EXECUTIVE SUMMARY

The field of equity research is very vast and one has to look into various aspects of the functioning of the company to get any conclusion about the possible performance of the company in the market. Investors like Warren Buffet made a fortune out of investments in the stock market, which is quite impossible without proper research about the companies. The field of equity research is full of challenges. It is your door to fame, fortune and above all professional challenge. In a world that is shrinking in size due to information technology and blurring boundaries between nations, the stock market(equities market), which is considered to be in its infant stage is all set to grow in size. The project on equity research was carried out on self study based on secondary data. It was a limited learning and devoting time towards equity research but it also provided an insight on various services which broking houses provide and what efforts are required to manage such organizations. The reason for choosing this project is that it provides hands on experience with what goes on in the stock market on a day to day basis. Some valued investors only look at present assets/earnings and do not place any value on future growth. Other valued investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than its worth. The project initiated with understanding the mannerisms of the stock market trading followed by the dynamics of banking sector. Some of the major players in banking sector were then chosen for further analysis. These companies were further studied in detail with respect to their financials and the managements future plans and their global forays.
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Based on the complete study of the companies and sector wise analysis of banks, leading banks in private and public sector- ICICI Bank, SBI Bank, Yes Bank and also giving recommendation on the Buy or Sell or Hold by fundamental and technical analysis of the company.

Literature Review
Stocks and Markets are analysed by various methods by the learned Researchers and Analysts. All these methods can be broadly classified into three categories- Fundamental Analysis, Technical Analysis and Techno-Fundamental Analysis. Fundamental Analysis Fundamental Analysis aims at determining the intrinsic (in-built) worth of the stock or financial security and comparing it with the market price to identify as to whether it is overpriced or underpriced. A fundamentalist would buy a stock or financial security if it is under priced and sell if it is overpriced. Fundamentalists firmly believe that sooner or later, market price will be equal to the intrinsic worth of the stock or financial security. Global Market Analysis, Economic Analysis, Industry Analysis and Corporate Analysis- are the levels at which Fundamental Analysis is carried out. Balance Sheet Analysis, Profit & Loss Account Analysis by using various ratios like EPS,PE,CR,IRRI etc are only the basic fundamentals used at Corporate Level Analysis, which are considered by many as the basic indicators. Foreign Institutional Investors(FII), Banks, Mutual Funds etc. Have their teams of researchers and fundamental analysts who are capable of carrying out detailed fundamental analysis with the help of sophisticated information systems. Similarly, these institutions have 5 to 15 years of long term investment strategies. Therefore fundamental analysis is more suitable for them. Individual investors are not capable of carrying out Global Market Analysis, Economic Analysis, Industry Analysis and Corporate Analysis in details due to limited resources. Similarly, individual investors cannot wait for earning returns after 5 to 15 years. Therefore, Fundamental Analysis has limited use for individual and common investors. Technical Analysis Technical Analysis aims at analyzing the Markets, Stocks and Financial Securities by considering only two factors- Prices and Volume (number of stocks/securities bought and sold). Technical Analysis is more of an art than a science of analyzing charts of the securities for identifying prevailing trends.

Institutions create the trends (tides) because of their voluminous investments and technicians (Technical Analysts) ride those tides, at the earliest, to make profits. Ride the tides to make profits and skip off the tides when there is a slide, is the modus operandi of Technical Analysts. The beauty of technical analysis is in its simplicity and effectiveness. Any individual of even average educational background can learn technical analysis. Technical analysis is effective in analyzing stock markets, commodities markets, debt markets, derivatives market and foreign markets. In the globalized urban scenario, every intelligent investor must at least have working, if not expert, knowledge of technical analysis. Technical analysis is not a flaw less art of taking investment decisions. One of the major drawbacks of this art is delayed decisions. Unless the trend gets established, a technician cannot take decision but one must admit that these decisions are more reliable with exact entry and exit levels, which is not possible with fundamental analysis. Timing of the entry and exit is the real strength of technical analysis. For short and medium term trading and investment, there is no substitute to technical analysis. For long term investments, techno-fundamental analysis is best suited for the common and individual investors.

Tech-Fundamental Analysis This approach is by far the best and more suitable to the common individual investors, having long term perspective. In this approach stocks or securities are identified by using technical analysis but before taking investment decisions a few selected fundamentals are checked. The fundamentals such as size of equity, owners equity holding, institutional holding, floating stock, dividend and bonus history, operating and net profit trend, position of free reserves are considered. When technical analysis is favourable, so is the fundamental analysis, then the investors can invest with conviction for long term. The primary objective of equity research is to analyse the earnings persistence. Some key aspects that affect the earnings persistence can be summarized as follows: -stability of the equity under consideration -the predictability of the value of the given equity under given circumstances. -the variability of given equity, given the various variance factors. -the general market trend influencing the market value of given equity. -the earnings management. -the accounting methods in use. Two ways in which you can facilitate the assessment of the earnings persistence are by either recasting the income statement or adjusting the same. Objectives of recasting include: -Ensuring that the given earnings and their components are suitably recasted to facilitate stable, consistent and maintainable elements. These elements are composed of earnings. These earnings are distinctly separable from any random, abnormal or unique elements.
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-whatever elements have been recast, and at the same time have also been included as part of the current earnings, must subsequently get included within the operating results of one or more of an earlier period. -determining the earning power Objectives of adjusting include: -Allocating the earnings component to the most appropriate period. On the other hand, the primary objectives of stock valuation include an understanding of: -the benefits and drawbacks of common stock. Here the common stock is considered to be an investment, in addition to being a source of funds. -the characteristics, the legal implications, the rights and the privileges if any, in holding common stocks. -the different types of common stock existent. -the comprehension of various types of transactions or markets where common stock is prevalent. -the valuation process used for common stock. -the conditions that lead up to a state of stock market equilibrium. -the efficient market hypothesis.

