How to Do Equity Research

8/8/2019 How to Do Equity Research

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2How to do equity research

How to do equity researchAngel Broking LimitedMuch Beyond Broking India Research

Foreword


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Index

MACRO Page No.

Executive Summary 4

Markets and Investing, Choosing between ST losses vs LT Gains, Greed & Fear 5

Intelligent Investing: Invest in businesses and not only in price and assets 9

Growth Versus Value 11

Market and its determinants, Sensex PER Band Chart 14

- Interest rates, Inflation, FII

Trading Systems in India vs US/UK 16

SECTORS - (Characteristics and what to look out for within the sector i.e working capital or Fixed assets,

monthly auto and cement nos, Manufacturing flow chart, Business cycle, Forecasting techniques)

Automobile 23

Banking Industries 28

Cement Industries 31

Construction 36

Consumer Durables 38

Couriers 41

Fertilizer 42

FMCG 45

Gems & Jewellery 49 Hotels 50

Information Technology 52

Media 53

Metals 56

- Aluminium 56

- Steel 62

Oil & Gas 64

Packaging 66

Paints 67

Paper 70

Petrochemicals 73

Pharma 78

Power 81

Shipping 84

Sugar 86

Tea 87

Telecom 90

Textiles 93


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VALUATIONS 97

Valuation Tools 98

Formulas 105

TRACKING 107

Raw material and Product usages

Which sector tracks which other sectors

Globally impacted sectors 110

WHAT HAPPENS 111

A M&A, Consolidation 112

B Adjustment in equities (Fully diluted and Weighted Avg Basis) 114- for Bonus, Rights, Warrants, CD, Stk options

WHAT IMPACTS THE SHARE PRICES 116

BACK PAGES OF THE REPORT 120

Checklist when starting to research a company 121

Page No.


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Executive Summary Researching equities as an asset class has been active since the time this

country started on economic liberalization. Lots of theories have evolved togive investors an insight of what equities, as an asset class can do to theirinvestments.

Investors, who had been thinking of stock market as a gambling place whereyou can win or lose it all, have been beaten time and again. Particularly theretail investors, who had been taken over by greed and fear, have beendependent on brokers for tips rather than working on the logic.

With some experience, we can predict the rise and fall of the stock market. Inthe past 12 years since the economic liberalization in 1992, we have seenhuge scale up in the Sensex. However, we also saw massive correctionsfollowing the various scams. We saw an unprecedented bull run in Dec 1991followed with a scam in April 2002. Technology shares boomed in 1999 onlyto be seen the bubble bursting in April 2000. Despite, all even and the odds,we have never seen the Sensex going back to the levels when the economiclinearization started in 1992. The power of compounding works wonders andinvestors need to benefit out of this theory rather than time the markets.

Investors who had invested in companies like Colgate even before theeconomic linearization and continue to hold them, have made more moneythan keeping the same amount in a bank earning interest. Hence, becauseof the Stock Market, we will never have to worry about money again. Webelieve that everyone can also do the same, with a little patient anddetermination, the skill-sets required to become rich... Before you invest,

you should tell yourself 2 things: don't be too greedy, be patient and investingin businesses is more useful rather than just investing only in price and assets.

In this report, we endeavor to put things together in perspective and look atequities as an asset class for investors to park their investments and tell yousome of the tricks that have been learned over the last 15 years.


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A moderate allocation is a more balanced approach, with consideration paid to stability as well as growth. This type of allocation

is well-diversified and withstands volatility better than the aggressive allocation described earlier. Investors who choose moderateallocations may have fewer years until retirement than aggressive investors, and are looking to balance growth with preservationof assets.

You should evaluate your portfolio regularly and make changes based on your comfort with risk, rather than short term marketconditions. The investor who is nearing or in retirement is most likely to employ a conservative allocation consisting primarily ofbonds and cash. A portfolio of this type is focused on preserving value and minimizing volatility and risk.

These examples are but a few of the many different ways you can choose to direct your retirement investments. The mostimportant thing to remember is that you should evaluate your portfolio regularly and make changes based on your comfort withrisk, rather than short term market conditions. History has shown that if you keep a long-term perspective and stay investedthrough market ups and downs, you will eventually be rewarded.

Retiring Rich!

As weve seen time and again, a successful campaign to retire rich is not for the faint of heart or weak of will. The normalgyrations of the market will constantly test your devotion to these strategies.

Knowledge is power. People who jump into the market without an underlying investment plan will run to the safety of cash orbonds long before those who understand history. But as any bear market grinds on, every instinct will tell you to sell. Yourstocks will be down. All your friends who never owned stocks in the first place (who will never retire rich) will be amazed at howfoolish and reckless you are to be invested in the market. Relatives will try to talk you into more prudent, guaranteed investments.Worse yet, you may be drawn to the idea of market timing.

If there were a simple market-timing method with a batting average as successful as that of these strategies, it would be a

dream come true. But there isnt one. Many investors believe that they can time their purchases and miss those wrenchingbear markets, but no one has effectively demonstrated the ability to do so. Market-timing newsletters scream about all thetimes youd be better off on the sidelines, but their actual track records are dismal. Most of them fail to beat even T-bills, andyou wind up paying a fortune in commissions as you move in and out of the market. Since no effective market-timing tool hasyet been invented, you simply have to gut out those down markets.

Most important, you shouldnt care about the short term. In the grand scheme of saving and investing for a rich retirement, fiveyears is a short period of time. When a bear market gets you down, revisit the performance of the Sensex from the time ofeconomic librealisation of 1993 and onwards. An index level of 1400 was never seen again.

The financial industry is littered with famous money managers who did extraordinarily well for a short time but then crashed andburned. Dont let success go to your head and make you think youre smarter than the strategies that made you successful.

But as weve seen over and over, this is the worst thing an investors can do: compare your carefully picked stocks in yourportfolio with someone else doing better. When things are going particularly well, we tend to think they could be even better.But the odds are that others will soon join the vast majority of investors who get burned when trying to outsmart the market.

The market will probably soon teach the genius otherwise since theres always someone with a portfolio thats up 30-40percent, who almost always thinks its due to his or her brilliant stock picking. More often than not its just dumb luck. Theminute you think that you can outsmart the market, remember the sobering fact that 80 percent of the brilliant, well-connected,and super-informed money managers across the world cant beat their main market indices over the long termprimarilybecause they believe that they can outsmart the market in the short term.


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Power of compounding

The whole point of strategic investing is to put your long-term investment strategy on automatic pilot and let the time-testedtechniques do their stuff. When the market starts moving against you, youll probably panic even more than other investors doand want to abandon your strategy even faster.

Second, and on a more positive note, remember that when these strategies outperform, its the rule, not the exception. Thereason you put your money in Leaders in their industry or the ones who are product price setters, the first place is that they domuch better than the main indices. This is quite normal, not something you deserve to jump up and down about. Youre usingsimple models that have nothing to do with your brilliance and everything to do with empirical research and great battingaverages over long periods of time spilling out the sheer power of compounding.

Greed and Fear

Stock chart pattern analysis unveils a world driven by lust and pain. The financial markets are about money. No other controlledsubstance awakens the best and worst of our humanity with quite so much intensity. When we risk our capital, the marketsbecome our lovers, our bosses and the bullies who beat us up when we were kids. As assets shrink and swell, emotions floodin to cloud our reason, planning and self-discipline. Fight/flight impulses emerge and trigger unconscious (and inappropriate)buying and selling behavior.

