complete range of pre-trade, trade and post-tradeservices on the BSE and the NSE. Whether you approach(go to) convenientlylocated offices and trade in a dedicated environment, or issue instructions over the phone , their highly trained team and sophisticated equipment ensuresmooth transactions and prompt service.
Anagram was one of the FRIST to offer online trading. At site,www.moneypore.com, high bandwidth leased lines, secure servers and acustom- built user interface gives customer an international standard tradingexperience.
Moneypore also gives them regular updates during trading hours, andaccess to information, analysis and research, and a range of monitoring tools.
Anagram has affiliation with 2 banks, which allows its customers toenjoy the facility of instant credit and transfer of funds from his savings bank account to his anagram account. The affiliated banks are as follows:
I have here prepared competitors analysis to find out and study variousproducts and scheme offered by other players in the market. and this wouldalso helpful to Anagram to find its place in this increasing cut throatcompetition.
I have selected few companies which are having major share in their hands and are currently major competitors for Anagram Securities.
My study of concern included the following parameters:
• Religare offer three schemes depend on scrips display and alsoproviding interests rate on the margin of clients.
• Sharekhan is providing online a/c only in Rs.500 and no annualmaintenance charge for first year.
• Reliance Money is offering no brokerage and minimum AMC withproviding unique security number that changes every 32 seconds so keep
account extra safe.
• I also found that Angel is providing more flexibility compare to other players in the industry in terms of brokerage, margin, or any other servicesso leading the industry.
• So there is great competition in stock broking industry and companiesare providing as possible as maximum service to their customers to retainthem and to attract more potential customers. And that’s why many
companies have offered attractive offers. And other new players are alsoentering in the industry.
Indian Securities markets are touching new heights as it has surpassed15,000 marks. More and more investors are attracting towards equityinvestment and trading. But this is not always the case that no one can assureyou certain returns there is always essence of uncertainty and risk ininvestment and that push investors on back seats. Sometimes it becomes verydifficult for investors to predict the share price of the particular company inthis very volatile market. It raises questions in investor’s mind that
At what price I should buy? When to sell it... hold?
But as trading and investments are increasing on the markets as SEBIhad taken stern steps to disclose important information to its Shareholder andinvestor. So they can get as possible as information about the companies of which they are holding the shares or going to buy. And now-a-days brokersand some analyst providing some future predictions of stocks pricemovements. So now investment has become somewhat easy for investors.
How they get it? This is done with a Stock Analysis getting theinformation about company and its price movements on stock markets andtry to predict how would behave on stock markets. So, there is great
importance of stock analysis among investors done brokers, experts, analyst,etc.
Types of Stock Analysis:
The methods used to analyze securities and make investmentdecisions fall into two very broad categories: fundamental analysis andtechnical analysis
1. TECHNICAL ANALYSIS2. FUNDAMENTAL ANALYSIS
Here I have selected a Fundamental analysis as subject of our project so I would do it in detail with practical analysis of two companies.And I would get only some flavor of technical analysis and then I wouldunderstand about fundamental analysis.
“Technical analysis is a method of evaluatingsecurities by analyzing the statistics generated by marketactivity, such as past prices and volume. Technical analystsdo not attempt to measure a security's intrinsic value, butinstead use charts and other tools to identify patterns thatcan suggest future activity.”
Just as there are many investment styles on the fundamental side,
there are also many different types of technical traders. Some rely on chartpatterns; others use technical indicators and oscillators, and most use somecombination of the two. In any case, technical analysts' exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analystsdon't care whether a stock is undervalued - the only thing that matters is asecurity's past trading data and what information this data can provide aboutwhere the security might move in the future.
The field of technical analysis is based on three assumptions:
1. The Market discounts everything.2. Price moves in trends.3. History tends to repeat itself.
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considersprice movement, ignoring the fundamental factors of the company. However,technical analysis assumes that, at any given time, a stock's price reflectseverything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, alongwith broader economic factors and market psychology , are all priced into thestock, removing the need to actually consider these factors separately. This
only leaves the analysis of price movement, which technical theory views asa product of the supply and demand for a particular stock in the market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. Thismeans that after a trend has been established, the future price movement ismore likely to be in the same direction as the trend than to be against it. Mosttechnical trading strategies are based on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeatitself, mainly in terms of price movement. The repetitive nature of pricemovements is attributed to market psychology; in other words, marketparticipants tend to provide a consistent reaction to similar market stimuliover time. Technical analysis uses chart patterns to analyze marketmovements and understand trends. Although many of these charts have beenused for more than 100 years, they are still believed to be relevant becausethey illustrate patterns in price movements that often repeat themselves.
[B] Other Usage:
Technical analysis can be used on any security with historical tradingdata. This includes stocks, futures and commodities, fixed-income securities,forex, etc. In this tutorial, we'll usually analyze stocks in our examples, butkeep in mind that these concepts can be applied to any type of security. Infact, technical analysis is more frequently associated with commodities andforex, where the participants are predominantly traders.
Now that you understand the philosophy behind technicalanalysis, we'll get into explaining how it really works. One of the best waysto understand what technical analysis is (and is not) to compare it tofundamental analysis. We'll do this in the next section.