-the general characteristics of a preferred stock. -the pre-requisites of a preferred stock or the conditions that a preferred stock must satisfy, in order to be considered as an investment or as a source of funds. -the legal implications and rights as well as the privileges of being a preferred stock holder. -the valuation process of a preferred stock. Thus, we are now aware of the objectives behind the process of equity analysis and stock valuation. These objectives have also made us aware of the goals to be achieved or the results that are expected from a given equity analysis and stock valuation process.

Objectives of the Study

Primary Objective: To understand the basics of equity research Sub-Objectives: a) To justify the current investment in the chosen securities b) To understand the movement and performance of stocks c) To recommend increase/decrease of investment in a particular security

Research methodology & Design

Type of Study The research has been based on secondary data analysis. The study has been exploratory as it aims at examining the secondary data for analyzing the previous researches that have been done in the area of technical and fundamental analysis of stocks. The knowledge thus gained from this preliminary study forms the basis for further detailed descriptive research. In the exploratory study, the various technical indicators that are important for analyzing stock were actually identified and important ones short listed. Sample design The sample of stocks for the purpose of collecting secondary data has been selected on the basis of random sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen. The stocks are chosen from the banking sector. Sample Size The sample size for the number of stocks is taken as 3 for technical analysis and fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed study.

Scope of Study The scope of this project is limited to only one sector, i.e; banking sector. This project is concerned with only one sector of companies in the stock market. The project does not extend its scope to any other sector of companies. Also the project is concerned with only three banks among the major players in the banking sector which are ICICI Bank, State Bank of India (SBI) and Yes Bank

Chapter-1
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Introduction
1.1 Introduction
Investing, like marriage isnt something that should be entered into lightly. Investing in equities gives high returns but they correspondingly have higher risk. Before we invest in a company, there are more than few things we need to know about it. Security Analysis An analysis of securities and the organization and operation of their markets. The determination of the risk reward structure of equity and debt securities and their valuation. Special emphasis on common stocks, other topics include options, mutual funds and technical analysis. Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and where applicable open interest in the instruments. Fundamental analysis is a method of forecasting in the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. Main difference between the two types of analysis: Fundamental Analysis Focuses on what ought to happen in a market Factors involved in price analysis: -Supply & Demand -Seasonal Cycles -Weather -Government Policy 1.2 Rationale for the Study In an industry plagued with scepticism and a stock market increasingly difficult to predict and contend with, if one looks hard enough there may still be a genuine aid for the Day Trader and Short Term Investor. The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which investor is willing to buy or sell depends primarily on his expectations. If he expects
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Technical Analysis Focuses on what actually happens in a market Charts are based on market action involving: -Price -Volume -Open interest (Futures only)