Rising prices attract greed. Paper profits distort self-image and foster inappropriate use of margin. The addictive thrill of a stockrally draws in many participants looking for a quick buck. More jump on board just to take a joyride in the markets amusementpark. But greed-driven rallies will continue only as long as the greater fool mechanism holds. Eventually, growing excitementcloses the mind to negative news as the crowd recognizes only positive reinforcement. Momentum fades and the uptrendfinally ends.

Falling prices awaken fear. The rational mind sets artificial limits as profits evaporate or losses deepen. Corrections repeatedlypierce these boundaries, forcing animal instinct to replace reason. Destructive traits in the non-market personality invade thepsyche of the wounded long. Short covering rallies raise false hopes and increase pain. The subsequent drop becomesunbearable and the long finally sells, just as the market reverses.

The impulse-driven crowd generates constant price imbalances that traders can exploit. But successful execution requiresaccuracy in both time and direction. Chart pattern analysis allows measurement of the emotional crowds impact on these keyelements. Within the charting landscape, exact price triggers can be located where these unstable forces should erupt.

You can only capitalize on the emotions of others when you are able to control your own. Pattern analysis cautions the traderto stand apart from the crowd at all times. In simplest terms, they represent the attractive prey from which your livelihood ismade. And just as a wild cat stalks the herds edge looking for a vulnerable meal, the trader must recognize opportunity by

watching the daily grind of pattern swings and volume spikes.


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Intelligent Investing: Invest in Businesses and not just in price and assets!

One imminent question keeps coming to Investors mind on How to beat the market consistently and are there enough investorson this planet who would have beaten the markets for last couple of years if not decades?

Even market ignoramuses have heard of the Sage of Omaha and chief executive officer of Berkshire Hathaway, the one andonly Warren Buffett, the man who has beaten the market for 50 years. One who walks patiently down the Buffett way will learnmuch that is of relevance to Indian investors. Those who cant be bothered with studying his methods or reading his transparentannual letters to Berkshire shareholders often regard Buffett as an all-knowing oracle. He isnt blessed with prescience; he ismerely a man with immense self-discipline and humility who has translated common sense into an investment strategy.

Invest in brands. The cornerstone of Buffetts strategy is to only buy businesses where he can figure out future prospects fiveyears or further down the line. This automatically shuts out hi-tech sectors. He has never owned a technology stock no

IBM, no Microsoft, no Intel, no molecular biology wonders and no Internet stocks. It also shuts out cyclicals businesses withunstable ebbs and flows such as automobiles, paper and chemicals.

Buffetts universe of stocks is packed with strong brands with direct consumer contact. He wants the likes of Coke, Pepsi,Gillette, McDonalds and Wal-Mart. He has also owned many banking, credit card, brokerage and insurance stocks, but financeis a sector where he has specialised knowledge.

He misses out on the high fliers and the cyclicals in good times, but his portfolio sees little erosion in bear markets. In the Indiancontext, Buffetts universe would comprise companies such as Hindustan Lever, Indian Shaving, Nirma, Dabur, Britannia andNestle. These consumer-oriented stocks have better growth prospects in a developing economy than in the US. Hence, a focuson such companies could be even more rewarding than it has been for Buffett.

Proven payers: Buffett likes companies with an established track record. He doesnt play the primary market; he invests only

in companies that have been around for three to five years. By then, its fairly evident whether the management can buildbrands that will last. His companies are usually also dividend payers before he gets interested.

Buy and hold: In fact, Buffett lives off his dividend income and re-invests surpluses. He does not sell stocks for quick capitalgains. His tax-saving strategy is to avoid booking a profit! He will disinvest only if he sees the companys fundamentals weakening.This too is of immense relevance in the Indian context, as dividend income is tax-free.

Get in cheap: Moreover, Buffett will never buy a stock unless it is cheap. His valuation model is simple: if the company has highdebt, avoid it. The implication is that the business does not generate enough cash to grow out of its own revenues.

After filtering out the high-debt companies, he looks at cash earnings (net profit plus depreciation) and cash return on networth(cash earnings divided by equity plus accumulated reserves). If these numbers show consistent growth over several years,

hes interested.

Buffett will compare returns with the prevailing interest rates. As far as hes concerned, cash earnings can be treated like theyield of a debt instrument. Theres an underlying assumption here: the company management is honest enough not to fudgeaccounts. This is crucial in the Indian context, since Indian accounting practices are far more lax.

Buffett inverts the cash earnings to price (cash PE) ratio of a stock to calculate his yield. He looks at the historic cash PE ratiorange, and increases his holdings in a stock only when its trading near the lower end. A simple mechanistic strategy that works.But only because the man has the discipline to ignore digressions.

Though the above mechanism misses out on turnaround and cyclical opportunities, investing in businesses have proved morerewarding since it generates wealth which goes onto pay the shareholders in the long term. Investing in assets which does notgenerate would be subjected to timing the event of the asset sell-off and misses out on host of other investment opportunities.


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Choosing Between short term losses and long term gains

With attacks on Iraq, recessionary US economy and on top of it the Congress in a mood to spend money they do not have withpatriotic fervor, it is very tempting to try market timing. Surely now it can be certain that the stock market will go down and thatFII money would zig zag out of that country to some other place. It must be obvious too that infrastructure stocks will do well inthis kind of environment wherein the planned expenditure is going to provide the backdrop for demand growth in India. Butattempting to correctly guess the direction of markets is almost always, sooner or later, a fool's errand. The gains one maymake in even a series of correct guesses are often more than offset by losses when one is wrong.

In this case, americans and others could rally to the cause of stocks, buying to bolster them now in a spirit of patriotism,encouraged to buy bonds to help US. While that seems unlikely, the truth is one almost never knows ahead of time just what"Mr. Market" will do and why. Even airline stocks are not a sure bet to fall. Congress is earmarking billions of dollars to assistthem. Maybe they will rally on this news instead.

As for the defense industry, it could still take some time before new expenditures lead to real profits. And what happens wheneveryone fully realizes that there will be no quick fix for terrorism? We cannot in one massive raid rid the world of evil.

Successful market timing requires knowing not only when to buy but also just when to sell, a dicey question. Overall, few evermanage sustained profits in this way.

By contrast, many have seen moderate investments grow to real wealth through purchase of carefully selected shares in goodbusinesses, held for the long haul. If now seems a little too risky a time for investing, market volatility being what it is now, thenconsider buying investing in small and mid cap stocks with sustainable earnings growth atleast for the next 5 years. This wouldenable building up a decent portfolio over the long haul which would beat the real interest rates. One thus buys more shareswhen the market is low, fewer when it is high, with an almost automatic benefit: lower average cost per share.


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Growth Versus Value Investing

In the last five years or so, a tremendous amount of money has flowed through the stock market into investors pockets. Thevolatility of the market has led many to believe that the only kind of stock to invest in is one thats going to take off like a rocketand explode in a shower of profit. So are the growth stocks the way to go, or should the wise investor stay with the tried andtrue?

As the volatile stock market climbs to new highs, investors continue to fight for the best returns. Our investment roundtable triesto pick the winners as the battle between growth and value rages.

WITH RISING INTEREST RATES AND INFLATION FEARS, ITS NOT EASY TO MAKE THE right investment decisions thesedays. Should you bulk up your assets with pricey growth stocks or keep your portfolio in fighting trim with cheap value equitiesthat may not pay off for monthsor years? Whether youre prepared to climb in the investment ring and fight for the best

returns depends, of course, on your pocketbook tolerance level and stamina.