“Fundamental analysis is the study of economic, industry,and company conditions in an effort to determine the valueof a company's stock. Fundamental analysis typically focuseson key statistics in a company's financial statements todetermine if the stock price is correctly valued.”
The main principle of fundamental analysis is to find profitablecompanies to invest in by comparing revenues, sales, management, etc.Fundamentals include earnings report, dividends, sales, inventories, profitmargins, P/E ratio, market share, etc. Those looking to invest in a companywill be the most likely to use fundamental analysis. This is because theresearch is used to not just look at the value of the company, but to look atthe company itself. This includes the results of its finances and its potentialto grow. The fundamentals can give a better picture the entire company, notjust a snapshot. This means that analysis is used to look at the long term of acompany not just the short term.
The basic idea is if you put a rupee into the business (in the form of buying the stock) how much of a return can you expect. How much yield youwill likely see and / or how much growth you will experience based on theoperation, markets, competitors and costs of the business. Obviously, not allaspects of these fundamentals can be quantified. Fundamentals areassociated with the economic health of a company, measured in terms of revenues, earnings, assets, liabilities, Return on Equity (ROE), Return onAssets (ROA), Return on Investments (ROI), growth prospects and cashflows, etc. The fundamentals tell you about a company. You can say acompany is having robust fundamentals if it is growing at a nice pace,generating a profit, has limited debts and abundant cash.
• To make projection on its business performance and in the badcondition to improve the performance of company.
• To evaluate its management and make internal business decisions,
• To make the company's stock valuation and predict its probable priceevolution.• Investors may use fundamental analysis to determine future growthrates for buying high priced growth stocks.
[C] Approaches of Fundamental Analysis:
Investors can use either a top-down or bottom-up approach.
• The top-down investor starts his analysis with global economics,including both international and national economic indicators, such as GDPgrowth rates, inflation, interest rates, exchange rates, productivity, andenergy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreigncompetition, and entry or exit from the industry. Only then does he narrowhis search to the best business in that area.
• The bottom-up investor starts with specific businesses, regardless
The most common way that fundamental analysis is done in is in three steps:[1] Economic Analysis:-
The first step to this type of analysis includes looking at themacroeconomic situation. This includes GDP, growth rates, inflation,interest rates, exchange rates, productivity and energy prices.
[2] Industry Analysis: -
The next step taken in analysis in this category is looking at theindustry as a whole. This includes total sales, price levels, competition and
their effects, foreign competition as well as any entrances or exits from theindustry.
[3] Company Analysis:-
Last in this process of studying the fundamentals includes looking atthe company individually. This includes looking at unit sales, prices, newproducts, earnings and any chance of debt or equity occurring.
Now we would understand each one briefly than we practicallyanalyze in analysis chapter.
[E] Economic Analysis:-
The purpose of analyzes economic condition of the country infundamental analysis to assess the general economic situation both withinthe country and inter nationally.
The economy is like the tide and the various industry groups and
individual companies are like boats. When economy expands most industrygroups and companies benefits and grows. When the economy decline, mostsectors and companies usually suffer. The stock market does not operate in avacuum it is an integral part of ht whole economy of a country, more so in afree economy that of United States and to some extent in mixed economylike ours.
To gain an insight into the complexities of stock market. One needs todevelop a sound economic understanding and be able to interpret the impactof important economic indicators on stock markets.
The following are some important factors, which should be taken intoaccount while doing fundamental analysis
• Economic Growth
• Per capita income
• Industrial Production
• Inflation
• Interest Rates
• Foreign Exchange Reserves
•
Budgetary Deficit• Domestic Savings and Investment
• Tax Rates
• Infrastructure
• Political Situation
[F] Industry Analysis: -
The purpose of industry analysis is to review prevailing conditionswithin specific industry and its segments. The company's industry obviouslyinfluences the outlook for the company. Even the best stocks can postmediocre returns if they are in an industry that is struggling.
“It is often said that a weak stock in a strongindustry is preferable to a strong stock in a weak industry.”
To assess the industry group potential, an investor would want to
consider the overall growth rate, market size, and its importance to economy.While the individual company is still important, its industry group is likely toexert as much as, or more, influence on the stock price. When stock movethe usually move as groups; there are very few lone guns out there. Anunderstanding of the industry sector involved, including the maturity of thesector and any cyclical effects that the overall economies have on it, is alsonecessary.
The followings are some important factors, which should be considered inFundamental Analysis
• Growth: A growing industry gives room for profitability.
• Profitability: Average profitability of the industry should beattractive.
• Demand-Supply: the wider demand supply gap, the better is theindustry’s fortune in the future
• Entry barrier
• Competition and Market share:
• Technology trends
• Government Policy
• Capacity Utilization
• Bargaining power of buyers
[G] Company Analysis:
The purpose of company analysis to analyze the financial and non-financial aspects of a company to determine whether to buy, sells, or holds
onto the shares of a particular company.
After determining the economic and industry conditions, the companyitself is analyzed to determine its financial health. Studying the company’sfinancial statements usually does this. From these statements a number of useful ratios can be calculated. The ratios fall under five main categories:profitability, price, liquidity, leverage, and efficiency. When performing ratioanalysis on a company, the ratios should be compared to other companieswithin the same or similar industry to get a feel for what is considered"normal." These are quantitative factors of company analysis; there are also
some qualitative factors, which should be considered also.