the securitys price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations and we all know that human expectations are neither easily quantifiable nor predictable. If prices are based on investor expectations, then knowing what a security should sell for (i.e; fundamental analysis) become less important than knowing what other investors expect it to sell for. Thats not to say that knowing what a security should sell for isnt important- it is. But there is usually a fairly strong consensus of a stocks future earnings that the average investor cannot disprove. Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the stock market want to make the maximum possible profits, they can just afford to ignore either fundamental or technical analysis. 1.3Investment Decision Making: Approaches As investors we would have diverse investment strategies with the primary aim to achieve superior performance, which would also mean a higher rate of return on our investments. All investment strategies can be broadly classified under four approaches which are explained below. Fundamental Approach: In this approach the investor is concerned with the intrinsic value of the investment instrument. Given below are the basic rules followed by fundamental investor. There is an intrinsic value of a security, which in turn is dependent on the underlying economic factors. This intrinsic value can be ascertained by an in-depth analysis of the fundamental or economic factors related to an economy, industry and company. At any point in time, many securities have current market prices, which are different from their intrinsic values. However, sometime in the future the current market price would become the same as its intrinsic value. We as fundamental investors can achieve superior results by buying undervalued securities and selling overvalued securities. Psychological Approach: The psychological investor would base his investment decision on the premise that stock prices are guided by emotions and not reason. This would imply that the stock prices are influenced by the prevalent mood of the investors. This mood would swing and oscillate between the two extremes of greed and fear. When greed has the lead, stock prices tend to achieve dizzy heights and when fear takes over, stock prices get depressed to lower than lower levels. As psychic values seem to be more important than intrinsic values, it is suggested that it would be more profitable to analyze investor behaviour as the market is swept by optimism and pessimism which seem to alternate one after the other. This approach is also called Castle-in-the-air theory. In this approach the investor uses some tools of technical analysis, with a view to study the internal market data, towards developing trading rules to make profits. In technical analysis the basic premise is that price movement of stocks have certain persistent and recurring patterns which can be derived from market trading data. Technical analysts use many tools like bar charts, point and figure charts, moving average analysis, and market breadth analysis amongst others. Academic Approach: Over the years, the academics have studied many aspects of the securities market and have developed advanced methods of analysis. The basic rules are: The stock markets are efficient and react rationally and fast to the information flow over time. So, the current market price would reflect its intrinsic value at all times. This would mean Current Market price=Intrinsic Value. Stock prices behave in a random
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fashion and successive price changes are independent of each other. Thus, present price behaviour cannot predict future price behaviour. In the securities market there is a positive and linear relationship between risk and return i.e; the expected return from a security has a linear relationship with the systematic or nondiversifiable risk of the market. Eclectic Approach: This approach draws upon all the 3 approaches discussed above. The basic rules of this approach are: -fundamental analysis would help us in establishing standards and benchmarks -technical analysis would help us gauge the current investor mood and the relative strength of demand and supply. -the market is neither well ordered nor speculative. The market has imperfections, but reacts reasonably well to the flow of information. Although some securities would be mispriced, there is a positive correlation between risk and return. 1.4 The changing role of Equity research: In this interactive discussion of equity research, we will review the role of this research and how it is impacted by bull and bear markets. We will even discuss fee based research and its growing importance. Research and Stock market Actually the title of this article is a bit misleading because the role of research has not changed since the first trade occurred under the Buttonwood Tree on Manhattan Island. What has changed is the environment (bull and bear markets) that influences research. The role of research is to provide information to the market. An efficient market relies on information: a lack of information creates inefficiencies that result in stocks being misrepresented (over or under valued). Analysts use their expertise and spend a lot of time analysing a stock, its industry and peer group to provide earnings and valuation estimates. Research is valuable because it fills information gaps so that each individual investor does not need to analyze every stock. This division of labour makes the market more efficient. Research in Bull and Bear Markets If the role of research has always been so noble, why is it currently in such a state of ill-repute? There are two reasons: firstly the current bear market gives us a new perspective to evaluate the excesses of the last bull market; secondly investors need to blame somebody. In every bull market there are excuses that become apparent only in the bear market that follows. Whether its tulips or transistors each age has its mania that distorts the normal functioning of the market. In the rush to make money, rationality is the first casualty. Investors rush to jump on the bandwagon and the market overallocates capital to the hot sectors. The most recent examples being web based grocery companies, online pet stores and fibre-optic capacity. This herd mentality is the reason why bull markets have funded so many metoo ideas throughout history. Research is a function of the market and is influenced by these swings. In a bull market, investment bankers, the media and investors pressurize analysts to focus on the hot sectors. Some analysts morph into promoters as they ride the market. Those analysts that remain rational practitioners are ignored, and their research reports
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go unread. During the late 1990s the business media catered to the audiences demand and gave the spotlight to the famous talking heads that are now under investigation. Research in Todays Market To discuss the role of research in todays market, we need to differentiate between Wall Street Research and other research. Wall Street research is provided by the major brokerage firms (both on and off Wall Street). Other research is produced by independent research firms and small boutique brokerage firms. The differentiation is important. First, Wall Street research has become focused on big cap, very liquid stocks and ignores the majority (over 60% based on research) of publicly traded stocks. This myopic focus on a small number of stocks is the result of deregulation and industry consolidation. In order to remain profitable, Wall Street firms have focused on big cap stocks to generate highly lucrative investment banking deals and trading profits. Those companies that are likely to provide the research firms with a sizeable investment banking deals are the stocks that are determined worth being followed by the market. The stocks long-term investment potential is secondary. The second reason to distinguish Wall Street from other research is that most of the blame for the excesses of the last bull market is rightfully placed on Wall Street. Other research is filling the information gap created by Wall Street. Independent research firms and boutique brokerage firms are providing research on the stocks that have been orphaned by Wall Street. Investors, now educated in the benefits of electronic trading, may not be willing to support boutique brokerage firms for their research by opening an account and paying higher commissions. Who pays for Research? Big Investors do! The ironic thing is that while research has proven to be valuable, individual investors do not seem to want to pay for it. This may be because, under the traditional system, brokerage houses provided research in order to gain and keep clients. Investors just had to ask their brokers for a report and retained it at no charge. What seems to have gone unrealized is that the commissions pay for that research. A good indicator of the value of research is the amount institutional investors are willing to pay for it. Institutional investors hire their own analysts to gain a competitive edge over other investors. They also pay (often handsomely) independent research firms for additional research. Institutions also pay for the sell-side research they receive (either with dollars or by giving the supplying brokerage firm trades to execute). All this amounts to big money, but the institutions realize that research is integral to making successful investment decisions. If investors are unwilling to buy research how will the market correct the imbalance caused by the lack of coverage? The solution may be found by looking at the issue a slightly different way. The Growing Role of Fee-Based Research Fee- based research increases market efficiency and bridges the gap between investors who want research (without paying) and companies realize that Wall Street is not likely to provide research on their stock. Feebased research provides information to the widest possible audience at no charge to the reader because the subject company has funded the research. It is important to differentiate between objective fee-based research and research that is promotional. Objective fee-based research is analogous to the role of your physician. You pay a physician not to tell you that you feel good but to give you his or her professional and truthful opinion of your condition. Legitimate
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fee-based research is a professional and objective analysis and opinion of a companys investment potential. Promotional research is short on analysis and full of hype. An example is the fax and email reports about the penny stocks that will supposedly triple in a short time. Legitimate fee-based research firms have the following characteristics: -they provide analytical not promotional services. -they are paid a set annual fee in cash; they do not accept any form of equity, which may cause conflicts of interest. -they provide full and clear disclosure of the relationship between the company and the research firm, so the investors can evaluate objectivity. Companies who engage a legitimate fee-based research firm to analyze their stock are trying to get information to investors and improve market efficiency. Such a company is making the following important statements: -that it believes its shares are undervalued because investors are not aware of the company. -that it is aware that Wall Street is no longer an option. -that it believes that its investment potential can withstand objective analysis. Perhaps more importantly, the reputations/credibility of the company and the research firm depends on the efforts they make to inform investors. A company does not want to be tarnished by being associated with disreputable research. Similarly a research firm will only want to analyze companies that have strong fundamentals and long term investment potential. Fee-based research has had to fight the stereotype of promotional research, but the market is starting to realize that fee-based research is a viable source of information. The National Investors Relations Institute (NIRI) was probably the first group to recognize the need for fee-based research. In January 2002 NIRI issued a letter emphasizing the need for small-cap companies to find alternatives to Wall Street research in order to get their information to investors. 1.5 Role of an Equity Research Analyst Equity research analysts study the movement of stock market, especially specific business stocks. Companies constantly produce large amounts of information regarding their financial status, their success in business markets and their current investments. Much of this information is required for legal purposes, but it also provides necessary data for the stock market. Most investors do not have the time or resources to follow this massive amount of company information, to provide investors with useful recommendations. Definition: In stock market terms, EQUITY refers to ownership of a business, which a business can sell as shares to interested investors. An equity research analyst specializes in examining what shares are for sale, what shares are selling well and what companies appear to be growing and will be worthwhile investments. Equity research analysts also track which stocks are falling so they can point out trends and provide useful information to brokers and investments.
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Process: Analysts spend much of their time analyzing individual stocks, especially stocks that have earned a lot of interest due to changing value. They look at the company that issued the stock and its history, and analyze the companys industry as a whole and what major changes are influencing it. The analyst will then look at businesses similar to the company they are studying to find information about overall value and average earnings for that kind of business. Common Tasks: Equity research analysts have many different jobs. Once they have compiled information, many use basic formulas and programs to create financial models of specific companies and industries, or ratios that show important facts about a business financial standing. Many follow up these models by writing reports for investors summarizing their findings. Some may tap into independent sources and contacts to keep up on recent events. All research analysts must ensure they use only publicly available knowledge and not illegal, insider information. Market Influence: Equity research analysts tend to be influenced by current events, and may tend to make recommendations based on market activity. This means that as the market changes, analysts attitudes also change to mirror current interest. This can create a tendency for some analysts to become myopic, only reporting on popular news and backing certain stocks because they are trendy in the short term.