Since the technology bubble burst, investors are searching for value in the stock market. The growth investing strategy wasintimately associated with the future of dot.coms, technology, and telecommunication companies that had virtually no earningsbut the promise of high appreciation. After a two-year love affair with investors, value-oriented mutual funds continue to outperformand outsell growth funds. But has value investment performance peaked? Is it now time to ease back into investing in growth?Some indicators point towards a growth resurgence. Of course, no one really knows but that never stopped advisors fromforecasting a change. The dream of getting in at the beginning of the resurgence of growth investment may prompt manyinvestors to see investments through rose colored glasses.

Investment Styles in Equities

There are four major investment styles for investors in equities: value, growth, momentum and indexing. Value investors seek

to purchase a portion of a business for a price below its intrinsic value. The intrinsic value of a company may be based on either(or both) the value of its net assets or the ability of the company to generate future earnings.

Growth investors attempt to purchase stocks that have high expected future growth rates. Some growth investors are moredisciplined with regard to the price they are willing to pay for future growth. They seek growth at a reasonable price while theiremphasis may be different, these investors are essentially equivalent to value investors who seek future earnings growth.

Momentum investors seek stocks that have experienced recent acceleration in earnings or upward price movement. Thetheory behind momentum investing is that stocks that have done well in the recent past will continue to do well.

Indexing has become more popular in recent years as some investors choose to accept modest under-performance relative toa chosen index in return for low management fees and transaction costs. An index fund is designed to track the performance

of a specific bond or stock market index. An index fund will have a tendency to under-perform its targeted index because therewill be management fees and transaction costs for the fund which are not reflected in the targeted index. Indexing is a passivestrategy which makes no attempt to identify undervalued or overvalued stocks.

Is Style a Key Determinant of Investment Returns?

There have been numerous empirical studies that indicate that investment style does make a difference in investment returns.As a result, some financial academics are beginning to abandon the prior acceptance of efficient market theory and are offeringalternative theories.

The efficient market hypothesis states that prices of securities fully reflect available information. The implication is that onecannot beat the market except by chance and that investors should strive only to develop a broadly diversified portfolio weightedon the basis of current market values. The only relevant measure of risk under efficient market theory is beta - a measure of thetendency of a securitys price to respond to price changes of a broad-based market index. Accounting based measurements of


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risk are not relevant because all information about a company is already reflected in the price of their securities.

Advocates of the new finance offer evidence that the financial markets are inefficient and that investors can take advantage ofthese systematic inefficiencies to generate superior returns.

Differences in approaches Growth Vs value

Individual investors (now on the value band wagon) have a poor record of timing their purchases. So to run from the maddeningcrowd strategy should be employed. Are value stocks still cheaper than growth stocks? But how do you measure the gap whengrowth investments are measured by comparing the price-to-sales multiple while value investments are usually measured bythe price to earning ratio? Since growth companies usually have no earnings, their value cannot be measured by its price-to-earning ratio.

In this current investment climate of questionable corporate accounting practices, corporate fraud and lack of corporate earnings,growth stocks can decline further. Individual investors have a tendency of chasing performance thus leaving them vulnerable tojoining an up-surge too late. Because investors chase performance, mutual fund cash-flow typically lags behind reality in themarket by a year or so. However, even that tendency alone cannot be a clear indication that value investments have or soon willpass.

Portfolio managers and stock pickers who subscribe to the value investment theory do not always agree in their approach.Some are classified as pure value managers who look for substantial discount prices, while some accept stocks with relativelyhigh price-to-earning ratios and at smaller discount prices than others. Value-oriented managers usually look for companieswith 5 good dividend history because in determining the total-return performance of a stock, both the stock appreciation anddividends are considered. When the stock valuation declines because of market conditions, dividends help to provide a bufferto the investor.

The investors time horizon, risk tolerance and goals should determine their ultimate investment strategy. Investing in growth orvalue becomes a secondary issue. If the investor has a short-term time horizon, investing in growth companies that promiselong-term superior appreciation is questionable. But if you have a high risk tolerance level, it may make sense. Many portfoliomanagers believe that large cap growth valuations are still too high and prefer to retain large cash positions until conditionsimprove.

Looking Ahead: Growth versus value where do you put your money?

So finally, whats the difference between growth and value? Or are they one and the same?

Last question first they are not the same, although a stock may be one and the same at a different time. Growth companiesare expected to increase sales and profits, return on equity and other measures of growth. They typically have a high price-to-

earnings (PE) ratio. Some of the tech stocks have PEs of 25 or more, which is generally considered much too high, in anenvironment when 16 used to be considered the acceptable range.

Value-oriented companies are ones which forms part of a slow moving industry, or have internal troubles, and typically, a lower-than-market-average price to earnings ratio.

Seldom do the two forces run parallel, vis-a-vis the market. The economy plays a large role in which sector is in and which isout, of style.

However, if you take the long term into consideration, you see a narrower margin in actual performance. Hence, to clear thecobwebs, as the year begins, you and your professional should sit down and see if your portfolio is performing as they shouldgiven your objectives, notwithstanding the horrendous market conditions we currently are experiencing, and whether somerebalancing is in order.


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Your portfolio may have become top-heavy with growth issues. And if growth and value rotate in and out of favor, you may have

taken a position that one style at a time is enough for your portfolio. That would work if you stick with it. But few investors havethe patience to do that. And those who have tried to time the cycles have been beaten back.

Returns seen using both methods

The most common variables which were tested were price/book value (P/BV), price/earnings (P/E), and price/cash flow (P/CF).Other variables that were tested included price/sales (P/S), price/depreciation, earnings growth rates, sales growth rates, anddividend yield. Stocks with a low price relative to book value, earnings, cash flow, or sales were considered to be value stockswhile those with high ratios were considered to be growth stocks. Stocks with high dividend yields are also considered to bevalue stocks.

When value portfolios (stocks with the lowest P/E, P/BV, etc.) were compared to growth portfolios (stocks with the highest P/E,P/BV, etc.), the value portfolios outperformed the growth portfolios but narrows down to marginal difference over a longerperiod.

Higher Returns with Less Risk?

Several of the studies considered risk as measured by beta and standard deviation. Beta is a measure of systematic risk - thetendency of the price of a security to respond to price changes in the broad market. Standard deviation is a measure ofdispersion from the mean return of the security. There was little, if any, evidence to support the view that value strategiesinvolve more risk. In fact, past evidence show to the contrary - stocks with low price/book value ratios actually had lower betas.

Reversion to the Mean

Attempts to explain the persistent advantage of value stocks over growth stocks focus on reversion to the mean. In pricing a

security, investors and analysts naturally take into consideration the expected future growth rates of the company. As futuregrowth rates are difficult to predict, investors and analysts often extrapolate from past growth rates. This process of estimatinggrowth tends to ignore the tendency of corporate profit growth to revert to the mean.

While growth stocks initially experience higher growth rates than value stocks, the higher growth rates do not last long enoughto justify the higher price/earnings multiples which growth investors have been willing to pay.

Earnings growth rates tend to revert to the mean quickly because of the nature of the capital markets. Industries which areexperiencing high growth rates tend to attract competition and capital investment by other firms. This competitive processeventually results in lower returns on equity and lower earnings growth rates. Conversely, industries with low growth rates donot attract much new capital investment and management may attempt to achieve higher earnings by operating more efficiently.Thus, the earnings growth rates of both high and low growth companies tend to revert to the mean.

Summary

Although growth stocks initially experience higher growth rates than value stocks, the growth rates of both quickly revert towardthe mean. When investing in stocks, investors demonstrate over-optimism for growth stocks and over-pessimism for valuestocks. Several researchers expect the value investing advantage to continue, based upon the persistent nature of humanbehavior. The best ways to take advantage of both styles is a balanced approach or go the analyst way of choosing 60% valueinvesting and 40% investing in growth stocks.