• Find out as much as possible about the company and their products.
• Do they have any “core competency” or “fundamental strength”that puts them ahead of all the other competing firms?
• What advantage do they have over their competing firms?
• Following are some more important aspects about company Do
they have a strong market presence and market share? Or do theyconstantly have to employ a large part of their profits and resources inmarketing and finding new customers and fighting for market share?
• Shareholding pattern
• Growth
• Market share
• Technology
• Expansion Plan
• Profitability
• Capital History
• Marketing Capabilities
• And most important its financial statement
After you understand the company & what they do, how theyrelate to the market and their customers, you will be in a much better position to decide whether the price of the companies stock is going to goup or down.
So fundamental analysts use different tools and ratios tocompare all sorts of companies no matter what business they are in or what they do!
Technical analysis and fundamental analysis are the two main schools
of thought in the financial markets. As we've mentioned, technical analysislooks at the price movement of a security and uses this data to predict itsfuture price movements. Fundamental analysis, on the other hand, looks ateconomic factors, known as fundamentals. Let's get into the details of howthese two approaches differ, the criticisms against technical analysis and howtechnical and fundamental analysis can be used together to analyzesecurities.
[I]The Differences
• Charts v/s. Financial Statements:
At the most basic level, a technical analyst approaches a securityfrom the charts, while a fundamental analyst starts with the financialstatements.
• Time Horizon:
Fundamental analysis takes a relatively long-term approach toanalyzing the market compared to technical analysis. While technical
analysis can be used on a timeframe of weeks, days or even minutes,fundamental analysis often looks at data over a number of years.
• Trading versus Investing:
Not only is technical analysis more short term in nature thatfundamental analysis, but also the goals of a purchase (or sale) of a stock areusually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.Investors buy assets they believe can increase in value, while traders buy
assets they believe they can sell to somebody else at a greater price. The linebetween a trade and an investment can be blurry, but it does characterize adifference between the two schools.
After getting basic theoretical knowledge now let’s apply it infundamental analysis. For that we have selected two companies frombanking sector ICICI Bank and State Bank of India (SBI).
I would do it step by step as I have mentioned earlier. I would try toderive at conclusion that how the stocks of this company are going to behavein stock market. I would cover relevant points to baking sector in three stepanalysis which influence and company and industry heavily.
I have selected these two companies because both are big players inindustry in public and private sector. They are also close competitor andmost traded stock on the stock market. And financial sector is also growingvery rapidly and one of the important chapters of Indian growth story. So itwould give better understanding of the sector.
As we know that it is a three phase analysis so I would follow that andtry to gain insight into it. Following are three phases
Economics experts and various studies conducted across theglobe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the worldbut major developments have taken place in the world economy since then,leading to the shift of focus from the US and the rich countries of Europe to
the two Asian giants- India and China.
Within Asia, the rising share of China and India has more thanmade up the declining global share of Japan since 1990. During the seventiesand the eighties, ASEAN countries and during the eighties South Korea,along with China and India, contributed to the rising share of Asia in worldGDP.
According to some experts, the share of the US in world GDP isexpected to fall (from 21 per cent to 18 per cent) and that of India to rise
(from 6 per cent to 11 per cent in 2025), and hence the latter will emerge asthe third pole in the global economy after the US and China.By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri-polar economy will becomplete by 2035, with the Indian economy only a little smaller than the USeconomy but larger than that of Western Europe. By 2035, India is likely tobe a larger growth driver than the six largest countries in the EU, though itsimpact will be a little over half that of the US.India, which is now the fourth largest economy in terms of purchasing power
parity, will overtake Japan and become third major economic power within10 years.
India is one of the fast growing economies. Indian economy expanded
9.4 per cent for the financial year ended March 2007, to remain the secondfastest growing behind China among large economiesThe Indian economy is going through one of its best phases of sustainedgrowth. Over the last four years, growth has averaged more than 8.5 per cent.The economy has shown signs of having entered a higher growth trajectoryand the expansion appears to be more sustainable. The quality of growth hasimproved when compared to similar growth phases in the past as growth isvisible in more segments.
Apart from the well documented strengths of the Indian servicessector, the country's manufacturing sector has made impressive gains and hasbecome more competitive in recent years. Over the last three years,manufacturing growth has matched growth in services. Farm sector performance continues to be highly erratic and depends heavily on monsoonrains.
Faster economic growth has also led to a steady rise in per capitaincome levels in recent years. From less than $400 per year at the turn of thecentury, per capita income at constant prices has increased to $555 for financial year 2006-07 at current rupee – dollar exchange rate. The gapbetween GDP growth and per capita income growth has declinedconsiderably in recent years. Per capita income growth has averaged over 7per cent over the last four years when GDP growth averaged more than 8.5per cent.
Inflation continued to fall for the fifth successive week. Wholesaleinflation for the week ended May 19 declined to 5.06 per cent annually from5.27 per cent for the previous week. Though the wholesale price index rose0.1 per cent for the week, higher base effect led to the decline. Prices of primary farm produce and manufactured goods saw modest increases duringthe week. Within manufactured goods, prices of food products declined. TheReserve Bank of India, the country's central bank, has set its target inflationrange for the current year at 4 per cent - 4.5 per cent.