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CHAPTER-2 TECHNICAL ANALYSIS

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A CONCEPTUAL OVERVIEW

TECHNICAL ANALYSIS
2.2 INTRODUCTION
What is Technical Analysis? We can define technical analysis as a study of the stock market considering factors related to the supply and demand of stocks. Technical analysis doesnt look at underlying earnings potential of a company while evaluating stocks (unlike fundamental analysis). It uses charts and computer programs to study the stocks trading volume and price movements in the hope of identifying a trend. In fact the decision made on the basis of technical analysis is done only after inferring a trend and judging the future movement of the stock on the basis of the trend. Technical analysis assumes that the market is efficient and the price has already taken into consideration the other factors related to the company and the industry. It is because of this assumption that many think technical analysis is a tool, which is effective for short-term investing. History of Technical Analysis: Technical analysis as a tool of investment for the average investor thrived in the late nineteenth century when Charles Dow, then editor of Wall Street Journal, proposed the Dow Theory. He recognized that the movement is caused by the action/reaction of the people dealing in stocks rather than the news in itself. Walter Deemer was one of the technical analysts of that time. He started at Merrill Lynch in New York as a member of bob Farrells department. Then when the legendary Gerry Tsai moved from Fidelity to found the Manhattan Fund in 1966, Deemer joined him. Tsai used to consult him before every major block trade, at the start of a time when large volume institutional trading became the norm and the meal ticket for brokers. Deemer could recreate market history on his charts and cite statistics. He maintained contact with the group of other pros around then, who shared their insights with each other in a collegial confidence worthy of the priesthood.
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A Technical Analysis is based on three axioms: 1. The market discounts everything A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that at any given time a stocks price reflects everything that has or could affect the company-including fundamental factors. Technical analysts believe that the companys fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a 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. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History tends to repeat itself Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. Technical Analysis: the use of trend One of the most important concepts in technical analysis is that of trend. The meaning in finance isnt all that different from the general definition of the term-a trend is really nothing more than the general direction in which a security or market is headed. Types of Trend: i) ii) iii) Upper trend Lower trend Sideways/Horizontal trend

Trend Length

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Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near term trend is anything less than a month. A long term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the upper trend, the correction is considered to be an intermediate trend. The short term trends are components of both major and intermediate trends. Take a look at the figure to get an idea of how these three trends might look.

When analyzing trends, it is important that the chart is constructed to best reflect the type of trends being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five year period are used by analysts to get a better idea of the long term trend. Daily data charts are best used when analyzing both intermediate and short term trends. It is also important to remember that longer the trend, the more important it is; for example, a one month trend is not as significant as a five year trend. Trend Lines A trend line is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trend line is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals. As you can see in the figure below, an upward trend line is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped
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up by this support. This type of trend line helps traders to anticipate the point at which a stocks price will begin moving upwards again. Similarly, a downward trend line is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.

Channels A channel or channel line is the addition of two parallel trend lines that act as strong areas of support and resistance. The upper trend line connects a series of highs, while the lower trend line connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.

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2.2Support and Resistance Once you understand the concept of a trend, the next major concept is that of support and resistance. You will often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).

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As you can see in the above figure, support is the price level through which a stock or market seldom falls (illustrated by blue arrows). Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the red arrows). Why does it happen? These resistance and support levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in case of support) or sell it (in case of resistance). When these trend lines are broken, the supply and demand and the psychology behind the stocks movements is thought to have shifted, in which case new levels of support and resistance will be likely to be established. Role Reversal Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however it is important that the price makes a strong move through either the support or resistance.

For example you can see in the figure, the dotted line is shown as a level of resistance that has prevented the price from heading higher on two previous occasions (point 1 and 2). However, once the resistance is broken, it becomes a level of support (point 3 and 4) by propping up the price and preventing it from heading lower again. Many traders who begin using technical analysis find this concept hard to believe and dont realize that this phenomenon occurs rather frequently, even with some of the most well-known companies. For example
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you can see in the figure below, this phenomenon is evident on the Wal-Mart Stores Inc chart between 2003 and 2006. Notice how the role of the $51 level changes from a strong level of support to a level of resistance.

In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels. This is most often seen when a stock is trading in a generally sideways manner as the price moves through successive peaks and troughs, testing resistance and support.