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GDP vs Sensex

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Interest vs Sensex

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Trading System in India

The Exchange, had an outcry trading system till March 1995, where the members - brokers used to assemble in trading ring fordoing transactions in securities. It had switched over a fully automated computerized mode of trading know as BOLT (BSE onLine Trading) system w.e.f from March 14, 1995. The trading in securities at the Exchange is conducted in an anonymousenvironment and the counterparty identity is not revealed. The buyers and sellers of securities do not know the names of eachother. This system was initially both order and quote driven, is currently only order driven. The facility of placing of quotes hasbeen discontinued w.e.f., August 13, 2001 in view of lack of market interest and to improve system-matching efficiency.

Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.m. and 3:30 p.m. The scrips traded on theExchange have been classified into A, B1, B2, F,G and Z groups. The Exchange has for the guidance and benefit ofinvestors classified the scrips in the Equity Segment in A, B1, & B2 based on certain qualitative and quantitative parameterswhich include number of trades, value traded, etc. for the guidance and benefit of investors. The F group represents the fixed

income securities. The Exchange has commenced trading in Govt. Securities for retail investors under G group. The Exchangealso provides a facility to the market participants for on-line trading in C group which covers the odd lot securities in physicalform in A, B1, B2 and Z groups and Rights renunciations in all the groups of scrips in the Equity Segment.

The scrips of the companies which are in demat can be traded in market lot of one but the securities of companies which arestill in the physical form are traded on the Exchange in the market lot of generally either 50 or 100. However, the investorshaving quantities of securities less than the market lot are required to sell them as Odd Lots. The C group facility can also beused by small investors for selling up to 500 shares in physical form in respect of scrips of companies where trades arerequired to be compulsorily settled by all investors in demat mode. This facility of selling physical shares in compulsory dematscrips is called an Exit Route Scheme. With effect from December 31, 2001, trading in all securities listed in equity segment ofthe Exchange takes place in one market segment, viz., Compulsory Rolling Settlement Segment.

Tick size:Tick size is the minimum difference in rates between two orders entered on the system for particular scrip. Trading in scripslisted on the Exchange is done with the tick size of 5 paisa. However, in order to increase the liquidity and enable the marketparticipants to put orders at finer rates, the Exchange has reduced the tick size from 5 paisa to 1 paisa in case of units of mutualfunds, securities traded in F group and equity shares having closing price up to Rs. 15/- on the last trading day of the calendarmonth.

Computation of closing price of scrips in the Cash Segment.

The closing price of scrips is computed by the Exchange on the basis of weighted average price of all trades executed duringthe last 15 minutes of the continuous trading session. However, if there is no trade recorded during the last 15 minutes, then thelast traded price of scrip in the continuous trading session is taken as the official closing price.

Compulsory Rolling Settlement (CRS) Segment:

In order to bring about settlement efficiency and reduce settlement risk, it was recommended in 1989 that all secondary marketacross the globe should adopt a rolling Settlement cycle on T+3 bases by 1992. As per the mandate received from SEBI, theExchange has since introduced the settlements for all groups of securities in the Equity Segment, F & G groups on T+2 basisw.e.f. from April 1, 2003. A T+2 settlement cycle means that the final settlement of transactions done on T, i.e., trade day byexchange of monies and securities between the buyers and sellers respectively takes place on second business day (excludingSaturdays, Sundays, bank and Exchange trading holidays) after the trade day. The transactions in securities of companieswhich have made arrangements for dematerialization of their securities are settled only in demat mode on T+2 on net basis,i.e., buy and sell positions of a member-broker in the same scrip are netted and the net quantity and value is required to besettled. However, transactions in securities of companies, which are in Z group or have been placed under trade to trade bythe Exchange as a surveillance measure, are settled only on a gross basis and the facility of netting of buy and sell transactions

in such scrips is not available.


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Settlement

All deliveries of securities are required to be routed through the Clearing House (called BOI Shareholding Ltd. (BOISL). For thepurpose of settlement of the trades done on the Exchange, the Clearing & Settlement Dept. of the Exchange liaises with theClearing House on a day to day basis. The Information Systems Department of the Exchange generates Delivery and ReceiveOrders for transactions done by the member-brokers in A, B1, B2, F and G group scrips after netting purchase and saletransactions in each scrip whereas Delivery and Receive Orders for C & Z group scrips and scrips which are traded on theExchange on trade to trade basis are generated on gross basis, i.e., without netting of purchase and sell transactions in ascrip. The securities, as per the Delivery Orders issued by the Exchange, are required to be delivered by the member-brokersin the Clearing House on the day designated pay-in, i.e. T+2 day.

Demat pay - in:

The member-brokers can effect pay-in of demat securities to the Clearing House either through the National Securities DepositoryLtd. (NSDL) or Central Depository Services (I) Ltd. (CDSL). In case of NSDL, the member-brokers are required to give instructionsto their respective Depository Participants (DPs) specifying settlement no., settlement type, effective pay-in date, quantity, etc.As regards CDSL; the member-brokers give pay-in instructions to their respective DPs. The securities are transferred by theDPs to the Clearing Member (CM) Principal Account. The member-brokers are required to give confirmation to their DPs, sothat securities are processed towards pay-in obligations.

Funds Pay-in:

Once the reconciliation of securities is completed by the Clearing House, the bank accounts of member-brokers maintainedwith the nine clearing banks, viz., Bank of India, HDFC Bank Ltd., Global Trust Bank Ltd., Standard Chartered Bank, CenturionBank Ltd., UTI Bank Ltd., ICICI Bank, Indusind Bank Ltd., and Hong Kong Shanghai Banking Corporation Ltd. are directlydebited through computerized posting for their funds settlement obligations. Once the pay-in of securities and funds is complete,the Clearing House arranges for the pay-out of securities and funds.

Securities Pay-out:

In case of demat securities; the same are credited by the Clearing House in the Pool/Principal Accounts of the member-brokers. The Exchange has also provided a facility to the member-brokers for transfer of pay-out securities directly to theclients beneficiary owner accounts without routing the same through their Pool/Principal accounts in NSDL/ CDSL. In casedelivery of securities received from one depository is to be credited to an account in the other depository, the Clearing Housedoes an inter depository transfer to give effect to such transfers.

In case of physical securities, the Receiving Members are required to collect the same from the Clearing House on the pay-outday. This process of passing on delivery of securities purchased by the member-brokers to them by the Clearing House iscalled pay-out of securities.

Funds Pay-outThe bank accounts of the member-brokers having pay-out of funds are credited by the Clearing House with the Clearing Bankson the same day. This process is referred to as Pay-out of Funds.In case of Rolling Settlements, pay-in and pay-out of both funds and securities, as stated earlier, is completed on the same day.The member-brokers are required to make payment for securities sold and/ or deliver securities purchased to their clientswithin one working day (excluding Saturday, Sunday, bank & Exchange trading holidays) after the pay-out of the funds andsecurities for the concerned settlement is completed by the Exchange. This is the timeframe permitted to the member-brokersof the Exchange to settle their funds/ securities obligations with their clients as per the Byelaws of the Exchange.

UK Trading System

The London Stock Exchange is one of the worlds oldest stock exchanges and can trace its history back more than 300 years.There are more than 2600 companies listed, worth over 3,300bn. In 2003/4 there were 117 IPOs raising 5,300m new


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capitals. It caters for companies large and small, from start-ups to global brands. They supervise the markets rigorously to

ensure their integrity and fairness for all market participants.There are more than 15,000 companies are traded on the London Stock Exchanges primary and secondary market. LSE hadhandled more than 59mn trades, an average of 2, 34,000 trades everyday. LSE has made this possible by providing a range oftrading systems for professional investors around the world.