Rupee appreciation against the US dollar did not have much impact onexports in April. Exports of goods from the country for April were $10.58
billion, an increase of 23 per cent year-on-year. The sharp appreciation of therupee, which is the best performing Asian currency against the dollar thisyear, is bound to affect low margin exports like textile products. However,overall export growth is unlikely to be affected as the share of value addedproducts have increased in recent years.
Imports in April increased 41 per cent year-on-year to $17.64 billionand the trade deficit widened 79 per cent to $7.06 billion. Strong domesticgrowth continues to drive import growth and stronger rupee would makeimports even cheaper. The up trend in crude oil prices would push up theimport bill even further.
These evident of growing economy is pushing our stock marketsfurther, with general public beginning to believe in the market andparticipating in the market, the total market capitalization is inching towards1 trillion mark
The journey towards the $1-trillion mark is nothing less thanspectacular, considering that the market cap was just about $150 billion in2004. To put in context, the total bank deposits in 2004 were $500 billionand have crawled to about $650-700 billion in the same period.
As India prepares herself for becoming an economic superpower,it must expedite socio-economic reforms and take steps for overcominginstitutional and infrastructure bottlenecks inherent in the system.Availability of both physical and social infrastructure is central tosustainable economic growth.
Since independence Indian economy has thrived hard for improving its pace of development. Notably in the past few years the citiesin India have undergone tremendous infrastructure up gradation but thesituation in not similar in most part of rural India. Similarly in the realm of health and education and other human development indicators India'sperformance has been far from satisfactory, showing a wide range of regional inequalities with urban areas getting most of the benefits. In order toattain the status that currently only a few countries in the world enjoy and toprovide a more egalitarian society to its mounting population, appropriatemeasures need to be taken. Currently Indian economy is facing thesechallenges:
• Sustaining the growth momentum and achieving an annual average
growth of 7-8 % in the next five years.• Simplifying procedures and relaxing entry barriers for businessactivities. Checking the growth of population; India is the second highestpopulated country in the world after China. However in terms of densityIndia exceeds China, as India's land area is almost half of China's total land.Due to a high population growth, GNI per capita remains very poor. It wasonly $ 2880 in 2003 (World Bank figures).
• Boosting agricultural growth through diversification and developmentof agro processing.
•
Expanding industry fast, by at least 10% per year to integrate not onlythe surplus labor in agriculture but also the unprecedented number of womenand teenagers joining the labor force every year.
• Developing world-class infrastructure for sustaining growth in all thesectors of the economy.
• Allowing foreign investment in more areas so competition amongcompanies can be increased.
• Effecting fiscal consolidation and eliminating the revenue deficitthrough revenue enhancement and expenditure management.
•
Empowering the population through universal education and healthcare. India needs to improve its HDI rank, as at 127 it is way below manyother developing countries' performance. The UPA government is committedto furthering economic reforms and developing basic infrastructure toimprove lives of the rural poor and boost economic performance.Government had reduced its controls on foreign trade and investment insome areas and has indicated more liberalization in civil aviation, telecomand insurance sector in the future.
[D] Development Indicators:
The productivity scenario of India’s economy is experiencing a faster rate of growth today. Some of the development indicators of the India’s economyare as follows:
1. Economic Growth
Indian economy grew by 9.4% during 2006-07. In absoluteterms the GDP of the country at constant prices stood at Rs 2848157 croresfor 2006-07 showing an annual rise of 9.4% over the previous year. Therevised annual rise in GDP was slightly higher than the 9.2% (for 2006-07)estimated in February 2007.
2. Inflation Trends
The overall WPI based inflation for 2006-07, averaged at 5.4% asagainst the 4.4% in the 2005-06. The upper limit of the targeted inflation for 2006-07 was breached in the last quarter of 2006-07, primarily on account of rising prices of primary articles and manufactured items. However, inflation
was found to average below the set range of 5-5.5% for 2006-07. For thecurrent fiscal (2007-08) RBI has kept the target inflation rate around 4.5%.The recent counter -inflation steps taken by the government helped incooling the inflation rate that was soaring above 6%. Moderate rate of inflation would help the banking sector create more demands for financialproducts.
A low interest rate of is a must for economic development. TheFinance minister assured the industry t6hat interest rates would be broughtdown in India the target interest appears to be the inflation rate pus 3%.Thus, if inflation settles at 5%, the interest rate should be approximately 8%.
4. Per Capita Income
Faster economic growth has also led to a steady rise in per capitaincome levels in recent years. This led to more disposable income with thepeople and also affected savings and investment rate. Also are from less than
$400 per year at the turn of the century, per capita income at constant priceshas increased to $555 for financial year 2006-07 at current rupee – dollar exchange rate.
5. Infrastructure Industries
Infrastructure has been remain main challenge to support and
improve health economic growth and it has shown positive growth rate
During the year 2006-07 the six core infrastructure industries grew at a highof 8.6% as compared to the 6.2% increase a year before. And this trendwould be helpful to all types of industry including banking to provide basicinfrastructural facilities.