The Importance of Support and Resistance

Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he may decide to take profits as the security moves towards this point because it is unlikely that it will move past this level. Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example if prices move up the resistance levels of an upward trending channel, the trend has accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel.

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2.3CHARTS AND CHART PATTERNS

There are many types of charts used in technical analysis: -line charts -bar charts -candlestick charts -point and figure charts A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Analysts use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. In the first section of this tutorial, we talked about the three assumptions of technical analysis, the third of which was that in technical analysis, history repeats itself. The theory behind chart patterns is based on this assumption. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern setting up a certain price movement, analysts look for these patterns to identify trading opportunities.

Head and Shoulders This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As you can see in the figure, there are two versions of the head and shoulders chart pattern. Head and Shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.

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Figure xx: Head and shoulders top is shown on the left. Head and shoulders bottom, or inverse head and shoulders, is on the right.

Both of these head and shoulders patterns are similar in which there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and low. For example, the head and shoulders top image shown on the left side of the figure. The left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. We must always remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows.

Cup and Handle A cup and handle chart is a bullish continuation pattern is which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.

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As you can see in the above figure, this price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downwards/sideways movement in the securitys price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue. There is a wide ranging time frame for this type of pattern, with the span ranging from several months to more than a year.

Double Tops and Bottoms This chart pattern is another well known pattern that signals a trend reversal- it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to analysts that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals.

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Figure w: A double top pattern is shown on the left, while a double bottom pattern is shown on the right. In the case of double top pattern in the above figure, the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward.

Triangle

Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months. The symmetrical triangle in the figure given below is a pattern in which two trend lines converge towards each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trend line is flat, while the bottom trend line is upward sloping. This is generally thought of as a bullish pattern in which analysts look for an upside breakout. In a descending triangle, the lower trend line is flat and the upper trend line is descending. This is generally seen as a bearish pattern where analysts look for a downside breakout.

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Flag and Pennant

These two short term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks.

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As you can see in the figure, there is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trend lines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between trend lines. In both cases, the trend is expected to continue when the price moves above the upper trend line.

Wedge The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over long periods usually between three and six months.

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The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. In the above Figure, we have a falling wedge in which two trend lines are converging in a downward direction. If the price was to rise above the upper trend line, it would form a continuation pattern, while a move below the lower trend line would signal a reversal pattern.

Gaps A gap in a chart is an empty space between a trading period and the following trading period. This occurs when there is a large difference in prices between two sequential trading periods. For example, if the trading range in one period is between $25 and $30 and the next trading period opens at $40, there will be a large gap on the chart between these two periods. Gap price movements can be found on bar charts and candlestick charts but will not be found on point and figure or basic line charts. Gaps generally show that something of significance has happened in the security, such as a better-than-expected earnings announcement. There are three main types of gaps, breakaway, runaway (measuring) and exhaustion. A breakaway gap forms at the start of a trend, a runaway gap forms during the middle of a trend and an exhaustion gap forms near the end of a trend. Triple Tops and Bottoms Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.

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Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon.

Rounding Bottom A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years.

A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The longterm nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, make it a difficult pattern to trade.

2.4THEORIES DOW THEORY-TRENDS: The idea of Charles Dow forms the basis of technical analysis. The Dow Theory is a method of interpreting and signalling changes in the stock market direction based on the monitoring of the Dow Jones Industrial and Transportation Averages. Dow created the Industrial Average, of top blue chip stocks, and a second average of top rail road stocks (now the Transport Average). He believed that the behaviour of the averages reflected
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the hopes and fears of the entire market. The behaviour patterns that he observed apply to markets throughout the world. Three Movements Markets fluctuate in more than one time frame at the same time. Nothing is more certain than that the market has three well defined movements which fit into each other. a) The first is the daily variation due to local causes and the balance of buying and selling at that particular time. b) The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days. c) The third move is the great swing covering from four to six years.

d) Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend. e) Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement. f) Daily fluctuations are important for short term trading, but are unimportant in analysis of broad market movements. Various cycles have subsequently been identified within these broad categories. Primary movements have three phases The general conditions in the market: Bull Market: Bull Markets commence with reviving confidence as business conditions improve. Prices rise as the market responds to improved earnings.
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Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

Bear Market: Bear Markets start with abandonment of the hopes and expectations that sustained inflated prices. Prices decline in response to disappointing earnings. Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value. Trends Bull Trends A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline. Successive higher highs and higher lows

The start of an upper trend is signalled when price makes a higher low (trough), followed by a rally above the previous high (peak):

Start=higher low + break above previous high

The end is signalled by a lower high (peak), followed by a decline below the previous low (trough):
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End=lower high + break below previous low

A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.

Elliot Waves Theory

Breaking through support or resistance levels results in a change of traders expectations (which causes supply/demand lines to shift). An upper trend is defined by successively higher low prices. A rising trend can be thought of as a rising support level: the bulls are in control and are pushing prices higher. A downtrend is defined by successively
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lower high prices. A falling trend can be thought of as a falling resistance level: the bears are in control and are pushing prices lower.

2.5MOVING AVERAGES Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a securitys overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a securitys average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favour. There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential. Simple Moving Average This is the most common method used to calculate the moving average of prices. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10 day moving average, the last 10 closing prices are added together and then divided by 10. Linear Weighted Average This moving average indicator is the least common out of the three and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five day linear weighted average, todays closing price is multiplies by five, yesterdays by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers. Exponential Moving Average This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. Having an understanding of the calculation is not generally required for most traders because most charting packages do the calculations for you. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. Major uses of Moving Averages Moving Averages are used to identify current trends and trend reversals as well as to set up support and resistance levels. Moving averages can be used to quickly identify whether a security is moving in a upper trend or downward trend depending on the direction of the moving average. As you can see in the figure below, when a moving average is heading upward and the price is above it, the security is in an upper trend. Conversely, a downward sloping moving average with the price below can be used to signal a down trend.