Domestic Trading System

SETS: SETS is the London Stock Exchanges blue chip trading service for UK FTSE Eurotop 300 equities. SETS is an electronicorder book that can execute hundreds of trades a minute. Securities traded on SETS include all the FTSE 100 constituents, themost liquid FTSE 250 securities; those with a LIFFE traded equity option and some euro-denominated Irish stocks.

The automatic order-driven trading service is flexible and transparent; ensuring that every buy or sell order receives maximum

exposure, resulting in a seamless and cost-effective execution. Order book trades in all UK securities are covered by a centralcounterparty operated by the London Clearing House.

Closing price: The Exchange has decided to revise the closing auction process for SETS securities, relating to Price MonitoringExtensions parameters and the length of the potential extension periods. The revised timings and details how the closing pricewill be determined where there is no auction match because of a potential excessive price movement with inadequate volumeor no matching orders. If auction matching occurs in the closing auction, then closing prices will be based on the closing auction price. If no

execution occurs, the Volume Weighted Average Price (VWAP) of the last ten minutes of continuous trading will be used.If no automatic trades occurred in the VWAP period, the last automatically executed trade price will be used.

Currently the exact time that closing prices are disseminated depends on whether auction execution occurs immediately (at

approximately 16.35), or after a Market Order and/or Price Monitoring Extension.

Price Monitoring Extensions are triggered by movements away from the Reference Price. (VWAP or if no VWAP periodtrades, last AT).

SEAQ: SEAQ is the London Stock Exchanges service for mid-cap securities and the most liquid AIM securities. The service isbased on two-way continuous quotes, offered by competing market makers. Prices are displayed on more than 100,000terminals around the world, enabling investors to buy and sell at a fair and transparent price.

SETSmm: SETSmm is the London Stock Exchanges trading service for FTSE 250 and other leading non order book securities.By combining the best features of the existing SETS and SEAQ trading services, SETSmm appeals to market users who wantto trade electronically, as well as those customers who use the market making system. The Exchange is currently consultingwith the market the proposals to extend SETSmm for Small Caps, dual listed securities and for the most liquid AIM securities.

SEATS Plus: SEATS Plus is the electronic trading service for the less liquid Main Market and AIM securities. This service offersbasic order driven execution capabilities with guaranteed liquidity provided by market makers.

International Trading System

SEAQ International: The Exchange is constantly developing the platforms to offer investors the most efficient and liquidmarkets possible. In order to facilitate this, all depository receipts on SEAQ-I are migrating to the order-driven InternationalOrder Book (IOB), and all equities are migrating to the order-driven International Bulletin Board (ITBB) The migration will alsoresult in a daily auction model for less liquid international securities, which will attempt to concentrate sparse liquidity into asingle daily auction to take place daily for IOB and ITBB.

International Order Book Depositary Receipts: IOB Depositary market is the market for trading liquid overseas securities.The market is based on an electronic order book similar to SETS but with the added option for member firms to display their


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identity pre-trade by using Named Orders, offering investor a greater visibility in the market. The IOB offers easy and cost

efficient access for traders looking to invest in fast growing economies. IOB offers investors direct access to large companiesin these markets by means of depositary receipts. IOB traders have been revised to prefer more auctions per day, to reduce thewaiting time to the next auction match, to maximize turnover in illiquid securities.

Trading services prices List with effect from 1st January 2005.

Order Charges.

Exchange Charge (per trade)


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US Trading System

The New York Stock Exchange traces its origins to 1792. The NYSE offers a variety of investment vehicles to help investorsbroaden and diversify their portfolios. Whether interested in traditional equities, bonds, or funds, investors can find the rightproduct(s) that meet their particular wealth-building strategies. The NYSE also lists a variety of structured products, which aredesigned to offer investors unique risk/return characteristics.

Order Execution

Overview

Today, 100 percent of investor orders are delivered electronically to the NYSEs central point of sale.

NYSE Direct+

NYSE Direct+, an automatic-execution service for limit orders of up to 1,099 shares, enables users to opt for an immediateexecution at the best bid or offer, without a fee and with anonymity and speed. The average execution time is 0.8 seconds.

Almost 10 percent of total NYSE volume is executed automatically via Direct+ - more than the volume of all electroniccommunications networks (ECNs) combined. Only the NYSE provides investors with a blend of market models, from completelyautomated to the value-added auction market.

The NYSE posts the best price of any market for NYSE-listed equities 93 percent of the time. The Exchange also has thehighest fill rate - the percentage of received orders executed - of any market for NYSE-listed equities.

Since 2002, the number of NYSE Direct+ orders has increased 140 percent, the number of trades 151 percent and sharevolume 111 percent.

Expansion of NYSE Direct+.

To offer investors the most compelling array of order-execution choices, The Exchange has filed a proposal with the SEC toexpand NYSE Direct+. The expansion will remove previous restrictions on Direct+, enabling more types of orders to be executed,larger share sizes to be traded and faster consecutive order execution.

Cross Session

For member firms, the Exchange currently offers four crossing sessions in its Off-Hours Trading Facility (OFHT).

Time of Operations Functionality

Crossing Session I 4:15 - 5 p.m. Match orders at closing price

Crossing Session II 4 - 6:15 p.m. Trade baskets of 15 stocks valued at least $1 million

Crossing Session III 4 - 6:30 p.m. Execute unfilled guaranteed price orders of at least 10,000 shares

Crossing Session IV 4- 6:30 p.m. Execute unfilled balance of a VWAP order of at least 10,000 shares

Crossing Session I (Single Stocks)

Enables members to enter one-sided, two-sided, or good-till-executed (GTX) orders for a particular stock into the Super Dotsystem for execution at 5 p.m. Matched orders are executed at the NYSE closing price determined during the Exchange's 9:30a.m. to 4 p.m. trading session and are printed on the Consolidated Tape. Member Firms receive reports at 5 p.m.

Crossing Session II (Program Trades)

Accommodates late-arriving program trades- the trading of baskets of at least 15 NYSE securities valued at $1 million or more.

Members that have either facilitated a basket trade or have paired two customers' baskets can submit aggregate information tothe Exchange for execution.


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Reports of execution are available via the web-based electronic filing platform (EFP) shortly after the trade is entered. At 6:15

p.m., the NYSE prints the aggregate information of all baskets to the consolidated tape. On the third day, after the trade date(T+3), individual component stocks executed as part of a basket trade are printed in aggregate form in the NYSE Daily SalesReport.

Crossing Session III (Guaranteed Price Orders)

Executes the unfilled portions of "guaranteed price" orders (also know as "upstairs stops") for member firms' institutionalcustomers. The member firm must record all details of the order, including the price at which it has guaranteed, or "stopped," itscustomer.

Trades must be for a minimum of 10,000 shares and may take place at prices outside the 9:30 a.m. to 4 p.m. trading range ofthe recorded security. Member firms receive an immediate report of execution upon entering an order for this session. At 6:30p.m., the Exchange will print trades reported through Crossing Session III as guaranteed-price coupled orders. Crossing

session III debuted on June 15, 2004.

Crossing Session IV (VWAP Orders)

Executes the unfilled balance of an order at a price that is not pre-determined, but is calculated to ensure that the entire orderis filled at a price no worse than the volume weighted average price (VWAP). Member firms may use this session for trades thatare full-day VWAP orders or for trades that are designated VWAP for a specific period of time.

Trades must be for a minimum of 10,000 shares (program trades for less than 10,000 shares can be completed in CrossingSession II) and can be priced up to four places to the right of the decimal. Member firms receive an immediate report ofexecution upon entering an order for this session. At 6:30 p.m., the Exchange will print trades reported through CrossingSession IV as VWAP executions. Crossing Session IV debuted on June 15, 2004.