6. Savings and Investment Rate
Both the savings and investment rates in the country is experiencing afaster rate of growth recently. As to the current statistics, India’s saving rateis 32 percent of the total Gross Domestic Product and investment is of 34
percent. Both the indicators are expected to rise very fast in the comingyears. So it would be good numbers for financial sector because investmentsand saving are increasing in banking sector so it would provide momentumto it.
Indian trade numbers available for the year 2006-07 shows Indianexports growing at 20.9%. Indian merchandise exports was able to achievethe targeted, USD 125 billion for 2006-07. However we saw that Indianimports soared at 26.4% during the year, further widening trade deficit.
8. Industrial Growth
Indian industry achieved an impressive growth in the last fiscal 2006-07. The overall industrial production grew at 11.3% in 2006-07 as againstthe growth of 8.2% in the previous fiscal. The growth was more
manufacturing sector led, which grew by 12.3% in overall industrial growthposting a high growth of 5.1% and 7.2% in 2006-07 respectively as againstthe 1.0% and 5.3% growth respectively in 2005-06.an upswing in industrialproduction is good for the economy.
[E] Economy and Banking Findings
• All these numbers shows good future prospects for the Indianeconomy and this would bring fruits to every citizen of India.
• Whatever we have seen in Indian economy is directly or indirectlyaffecting well behaving of Indian banking sector and its business. Like goodinfrastructure facilities support in establishment of new business.
• And per capita income, savings and investment rate are increasingaffect the industry so these are positive indicators for banking industry.
• Services contribute to 54 per cent of the economy and will grow to 60per cent in the next five years. Growing at 7 per cent, this sector can beboosted with further reform in regulations. Already, the Government isworking towards increased liberalisation in retail, banking and other
segments of the services sector. Banking is going to be play crucial in thisgrowing economy with continuing this growth momentum.
• Well being of economy is positive factors for the both stocks ICICIand SBI on stock market in long term. They are going to perform well infuture also. Because strong back up from the economy without financialsectors growth would be crippled down.
• With this positive indicator both SENSEX and NIFTY fearlesselymoving ahead and creating new highs. As Sensex has touched 15,000 mark now moving towards 16000. So in this environment stock markets are alsoperforming well so it would provide more support to the stocks of bothcompanies. We can expect that for long-term investment in the stock market
it is showing good prospects in the future.
• Not only banking sector but also other few like infrastructure, IT,retail sector are good for investment in this booming period. So as economysowing the seed of development In the future everyone can reap the fruits of this rapidly growing economy.
• At last we can say that the one should look at these developmentspositively and they can expect good return from their investment. Soeverything is favorable for every sector just your stocks properly and chooseand invest for long term.
The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branchesof Scheduled banks spread across India. During the first phase of financialreforms, there was a nationalization of 14 major banks in 1969. This crucialstep led to a shift from Class banking to Mass banking. Since then thegrowth of the banking industry in India has been a continuous process.
Currently, India has 88 scheduled commercial banks (SCBs) - 28public sector banks (that is with the Government of India holding a stake),29 private banks (these do not have government stake; they may be publiclylisted and traded on stock exchanges) and 31 foreign banks. They have acombined network of over 53,000 branches and 17,000 ATMs. According toa report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private andforeign banks holding 18.2% and 6.5% respectively
Financial sector reforms were initiated as part of overall
economic reforms in the country and wide ranging reforms coveringindustry, trade, taxation, external sector, banking and financial markets havebeen carried out since mid 1991. A decade of economic and financial sector reforms has strengthened the fundamentals of the Indian economy andtransformed the operating environment for banks and financial institutions inthe country. As pointed out in the RBI Annual Report 2001-02, GDP growthin the 10 years after reforms i.e. 1992-93 to 2001-02 averaged 6.0%against5.8% recorded during 1980-81 to 1989-90 in the pre-reform period. Themost significant achievement of the financial sector reforms has been themarked improvement in the financial health of commercial banks in terms of capital adequacy, profitability and asset quality as also greater attention torisk management.
Currently (2007), overall, banking in India is considered as fairlymature in terms of supply, product range and reach-even though reach in
rural Ind. still remains a challenge for the private sector and foreign banks.Even in terms of quality of assets and capital adequacy, Indian banks areconsidered to have clean, strong and transparent balance sheets-as comparedto other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government.The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for
quite some time-especially in its services sector, the demand for bankingservices-especially retail banking, mortgages and investment services areexpected to be strong. M&As, takeovers, asset sales and much more action(as it is unraveling in China) will happen on this front in India.
In March 2006, the Reserve Bank of India allowed WarburgPincus to increase its stake in Kotak Mahindra Bank (a private sector bank)to 10%. This is the first time an investor has been allowed to hold more than5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted bythem.
In sum, the processes of liberalisation fundamentally alter theterrain of operation of the banks. Their immediate impact is visible in a shiftin the focus of bank activities away from facilitating commodity productionand investment to lubricating trade and promoting personal consumption.Interest rates in these areas are much higher than that which could becharged to investments in commodity production.
Between 2000 & 2005, total banking industry assets grew from $265billion to $520 billion, profits from $1.7 billion to $5 billion. 2010projections- industry assets to exceed $1 trillion, with total profits peggedbetween $10-$12 billion. Growth powered by retail assets, which grew from$9 billion in 2000 to $66 billion today- projected to reach $320 billion in2010. Services contribute to 54 per cent of the economy and will grow to 60per cent in the next five years including banking. So no one can stop this fastgrowing trend as banking service is crucial need of the time will benefits toall players accordingly.