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Another method of determining momentum is to look at the order of a pair of moving averages. When a shortterm average is above a longer-term average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend. Moving average trend reversals are formed in two main ways: when the price moves through a moving average and when it moves through moving average crossovers. The first common signal is when the price moves through an important moving average. For example, when the price of a security that was in an uptrend falls below a 50-period moving average, like in Figure below, it is a sign that the uptrend may be reversing.

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The other signal of a trend reversal is when one moving average crosses through another. For example, as you can see in Figure below, if the 15-day moving average crosses above the 50-day moving average, it is a positive sign that the price will start to increase.

If the periods used in the calculation are relatively short, for example 15 and 35, this could signal a short-term trend reversal. On the other hand, when two averages with relatively long time frames cross over (50 and 200, for example), this is used to suggest a long-term shift in trend. Another major way moving averages are used is to identify support and resistance levels. It is not uncommon to see a stock that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing.

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Moving averages are a powerful tool for analyzing the trend in a security. They provide useful support and resistance points and are very easy to use. The most common time frames that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month and 10-day average of two weeks.

2.6INDICATORS
Accumulation/Distribution Line The accumulation/distribution line is one of the more popular volume indicators that measures money flows in a security. This indicator attempts to measure the ratio of buying to selling by comparing the price movement of a period to the volume of that period. Acc/Dist= {(Close-Low) - (High-Close)}/ {(High-Low)*Periods Volume} This is a non-bounded indicator that simply keeps a running sum over the period of the security. Traders look for trends in this indicator to gain insight on the amount of purchasing compared to selling of a security. If a security has an accumulation/distribution line that is trending upward, it is a sign that there is more buying than selling.

Average Directional Index

The average directional index (ADX) is a trend indicator that is used to measure the strength of a current trend. The indicator is seldom used to identify the direction of the current trend, but can identify the momentum behind trends. The ADX is a combination of two price movement measures: the positive directional indicator (+DI) and the negative directional indicator (-DI). The ADX measures the strength of a trend but not the direction. The +DI measures the strength of the upward trend while the -DI measures the strength of the downward trend. These two measures are also plotted along with the ADX line. Measured on a scale between zero and 100, readings below 20 signal a weak trend while readings above 40 signal a strong trend.

Moving Average Convergence

The moving average convergence divergence (MACD) is one of the most well known and used indicators in technical analysis. This indicator is comprised of two exponential moving averages, which help to measure momentum in the security. The MACD is simply the difference between these two moving averages plotted against a centre line. The centre line is the point at which the two moving averages are equal. Along with the MACD and the centre line, an exponential moving average of the MACD itself is plotted on the chart. The idea behind this momentum indicator is to measure short-term momentum compared to longer term momentum to help signal the current direction of momentum. MACD= shorter term moving average-longer term moving average
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When the MACD is positive, it signals that the shorter term moving average is above the longer term moving average and suggests upward momentum. The opposite holds true when the MACD is negative - this signals that the shorter term is below the longer and suggest downward momentum. When the MACD line crosses over the centre line, it signals a crossing in the moving averages. The most common moving average values used in the calculation are the 26-day and 12-day exponential moving averages. The signal line is commonly created by using a nine-day exponential moving average of the MACD values. These values can be adjusted to meet the needs of the technician and the security. For more volatile securities, shorter term averages are used while less volatile securities should have longer averages. As you can see in Figure below, one of the most common buy signals is generated when the MACD crosses above the signal line (blue dotted line), while sell signals often occur when the MACD crosses below the signal.

Relative Strength Index

The relative strength index (RSI) is another one of the most used and well-known momentum indicators in technical analysis. RSI helps to signal overbought and oversold conditions in a security. The indicator is plotted in a range between zero and 100. A reading above 70 is used to suggest that a security is overbought, while a reading below 30 is used to suggest that it is oversold. This indicator helps traders to identify whether a security's price has been unreasonably pushed to current levels and whether a reversal may be on the way.

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The standard calculation for RSI uses 14 trading days as the basis, which can be adjusted to meet the needs of the user. If the trading period is adjusted to use fewer days, the RSI will be more volatile and will be used for shorter term trades.

On-Balance Volume
The on-balance volume (OBV) indicator is a well known technical indicator that reflects movements in volume. It is also one of the simplest volume indicators to compute and understand. The OBV is calculated by taking the total volume for the trading period and assigning it a positive or negative value depending on whether the price is up or down during the trading period. When price is up during the trading period, the volume is assigned a positive value, while a negative value is assigned when the price is down for the period. The positive or negative volume total for the period is then added to a total that is accumulated from the start of the measure. It is important to focus on the trend in the OBV - this is more important than the actual value of the OBV measure. This measure expands on the basic volume measure by combining volume and price movement.

Stochastic Oscillator
The stochastic oscillator is one of the most recognized momentum indicators used in technical analysis. The idea behind this indicator is that in an uptrend, the price should be closing near the highs of the trading range, signalling upward momentum in the security. In downtrends, the price should be closing near the lows of the trading range, signalling downward momentum. The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20. The stochastic oscillator contains two lines. The first line is the %K, which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. The second line is the %D, which is simply a moving average of the %K. The %D line is considered to be the more important
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of the two lines as it is seen to produce better signals. The stochastic oscillator generally uses the past 14 trading periods in its calculation but can be adjusted to meet the needs of the user.