SuperDot

SuperDot is an electronic order-routing system used by NYSE member firms to send market and limit orders directly to thetrading post where the security is traded. After the orders have been executed, SuperDot uses the same electronic circuit tosend post-trade reports back to the firms.

Ninety-nine percent of all orders pass through SuperDot. It reliably meets ever-increasing demand, which currently stands at 6million quotes, 13 million orders and 5 million reports daily.

Anonymous Super Dot

Anonymous Super Dot (ADot) enables institutional investors sponsored by a member firm to submit orders directly to the NYSEwithout the Exchange, member firm, specialist or floor brokers knowing their identity.

The institution and its sponsoring member firm must establish parameters within which trading can occur, including a tradinglimit expressed in dollar value and a maximum order size.

With ADot, the institution will receive transaction reports as they occur, and the member firm will receive a copy only at the endof the day or after an agreed-upon time has elapsed, for clearing purposes.


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Sectors


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Characteristics

Automobile Industry

Compared to other modes of transport like railways and waterways, road transport plays a vital role in India accounting forabout 60% of goods traffic and 80% of passenger traffic.

With over 70% of the Indian population still living on agricultural income, this sector takes central place as it is transportationthat adds value to their produce and products. Similarly, in a country so wide and diverse, it is this sector that providestransportation to goods and materials, a service that is a prerequisite for growth and development to happen.

The infrastructure development, planning and outlay directly contribute to the sales and the nature of technology used inthe majority of commercial vehicles. The sales volumes are also dependent on several other factors like government

policies, fuel prices, better monsoons, rural incomes and replacement demand. The commercial vehicle sector can be broadly classified as Light Commercial Vehicles (LCV) and Medium & Heavy

Commercial vehicles (M&HCV) based on the Gross Vehicle Weight (GVW) of the vehicle. The HCV segment can befurther classified into three segments based on the gross vehicle weight of the respective vehicle. These are IntermediateCommercial Vehicle (ICVs) with GVW of 8 to 10 ton, Medium Commercial Vehicles (MCVs) with GVW of 10 to 15 ton andHCVs of GVW of 16 ton and above. Vehicles with GVW ranging between 3 to 7 tonnes are classified as light commercialvehicles (LCVs). Depending on the usage, M&HCVs can also be classified into two categories - trucks and buses. Busesare passenger carriers. Trucks include goods carriers along with specialized vehicles like dumpers, tractor-trailers etc.

Indias contribution to the world commercial vehicle market is a meager 1.5-2%. In the international market, USA occupiesthe top slot in terms of market share, followed by Japan, Canada and China.

Indias exports are marginal as they fail to meet international safety and pollution control norms.

A good monsoon, followed by agricultural and the economic growth, is critical for the industry. Besides economic growth,other major factors contributing to the success of the sector are easy availability of finance and low interest rates.

Government policies regarding sales tax rates, higher tax shelter with depreciation norms, higher allocation for roads,investment in heavy industries and infrastructure and greater allocations by state governments to state transport departmentsalso influence demand in this sector. Prices of diesel and freight rates are also vital factors affecting the industrys fortunes.

The newer models of vehicles with better technology and better compliance with the emission norms are also increasinglybecoming crucial factors.

As the investment is enormous, entry barrier to the industry is very high.

Effective distribution channel, after sales service and extensive service network are very essential for viability of theindustry.

A discouraging factor is the long gestation period required for establishing a foothold in the sector.

Product life cycle for commercial vehicle has become shorter as players have accelerated new product launches to retaintheir market shares.

Demand for commercial vehicle will have inverse relationship with the carrying capacity and proper functioning of railwaysas it is a cheaper mode of transport.


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Auto

Things To Look In The Industry

Automobile

Progress of other modes of transport vis--vis road.

The growth of agricultural production.

The infrastructure development, planning and outlay.

Government policies with regard to Sales Tax, Income Tax, Depreciation Norms etc.

Fuel price trend.

Rural Income.

Replacement Demand.

Freight Rates.

Laws like emission norms.

Better technology products entering the market.

Distribution channels, after sales service, service network of the various players of the industry.


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M&HV

0

20000

40000

60000

80000

100000

120000

140000

160000

19

90-91

19

91-92

19

92-93

19

93-94

19

94-95

19

95-96

19

96-97

19

97-98

19

98-99

1999

-2000

20

00-01

20

01-02

20

02-03

20

03-04

Year

No's

-60

-40

-20

0

20

40

60

%Change

Production % Change

Tractors

0

50000

100000

150000

200000

250000

300000

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

Year

Units

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

%Change

Production % Change

LCV

0

20000

40000

60000

80000

100000

120000

140000

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

Year

No's

-50

-40

-30

-20

-10

0

10

20

30

40

50

%Change

Production Change


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Forecasting Techniques

Auto & Auto Ancillary

Key Determinants of Automobile Sales Forecasting

Demographic Distribution Income levels Interest rates Infrastructure Models availability Dealer network After Sales Service

Capacity Pricing policy Discounts and gifts.

Net Sales is forecasted by taking into account the following

Ex Showroom prices Excise Duty Factory Prices Discounts and promotions Volumes sold Capacity Utilization Sales mix Average realizations.

The components of Expenditure

Number of Employees Number of Shifts Capacity Utilization Raw Material Price trend Advertisement and Promotions VRS etc.


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Characteristics

Banking Industry

The banking industry in India is in a midst of transformation, thanks to the economic liberalisation of the country, which haschanged business environment in the country.

The sector has become very competitive with the entry of many foreign and private sector banks.

The banking system can be broadly classified as organised and unorganised banking system. The unorganised bankingsystem comprises of moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc. The organisedbanking system comprises of Scheduled Banks and Non-Scheduled Banks, which are permitted by RBI to undertakebanking business.

Banking, everywhere in the world, is a highly regulated industry. The banking industry is the repository of savings of anation contributed by millions of people. Thus, a bank basically acts as an intermediary between savers and borrowers.Hence, costs to a bank are the interest cost paid to savers and the establishment cost. A banks margin arises out of thedifference in interest paid to depositors and charged to borrowers.

A banks sources of revenue are interest from loans and advances, income from government securities and dividend/interest from private sector equity investments and debt instruments. Apart from this, a bank also earns non-fund-basedincome, also called as fee-based income for the various services rendered by it as a banker or in the course of bankingactivities. It includes treasury and forex operations, income from trading in shares, guarantee commission, etc.

Asset liability management, effective monitoring of loans, recovery of NPAs, reducing cost of deposits and controllingestablishment costs are critical success factors.

Ensuring capital adequacy, exposure norms and other prudential norms in line with RBI guidelines are also critical. Wresting

blue chip accounts, expanding depositor base and leveraging them for fee-based income are also essential for growthand development.

Technology has already brought about revolutionary changes. Services like Internet Banking, Mobile Banking, Anywhereand Anytime Banking will not be added features but promise to be a standardised banking environment in the next fewyears. While on one hand it has the potential to reduce the transaction costs, the initial capital requirements will be heavy.


Banking Industry

Implications of various laws being introduced from time to time, concerning the industry.

Interest rates.

Economic growth.

Asset liability management, effective monitoring of loans, recovery of NPAs, reducing cost of deposits, control ofestablishment costs etc. by various players.

Ensuring capital adequacy, exposure norms and other prudential norms by various players, in line with RBI guidelines.

Expansion of depositor base by various players and leveraging them for fee-based income are also important.