2. Competition:
Liberalization has brought greater competition among banks, bothdomestic and foreign, as well as competition from mutual funds, NBFCs,post office, etc. Post-WTO, competition will only get intensified, as largeglobal players emerge on the scene. Increasing competition is squeezingprofitability and forcing banks to work efficiently on shrinking spreads.Positive fallout of competition is the greater choice available to consumers,and the increased level of sophistication and technology in banks. So would
have to perform well and satisfying customers needs provide more services.
3. Demand of Products:
With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector, the demand for bankingservices-especially retail banking, mortgages and investment services areexpected to be strong. And with that traditional banking service’s demand
are also increasing as investment and saving are increasing, so goodopportunities are there to attract more customers.
Currently, banks seem to be the prime targets of the government'sreforming zeal. Having encouraged foreign acquisition, consolidation anduniversalisation in the banking system, the Finance Ministry's current thrustseems to be to find a host of new areas of activity for these institutions.Banks have also been allowed to set up Offshore Banking Units in SpecialEconomic Zones. So this banking friendly government and its policy wouldboost the banks to achieve more out of it and to grow.
[D] Other Findings:
• Interest rate deregulation. Interest rates on deposits and lending havebeen deregulated with banks enjoying greater freedom to determine their rates. Now banks are using this flexibility to improve their business. E.g.ICICI Bank recently has increased fixed deposit rate to attract more depositsand other banks have also changed their rates.
• Reduction in pre-emptions – lowering of reserve requirements (SLR and CRR), thus releasing more lendable resources which banks can deployprofitably.
• Government equity in banks has been reduced and strong banks havebeen allowed to access the capital mark raisin additional capital e.g. we haveseen FPO of ICICI Bank to raise fund from capital market for their expansion plan and also corporation bank is bringing their IPO in short in themarkets. So there would be enough money for their expansion plan.
• Banks now enjoy greater operational freedom in terms of openingand swapping of branches, and banks with a good track record of profitability have greater flexibility in recruitment.
• New private sector banks have been set up and foreign bankspermitted to expand their operations in India including through subsidiaries.Banks have also been allowed to set up Offshore Banking Units in SpecialEconomic Zones.
• New areas have been opened up for bank financing: insurance, creditcards, infrastructure financing, leasing, gold banking, besides of courseinvestment banking, asset management, factoring, etc. now banks have other innovative products for every type of customers and would bring more
profitability to the all banks.
• Technology infrastructure for the payments and settlement system inthe country has been strengthened with electronic funds transfer, CentralizedFunds Management System, Structured Financial Messaging Solution,Negotiated Dealing System and move towards Real Time Gross Settlement.It plays a vital role in the developments of banks now banks ahs becomemore efficient and system has become transparent.
[E] Challenges Ahead:
1. Improving profitability:
The most direct result of the above changes is increasingcompetition and its impact on the profitability of banks. The challenge for banks is how to manage with thinning margins while at the same timeworking to improve productivity, which remains low in relation to global
standards.
2. Reinforcing technology:
Technology has thus become a strategic and integral part of banking,driving banks to acquire and implement world-class systems that enablethem to provide products and services in large volumes at a competitive costwith better risk management practices. The pressure to undertake extensivecomputerization is very real as banks that adopt the latest in technology havean edge over others.
3. Risk management:
Banks are upgrading their credit assessment and risk managementskills and retraining staff, developing a cadre of specialists and introducingtechnology driven management information systems.
To meet increased competition and manage risks, the demand for specialised banking functions, using IT as a competitive tool is set to go up.Special skills in retail banking, treasury, risk management, foreign exchange,development banking, etc., will need to be carefully nurtured and built. Thus,the twin pillars of the banking sector i.e. human resources and IT will haveto be strengthened.
5. Greater customer orientation:
In today’s competitive environment, banks will have to strive to
attract and retain customers by introducing innovative products, enhancingthe quality of customer service and marketing a variety of products throughdiverse channels targeted at specific customer groups.
6. Corporate governance:
Besides using their strengths and strategic initiatives for creatingshareholder value, banks have to be conscious of their responsibilitiestowards corporate governance.
7. International standards:
Introducing internationally followed best practices and observing thedomestic financial architecture. This includes best practices in the area of corporate governance along with full transparency in disclosures. In today’sglobalised world, focusing on the observance of standards will help smoothintegration with world financial markets.
The face of banking is changing rapidly. Competition is going to betough and with financial liberalization under the WTO, banks in India willhave to benchmark themselves against the best in the world. For a strong andresilient banking and financial system, therefore, banks need to go beyondperipheral issues and tackle significant issues like improvements inprofitability, efficiency and technology, while achieving economies of scalethrough consolidation and exploring available cost-effective solutions. Theseare some of the issues that need to be addressed if banks are to succeed, notjust survive, in the changing environment.
As service industry is growing very fast Bankex on BSE is alsoperforming well a bank stocks’ performance has more investors towards it.And banking sector’s reforms have helped to improve their financial
performance. As we are seeing all these momentum in the industry stocks of ICICI Bank and SBI are looking good options for long-term investment.