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CHAPTER 3

FUNDAMENTAL ANALYSIS

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Fundamental Analysis
Fundamental Analysis refers to the study of the core underlying elements that influence the economy of a particular entity. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors (to name just a few elements) within a business cycle framework. I. Economic Analysis:

Politico-Economic Analysis: No industry or company can exist in isolation. It may have splendid managers and a tremendous product. However, its sales and its costs are affected by factors, some of which are beyond its control. It is important therefore, to have an appreciation of the politico-economic factors that affect an industry and a company. II. Industry Analysis:

The importance of industry analysis is now dawning on the Indian investor as never before. 1. Barrier to Entry New entrants increase the capacity in an industry and the inflow of funds. The question that arises is how easy is it to enter an industry? There are some barriers to entry: a) b) c) d) Economies of scale Product differentiation Capital requirement Government policy

2. The threat of substitution New inventions are always taking place and new and better products replacing existing ones. An industry that can be replaced by substitutes or is threatened by substitutes is normally an industry one must be careful of investing in. An industry where this occurs constantly is the packaging industry- bottles replaced by cans, cans replaced by plastic bottles. To ward off the threat of substitution, companies often have to spend large sums of money in advertising and promotion. 3. Bargaining power of Buyers In an industry where buyers have control, i.e; in a buyers market, buyers are constantly forcing prices down, demanding better services or higher quality and this often erodes profitability. 4. Bargaining power of Suppliers An industry unduly controlled by its suppliers is also under threat. 5. Rivalry among competitors
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Rivalry among competitors can cause an industry great harm. This occurs mainly by price cuts, heavy advertising, additional high cost services or offers, and the like.

III.

Company Analysis:

At the final stage of fundamental analysis, the investor analyzes the company. The analysis has two thrusts: How has the company performed vis-a-vis other similar companies and how has the company performed in comparison to earlier years? It is imperative that one completes the politico economic analysis and the industry analysis before a company is analyzed because the companys performance at a period of time is to an extent a reflection of the economy, the political situation and the industry. What does one look at when analyzing a company? The different issues regarding a company that should be examined are: i) ii) iii) iv) The Management The Company The Annual report Ratios

The Management The single most important factor one should consider when investing in a company and one often never considered is its management. In India, management can be broadly divided in two types: Family Management and Professional Management The Company An aspect not necessarily examined during an analysis of fundamentals is the company. A company may have made losses consecutively for two years or more and one may not wish to touch its shares- yet it may be a good company and worth purchasing into. There are several factors one should look into: 1. How a company is perceived by its competitors? One of the key factors to ascertain is how a company is perceived by its competitors. It is held in high regard. Its management may be known for its maturity, vision, competence and aggressiveness. The investor must ascertain the reason and then determine whether the reason will continue into the foreseeable future. 2. Whether the company is the market leader in its products or in its segment? Another aspect that should be ascertained is whether the company is the market leader in its products or in its segment. When you invest in market leaders, the risk is less. The shares of market leaders do not fall as quickly as those of other companies. There is a magic to their name that would make individuals prefer to buy their products as opposed to others.

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3. Company Policies The policy a company follows is important. What are its plans for growth? What is its vision? Every company has a life. Is it is allowed to live a normal life it will grow up to a point and then begin to level out and eventually die. It is at the point of levelling out that it must be given new life. This can give it renewed vigour and a new lease of life.

The Annual Report:

The primary and most important source of information about a company is its Annual Report. By law, this is prepared every year and distributed to the shareholders. Annual Reports are usually very well presented. A tremendous amount of data is given about the performance of a company over a period of time. The Annual Report is broken down into the following specific parts: a) b) c) d) The Directors Report The Auditors Report The Financial Statements The Schedules and Notes to the Accounts

The Directors Report It is a report submitted by the directors of a company to its shareholders, advising them of the performance of the company under their stewardship. It enunciates the opinion of the directors on the state of the economy and the political situation. Explains the performance and the financial results of the company in the period under review. This is an extremely important part. The results and operations of the various separate divisions are usually detailed and investors can determine the reasons for their good or bad performance. The Directors Report details the companys plans for modernisation, expansion and diversification. Without these, a company will remain static and eventually decline. Discusses the profit earned in the period under review and the dividend. Elaborates on the Directors views of the companys prospects in the future. Discuss plans for new acquisitions and investments. An investor must intelligently evaluate the issues raised in a Directors Report. Industry conditions and the Managements knowledge of the business must be considered.

The Auditors Report The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors. Auditors are required to report whether the financial statements presented present a true and fair view of the state of the company. Investors must remember that the auditors are their representatives and that they are required by law to point out if the financial statements are not true and fair. Financial Statements The published financial statements of a company in an Annual Report consists of its Balance Sheet as at the end of the accounting period detailing the financing condition of the company at that date, and the profit and loss account or income statement summarizing the activities of the company for the accounting period.
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Balance Sheet It gives the financial position of a company on a particular date, assets and liabilities grouped logically under specific heads.

Sources of Funds
Shareholders Fund Share Capital Private Placement Public Issue Rights Issue Reserves Capital Reserves Revenue Reserves Loan Funds Secured Loans Unsecured Loans

Application of Funds
Fixed Assets Investments Stock/Inventories Raw Materials Work in Progress Finished Goods

Cash and Bank Balances Loans and Advances

Profit and Loss Account

The P&L Account summarizes the activities of a company during an accounting period which may be a month, a quarter, six months, a year or longer, and the result achieved by the company. It details the income earned by the company, its cost and the resulting profit or loss. It is, in effect, the performance appraisal not only of the company but also of its management- its competence, foresight and ability to lead.