Introduction of new technology which can bring revolutionary changes.


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Bank


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Characteristics

Cement Industry

Limestone, coal, freight, electricity and furnace oil are the major cost factors.

As per standard input-output norms, to produce one tonne of cement, 1.5 tonne of limestone, 0.25 ton of coal, 120 kwh ofpower and 0.05 tonne of gypsum are required.

As far as lime stone is concerned, the major cost is the royalty paid to the central government and cess levies on royaltiescharged by the state governments.

Coal and oil constitutes around 35-40% of the production cost of cement. Indias coal has low calorific value and high ashcontent. As the cost per calorie of imported coal compares favourably with domestic coal, the industry resorts to importalso.

Cement is power-intensive, accounting for nearly 16% of the operating costs. As state governments usually supply power,the tariff varies from state to state and location to location. Rising power costs and frequent power cuts have forced majorplayers in the sector to set up captive power plants.

With freight costs at 15% of the total cost, plants are ideally located closer to the lime stone quarries. However, this resultsin substantial differential in prices within the country. Inclusive of freight costs, the selling and administrative expenses ofthe industry are relatively high at 24% of the total operating costs.

As the cement industry is highly capital-intensive, leading players have leveraged on their balance sheets and have hugeloan exposure.

The cement industry has capitalised on the countrys long coastline and is exporting cement to its neighbouring countrieslike Sri Lanka, Bangladesh, Nepal and Middle East. Being a bulky item, the global trade in cement is quite low.

Cement being a bulky item and predominantly being consumed in relatively smaller quantities, the actual import is quite

negligible. Further, the infrastructure bottlenecks in the ports also add to cost of imported cements.

Better cost control, lowering debt-equity ratio caused by funding of acquisitions and Greenfield projects primarily throughborrowings and better capacity utilization are critical success factors for the industry.

Freight and transport costs being significant in cement industry, efficient logistics management is equally critical.

With power and fuel costs exceeding 21% of the sales, units with captive power plants have a distinct advantage. This isparticularly because of unreliable supply from SEBs that comes at a huge cost, as against reliable and relatively low costcaptive power plants.


Cement Industry

Availability of limestone, coal, freight, electricity and furnace oil, as they are the major cost factors.

As the industry is capital-intensive, the impact of debt on the overall performance of the company.

Capacity utilization levels.

Effective logistics management by the company as freight and transport costs is significant in the industry.

Whether the player has a captive power plant, as power from SEBs is unreliable and is also available at a comparativelyhigher cost.


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Cement Process


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Cement Manufacturing Process

Note: - Fuel includes coal, furnace oil and lignite


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Cement

0

200

400

600

800

1000

1200

1400

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

Year

LakhTonnes

-2

0

2

4

6

8

10

12

14

1618

%Change

Production % Change


CEMENT

Cement forms the basic ingredient in any construction activity and its quantum of consumption denotes the level of infrastructuredevelopment taking place in a region.

End Users

Housing Infrastructure Commercial/Office Buildings

Industry Analysis

Demand-Supply gap in different regions and export potential Capacity additions planned

Demand Drivers

The big infrastructure push being given by the central and state governments towards building/modernizing of highways,roads, airports, ports, power plants, rural housing

Liberal government norms to allow private participation in development of infrastructure Low interest rates and easy availability of finance

Price Determinants

Regional dynamics (demand-supply balance and number of players) Cost efficiency (production process) Capacity utilization levels Quality of end product Location of plants (geographical spread)


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Salient Features of the industry

Basic raw material (gypsum), power& fuel and freight costs form a significant portion of the raw material cost; Captivesources of coal and power ensures better margins

The industry is subject to a high tax rate (excise duty) Construction activity slows down during the monsoon period and starts picking up from Q3 onwards. Capex for setting up a plant and the lead time involved is big, therefore choice between brownfield, greenfield expansion

and acquisition needs to be considered Consolidation is the mantra to grow rapidly; it is expected to continue in the coming years as well (Recent Case- L&Ts

cement division bought over by Grasim Industries)

Efficiency parameters

Capacity utilization levels, Realization per bag, EBITDA per tonne

Valuation parameters

EV per tonne, EV/Sales, EV/EBITDA, P/E, RoNW, RoCE


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Characteristics

Construction

In India, construction is the second largest economic activity after agriculture. Construction investment accounts for nearly11 per cent of the GDP.

The Indian construction industry is divided into the following three segments:

Real estate (residential and commercial construction). Infrastructure (roads, ports, power, railways, urban infrastructure). Industrial construction (cement plants, fertiliser plants, and refining, oil, and gas plants).

The sector is highly monopolistic, as the government is the major customer. This poses problems in two ways:One, companies bagging project orders are highly dependent on the Budgetary allocation for the infrastructuresegment. This subjects their earnings stream to a high degree of volatility. And two, government projects are usually along-drawn process. In other words, there is a high probability of the project overstepping the scheduled period forcompletion. This exposes companies to a downside due to swings in construction material prices.

Infrastructure financing is risky since lenders are repaid only from the cash flows generated by the project. Not onlydoes this mean that the cash flows ought to be correctly forecast but also that there should be no significant timedelays in the implementation of the project.

Rising competition (domestic and foreign) drives down bidding prices. As competition intensifies, especially in roadprojects, bids have become increasingly competitive, resulting in lower profit margins.

Surging raw material prices: Raw material (cement and steel) costs vary according to the project mix. Moreover,when input costs go up, margins come down. But companies executing projects with an in-built escalation clause

will be insulated from any sharp swing in the prices of key inputs. Volume growth in housing is largely driven by population growth and urbanisation. Further, it has been observed

that the housing boom is not localised in the organised urban housing segment and extends to the relatively prosperousrural belts. This growth in housing is being mainly driven by two factors:

Faster growth in the income levels of the middle and higher income classes. Decline in EMIs owing to the fall in housing finance rates.


Construction

The GDP growth, along with the population growth and urbanization, as the construction activity largely depends on thesefactors.

The prevalent housing interest rates.

The budgeted allocation for the infrastructure sector, as the new orders are largely determined by it.

In case of government projects, swings in raw material prices are to be kept in mind in case of project over-stepping thescheduled period for completion.


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Characteristics

Consumer Durables

The industry can be broadly classified as consumer electronics and consumer appliances.

Colour TVs dominate the industry with a 40% market share, followed by refrigerators with 25%, washing machines 10%,B & W TVs 8%, and the rest contributed by ACs, audio systems, microwave ovens, etc.

Raw materials accounts for nearly 70% of the total cost of sales of major consumer durables.

The picture tube accounts for about 55% of the cost of colour TV (CTV). Other major cost heads in a CTV includepopulated printed circuit boards (20-25%), plastic moulded parts (10%).

For refrigerators and ACs, compressors constitute the major cost while for washing machines, the electric motor is the keycost. In addition, copper tubes, sheets of cold rolled steel and plastic are the other raw materials used in consumer

durables. The obsolescence rate is higher in consumer durables as newer models with latest technologies catch market fancy,

adversely affecting the demand for the earlier models. The drive for latest technology calls for frequent upgradations andnew product introductions, leading to fluctuations in cost structure.

The industry is also facing hectic competition from both domestic and international players, which have resulted in thinmargins. It is more a game of numbers, wherein pushing up sales volumes brings in profits. As a result, the selling anddistribution costs ranges between 10-15% of the sale value.

Increasing disposable income, availability of institutional finance, fall in prices and urbanisation are the demand drivers ofthe industry.

Constant product innovation, brand building, superior technologies are critical for the domestic industrys survival.

The global consumer durables market has switched over to digital products. With low penetration levels of most of the consumer durables, the long-term prospects are bright.