At last we can say that long-term picture is looking good for thesector and every thing is favorable. As both banks would be successful toreap the fruits of these reforms and this fast growing economy. And as it’sCAGR suggest lot of things that we would see in its financial analysis.
For fundamental analysis as we have mentioned earlier we haveselected two companies ICICI Bank and State Bank of India. we woulddo detail analysis Of these two companies one by one fundamentally as wellas financially. So let’s start by State Bank of India.
ICICI BANK
Particular Amount (Rs.) 3-7-07Current Price 966.7
52 Week High 1010
52 Week Low 435
Face Value 10.00
[A] Background:-
ICICI Bank (ICICIBK) is a commercial bank promoted by ICICI Ltd,an Indian Financial Institution. It was incorporated in Jan.'94 and received itsbanking license from Reserve Bank of India in May.'94. It is the 2nd largestbank in India. ICICI Bank is the largest private sector bank and the secondlargest bank in India with a network of 531 branches and 2030 ATMs spread
across 371 locations. The bank has a balance sheet size of ~Rs 1,89,200 cr growing at CAGR of more than 20% in the last three years. The bank was anearly mover in most of the retail segment and was the first to develop theconcept of universal banking. The bank also has been one of the pioneers incapitalizing on technology to reach every customer segment. After thesuccess in the urban areas in India the banks focus now stands on the ruralareas. The bank is eyeing the rural and agriculture credit in particular and hasplanned to open at least one branch in every district in India.
• The Bank of Madura (BOM) got merged with ICICIBK. With thismerger ICICI Bank has become one of the largest private sector banks inIndia.
•
The Bank offers a wide spectrum of domestic and internationalbanking services to facilitate trade, investment banking, Insurance, VentureCapital, asset management, cross border business & treasury and foreignexchange services besides providing a full range of deposit and ancillaryservices for both individuals and corporate through various deliveryChannels and specialized subsidiaries.
• It has gained favorable acceptance from its customer for its initiatives inbusiness-to-business and business to customer solution.
• To efficiently distribute its products and services, the bank has developedmultiple access channels comprising lean brick and mortar branches, ATMs,call centers and Internet banking.
[C] Investment Argument:
1. Group companies adding values to business:
The bank’s group companies are expected to be a major contributor to the company’s value going ahead. ICICI Prudential and ICICI Lombardcontinue to maintain the leadership position in life insurance and generalinsurance among the private sector players, and have been growing by 70-100% p.a. The mutual fund arm of the bank, Prudential ICICI Mutual Fundis the largest private sector mutual fund in India with asset under management of over Rs 21,500 cr.
ICICI Bank was amongst the first to identify the potential in retailcredit in India and now commands a leadership position in every segment of the high yielding business The Bank’s net customer assets increased 35% toRs. 205,374 crore at March 31, 2007 compared to Rs. 152,049 crore (US$35.0 billion) at March 31, 2006. The Bank’s retail advances increased by39% to Rs. 127,689 crore at March 31, 2007 from Rs. 92,198 crore March31, 2006. Retail assets constituted 65% of advances and 62% of customer assets. The Bank is focusing on fee based products and services, as well ascapitalizing on opportunities presented by the domestic and internationalexpansion of Indian companies. The Bank’s rural portfolio increased by 37%on a year-on-year basis to about Rs. 20,179 crore. The Bank is alsoextending its reach in the small and medium enterprises segment. The retailsegment in India is still under penetrated and under served which we believewill keep the growth momentum continue for the bank.
3. Deposit mobilization not a constraint:
Deposits increased 40% to Rs. 230,510 crore (US$ 53.0 billion) atMarch 31, 2007 from Rs. 165,083 crore (US$ 38.0 billion) at March 31,2006. 4. Fees income continues to grow:
Core fees incomes is going to be a major source of revenue for thebank going ahead and the bank believes it has formed a strong platform for this by expanding retail customer base. Fee income increased 45% to Rs.5,012 crore for FY2007 from Rs. 3,447 crore for FY2006.
5. Significant improvement in asset quality:
At March 31, 2007, the Bank’s net non-performing assets constituted0.98% of net customer assets. The net non-performing asset ratio in theHome loan portfolio was 0.71%.
The Bank added 141 branches and 1,071 ATMs during the year,taking the number of branches and extension counters to 755 and ATMs to
3,271. The Bank has also received Reserve Bank of India’s approval for amalgamation of Sangli Bank, which will increase the Bank’s branchnetwork to about 950 branches.
• Its Net interest margins (NIMs) are fluctuating and lower thancompetitors due its higher cost of funds, return on assets have been decliningdue to rising credit and operational costs.
• More importantly, the bank’s ROE (Return on Equity), which is afunction of ROA (Return on Assets) and leverage, has been depressed sinceit has raised capital more often. Since the bank will have excess capital for the next two years, its ROE would continue to suffer. Analysts expect thebank to report an average ROE of 13 per cent till 2011, roughly the timeperiod for which the additional capital is estimated to last.
(Pat/wacc) 23047.37Value of shares 256.2812(Value of firm/no. of
shares)
Future Cash Flow: (Rs.Crore)
[E] Stock Valuation andConclusion:
At the current market Price of 966, stock is trading and privatesector’s bank average P/E ratio is 21.90.at it is P/E ratio is 25.95 and its EPSis 37.25. So we can expect that price would improve to industry average. Webelieve that stock of ICICI would perform well on the markets becauseICICI Bank is on a strong growth path and has consistently deliveredimpressive results. The banks thrust on high yielding retail loans has resultedin significant improvement in the profitability. The penetration of retail
credit in India is still very low and the segment is still in a growth stage,which gives the bank enough scope to expand its retail loan book, which hasalready posted a 73% growth in the first two quarters of this financial year.The bank’s rapid branch expansion will help in taping the low cost deposits.Further as a large part of the banks high cost borrowings has been replacedlow cost deposits the incremental interest expenses will be lower which willhelp in containing the margin at the present level.
Sum 27750Tax 60%Dis PAT 11100Current PAT 3110.22Total PAT 14210.22Less Debt -Cash flow 14210.22Wacc 0.19Value of Equity 74790.63(Cash flow/ Wacc)
Calcutta on 2 June 1806 The Imperial Bank during its existence recorded animpressive growth in terms of offices, reserves, deposits, investments andadvances, the increases in some cases amounting to more than six-fold. Thebank had acquired very good confidence among depositors by its highstandard of integrated operations. The Bank's National Banking Group(NBG) consists of four-business groups viz., Personal Banking, SME,Agricultural Banking and Government Banking. NBG has 14 administrativecircles encompassing a vast network of 9177 branches, 4 sub-offices, 12exchange bureaus, 104 satellite offices and 679 extension counters, to reachout to customers, even in the remotest corners of the country. SBI is thelargest commercial bank in India in terms of profits, assets, deposits,branches and employees.
[B] Key Strengths:-
• Strong brand equity.
• Largest commercial bank in terms of profits, assets, deposits, branchesand employees.
• Commands one-fifth of deposits and loans of all scheduledcommercial banks in India.
• Strong customer base and capital base.
• Extensive branch network-both domestic and international.
• Capacity to take large exposures because of high net worth.
• Low cost deposits from extensive branch network.
• Trendsetter in asset-liability management and risk management in thecountry.
• SBI’s results of 06-07 are impressive its net profit has been increasedby 134 crore 3.06 % changed.it’s income of deposits, interest, forex arealso following growth path it’s total income was 45,260 crore it was increaseof 4.25% over 2006.
Particulars 2007 2006 Change (%)
Deposits (Rs. crore) 4,35,521 3,80,046 14.60
Earnings per Share (Rs.) 86.29 83.73 3.06
Return on Average Assets 0.84 0.89 (–5.62)
Return on Equity (%) 14.24 15.47 (–7.95)
Advances (Rs. crore) 3,37,336 2,61,801 28.85
•
The UK-based Lloyd's, the world's leading provider of specialistinsurance services, and leading global reinsurers, Germany's Munich ReGroup and Switzerland's Swiss Re, are in talks with the State Bank of India(SBI), the country's largest bank, for partnering in its general insuranceforay. The partner is likely to be finalised in the next two months.
• Franklin Templeton Investments (India) has inked an agreement withState Bank of India for distribution of its products. As part of the pact, SBIwill distribute the entire range of Franklin Templeton products through someidentified branches across the country.
2. Diversification plan: -
The country's largest commercial bank, State Bank of India, is planning toglobalise its treasury to maximise its returns on money market operations.The bank has set up a new treasury and marketing business group as a profit
centre and to explore business opportunities in new financial markets inIndia and abroad.
The bank's market share in terms of deposits was 14.91%inMarch2007. SBIhas a balance sheet size of Rs 5,00,000 crore. Deposits stood at Rs 4,00,000crore, while advances were estimated at Rs 3,00,000 crore in 2006
4. Rapid Expansion: -
The Rs 5-trillion State Bank of India (SBI) has finned up plans to raise Rs15,000 crore in equity and debt this financial year to fund its diversifiedbusiness growth strategies amidst intense competition
5. Concerns:-
• Negative return on assets in last years financial results shows thatbanks has not utilized its resources efficiently.
• Increasing competition from foreign as well as Private sectors bankswith advance Technnology and State of art are coming so ready to faceintense competition
At the current market Price of 1530.75 stocks is trading and publicsector s bank average P/E ratio is 9.90 and SBI’s ratio is 11.83so at itsannualized EPS of RS. 83.29 then minimum price up to which share candepreciate is 83.29*9.9=824.51 but in the long-term investment it would besafe to invest.
SBI dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. The increasing focus
on upgrading the technology backbone of the bank will enable it to leverageits reach better, improve service levels, provide new delivery platforms, andimprove operating efficiency to counter the threat of competition effectively.Once the core banking solution (CBS) is fully implemented, it will cover over 10,000 branches and ATMs of the State Bank group, and emerge as thestrongest technology enabled distribution network in India. The increasingintegration of SBI with its associate banks (associates) and subsidiaries will
further strengthen its dominant position in the banking sector and position itas the country’s largest universal bank. So all these factors are showing goodindicators for the bank but should keep in mind risk factor also.
12. SUGGESTION:
1. From the competitive analysis, I want to say to recruit in theMarketing Department.
2. To flexible in the Brokerages for the Investors.