Consumer Durables

The availability and the price trend of the raw materials as they account for nearly 70% of the total cost of sales of majorconsumer durables.

The fluctuation in cost structure as the obsolescence rate is higher in consumer durables because newer models withlatest technologies catch market fancy, adversely affecting the demand for the earlier models. The drive for latest technology

calls for frequent upgradations and new product introductions. The selling & distribution costs, as it is more a game of numbers in this industry, wherein pushing up sales volumes brings

in profits.

The other points to be looked into are: disposable income, availability of institutional finance and urbanization as they arethe main demand drivers of the industry.

Constant innovations in products, brand building exercises undertaken and level of technologies employed should belooked into.

The penetration levels of various products compared to international standards, indicating the potential of the same.


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Consumer Durables


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CTV

0

1

2

3

4

5

6

7

8

1994

1995

1996

1997

199

8-99

1999-

2000

200

0-01

200

1-02

200

2-03

Year

mnUnits

0

5

10

15

20

25

30

35

40

4550

%Change

Production % Change


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Characteristics

Couriers

For a long time, delivery of packages were done by, what are locally known as, angadias. Many small firms and evenindividuals have traditionally run such services for small businesses and they continue to do so even now.

The beginning of the courier sector in India was marked in 1979 with the entry of DHL.

Initially, the focus of these courier firms was on delivery of small-sized packages. But soon the picture changed withthe introduction of breakthrough products, such as Jumbo Box and Jumbo Junior, wherein it became possible tosend packages of up to 25 kg anywhere in the world. Pick-up services such as 60-minute guarantee pick-up servicewere also introduced.

Like many other sectors, technology also played a major part in revolutionizing the industry. Bar code technologywas introduced into pick- up and delivery systems. Wireless communications and computer-based industrial engineering

marked a new era of the hi-tech courier industry. And, today the Internet has made it possible to track and trace thepackages sent with the help of e-tracking systems.

Now, courier companies have also started providing complete logistics solutions to their customers.

There are more than 2,300 courier companies in India, which includes 20 in the organized sector, about 2,000 in thesemi-organized sector and the rest in the unorganized sector.

The entry barriers, especially in the package segment of the business, are high because courier companies have to builda strong distribution network, they have to use latest technology and should have well-trained staff.

A strong brand image also acts as a major barrier. Economies of scale also play a very important role, given that fixedcosts of the industry are very high.

The demand is dictated by the extent of the business activity, which depends on the general economic scenario.

Therefore, it would be fair to expect that with improvement in the general economic scenario, the industry wouldgrow faster. Exports also are a major determinant of demand.

In the international market, the organized sector is well-placed because of their affiliations with major international players.As far as the domestic market is concerned, the organized sector still faces competition from the semi-organizedsector.

For reducing their costs and sticking to core competency, now-a-days, many companies are outsourcing the entirelogistics and supply chain management. Courier companies, which already have established distribution networks inplace, have plunged into this market segment. These courier companies see it as a big opportunity for growth in thefuture and are aggressively marketing themselves.

Things To Look In The IndustryCouriers

The size of operations as economies of scale play a very important role, given that fixed costs of the industry are veryhigh.

The economic scenario, as the demand for couriers is dictated by the extent of the business activity, which depends onthe economy.

The trend of export growth as exports also are a major determinant of demand for couriers.


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Characteristics

Fertilisers

Fertilisers play a vital role in the Indian economy as Agriculture accounts for 25% of the countrys GDP.

The Indian fertiliser industry is the third largest producer and consumer of fertilisers, next only to China and United States.

Raw materials constitute more then 50% of the fertilizer manufacturing cost, followed by power & fuel cost and othermanufacturing costs.

The industry is highly capital intensive and non-availability of quality feed stock in required quantities at affordable pricesalso adds to the cost. As a result, the cost of fertilisers production in India is grossly on a higher side and invariably higherthan the international prices of finished product.

Demand for fertilisers grows with better monsoons.

With the demand for food on the rise due to population growth, yield has to be increased. This will naturally call forbalanced application of fertilisers, thereby acting as a demand driver for fertilisers.

As the fixed costs are high, maintaining a high capacity utilisation is a key to achieving profitability.


Fertiliser Industry

Agricultural production trend.

Prices of raw materials, as they constitute around 50% of the manufacturing cost.

The monsoon factor, as demand for fertilisers grows with better monsoons. The level of capacity utilization, as because the fixed costs are high, maintaining a high capacity utilisation is a key to

achieving profitability.


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Fertilisers


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Fertiliser

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

19

81-82

19

85-86

19

90-91

19

91-92

19

92-93

19

93-94

19

94-95

19

95-96

19

96-97

19

97-98

19

98-99

1999

-2000

20

00-01

20

01-02

20

02-03

Year

'000tonnes

-10

0

10

20

30

40

50

60

%Change

Production % Change


Fertilisers

The growth in the fertiliser industry is directly related to the agriculture. The growth in the agricultural sector leads to a growthin the fertiliser industry. The fortune of the agricultural sector is directly dependant on the monsoons. Hence the demand forfertilisers depends on the monsoons. Different kinds of fertilisers manufactured are di-ammonium Phosphate (DAP), complexfertilisers, urea, etc.

Raw materials are a major cost component in the manufacture of fertilisers. The major raw materials used in the manufactureof fertilisers are natural gas, naphtha, sulphur, MEK, etc. Gas based plants are more cost competitive in comparison to otherfeedstock. The other major cost component is power & fuel.


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Characteristics

FMCG

The fast moving consumer goods (FMCG) industry has been moving slow of late, due to saturation of demand in urbanareas and due to its difficulty in expanding to rural markets.

One of the largest direct and indirect employment providers, the sector has strong backward linkages to spur growth ofother industries, and in turn, the economy.

FMCG are consumer non-durables that are required frequently, if not daily. It can be broadly classified into personal care,oral care and household products.

The industry is marked by high ad spend, brand building, brand extensions and quite a low capital to sales ratio onaccount of outsourcing and very low investment in fixed assets.

Production costs are estimated to be about 47% of sales, selling and distribution expenses about 12% and employeecost, around 5%.

The employee cost is quite low because outsourcing is widely prevalent in the industry. The players are more of brandmanagers with supply chain management, than pure manufacturers. Also, the interest cost for the industry is very low, asit is a cash and carry business.

Advertisement costs ranges from 5 to 12% of the revenue, depending upon the life cycle of the product, brand value,competition in the segment and the marketing strategy of the players.

Brand building, positioning and brand extensions play key roles in the success of a product. Slowdown in demand andfierce competition has made the players to sharpen their focus on key products and brands, cost reduction and focus onrural marketing.

The industry incurs heavy cost on launching the product. It includes advertisement, free samples, shelf display, trade

discounts etc. The typical launch cost of the industry ranges from 50 to 100% of the revenue from the product in the firstyear. The launch costs recede over the period, with growing acceptability from target segment, brand positioning andincrease in turnover.

Increase in disposable income, advertisements, product innovations and brand extensions are demand drivers. The hugeand growing middle class population, increasing consumerism and urbanisation, health and hygiene awareness leadingto preference for packaged foods, are also the demand drivers.

Rationalisation of costs, brand portfolio and distribution structures are critical to eliminate cost inefficiencies and to protectbottom line.

New product introductions and brand extensions are also critical for extracting optimum value and to stay ahead ofcompetition.


FMCG

The level of rural incomes, as the demand for the products depends a lot on it.

In the case of individual companies, any abnormal increase in marketing cost should be studied, as generally, the industryincurs heavy cost in the first year of launching of a new product.


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