Ratios
Ratios express mathematically the relationship between performance figures and assets/liabilities in a form that can be easily understood and interpreted
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No single ratio tells the complete story Ratios can be broken down into four categories: A. Profit and Loss Ratios These show the relationship between two items or groups of items in a profit and loss account or income statement. B. Balance Sheet Ratios- These deal with the relationship in the balance sheet such as Current Assets to Current Liabilities, Liabilities to Net Worth. C. Balance Sheet and Profit and Loss Account Ratios These relate an item on the balance sheet to another in the profit and loss account such as: earnings to shareholders funds and net income to assets employed. D. Financial Statements and Market Ratios These are normally known as market ratios and are arrived at by relative financial figures to market prices: 1. Market value to earnings 2. Book value to market value Market value Earnings Profitability The major ratios that are considered: Market value Price-earnings ratio Market to book ratio Earnings Earnings per share Dividend per share

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CHAPTER 4

BANKING SECTOR

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4.1 Banking in India

The Indian banking scenario witnessed a significant development in the recent years with the entry of private banks and their focus on retail banking and convergence of services. The business models of the leading players are adapting to this impending change as banks widen the spectrum of savings and loan products they offer. Private Banks are the best positioned to acquire market share in the emerging scenario: A change is expected to make mergers between banks and Foreign Institutional Investors possible, which will benefit large private bank groups. Nationalization A significant milestone in Indian Banking happened in the late 1960s when the then Indira Gandhi government nationalized, on 19th July, 1969, 14 major commercial Indian Banks followed by nationalization of 6 more commercial Indian Banks in 1980. The stated reason for the nationalization was more control of credit delivery. After this, until the 1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu growth of the Indian Economy. After the amalgamation of New Bank of India with Punjab National Bank, currently there are 59 nationalized banks in India. Liberalization In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks like ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all three sectors of banks, namely government banks, private banks and foreign banks. However, there had been a few hiccups for these new banks with many either being taken over like Global Trust Bank while others like Centurion Bank have found their going tough. The next stage for the Indian Banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%.

4.2 Current Scenario

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the INDIA VISION 2020 prepared by the Planning Commission and the Draft 10th plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled banks by end March 2010 is estimated at Rs. 40,90,000 crores. That will comprise about 65 percent of GDP at current market prices compared to 67 percent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 percent during the rest of the decade as against the growth rate of 16.7 percent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side.

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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 67000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase.

The Public Sector Banks (PSBs), which are the base of the Banking Sector in India account for more than 78 percent of the total banking industry assets. Unfortunately they are burdened with excessive non-performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned, they are likely to succeed in the Indian Banking Industry. In the Indian Banking Industry, some of the Private Sector Banks operating are IDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public sector include Punjab National Bank, Vijaya bank, UCO Bank, Oriental Bank, Allahabad Bank among others. ANZ Grind lays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citi Bank are some of the foreign banks operating in India. 4.3 CII SURVEY Indian banks are yet to get rid of financial bruises. In 2012-13, their profitability is likely to "decline sharply" due to two reasons: stricter regulatory requirements and stress assets, according to a survey done by Confederation of Indian Industries (CII) taking feedback from 15 lenders including five state-owned, three private sector and seven foreign entities. "From an average growth of 23 per cent witnessed during the last year (FY 2011-12), the surveyed banks have projected an increase of 14 per cent in profit after tax (PAT) for FY 2012-13. However, it is interesting to note that this has been forecasted to rise to 21 per cent in FY 2013-14, reflecting increased optimism of banks for a change in scenario positively," the survey report said. However, the CII survey did not specify the names of those surveyed banks. The CII survey christened as "Health of Indian Banking sector in current regulatory environment" assessed the prevailing market conditions vis--vis asset quality, capitalisation of banks and growth estimate of the banking sector while focusing upon the current regulatory environment and its impact on bank business and profitability. Actual Projected

S.No. Key Performance Indicators 1. 2. 3. 4. Credit growth Growth in Net Interest Income Growth in Profit after Tax (PAT) Return on Equity FY 2011-12 19 17 23 16 FY 2012-13 17 17 14 16
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So, what are the regulatory challenges?

The Basel III an international standard for banks' capital requirement is likely to have the highest impact on profitability of the Indian banking sector. Public sector banks, according to the RBI estimate, will require Rs 5 lakh crore Capital to meet Basel III norms. Among the other key regulatory requirements, the revised guidelines on priority sector lending and higher provisioning norms for restructured assets would also impact on bank's profit after tax, the respondent banks said in the survey. In October, 2012; the Reserve Bank of India had expanded the reach of priority sector lending by incorporating some new clauses. Those included loans upto Rs 2 crore to companies doing business in farming and allied activities and credit to housing finance companies for loans up to Rs 10 lakh disbursed for the poor. In February, 2013; RBI also proposed to increase the provisions against restructured loans from 2.75% to 5% in a staggered manner till March, 2015. "Since the global financial crisis the regulatory environment for the banking sector has changed significantly globally. Even as growth, inclusion and stability have been the key focus areas in the Indian context, the current regulatory and policy environment is critical to ensure that banks remain financially sound and profitable", said Chandrajit Banerjee, Director General, CII. Changes in key policy rate & CRR According to the survey, 64 per cent of the respondent banks are expecting 25 basis points cut in repo or the policy rate at which banks borrow money from the central bank. The rest does not see any change. This means, RBI is likely to cut repo by another 25bps to 7.50% on March 19. So far in FY13, RBI has reduced policy rate by 75 bps in two tranches (50bps in April, 2012 and 25 in Jan, 2013). At the same time, a majority of surveyed bankers (82%) see 25 bps cut in cash reserve ratio or the portion of deposits banks keep with RBI to 3.75%. The liquidity situation remains tight on account of advance tax payment. Banks are currently borrowing more than Rs 1 lakh crore every day through the RBI borrowing window called LAF. Indian banks are yet to get rid of financial bruises. In 2012-13, their profitability is likely to "decline sharply" due to two reasons: stricter regulatory requirements and stress assets, according to a survey done by Confederation of Indian Industries. Loan growth & asset quality On the back of economic downturn the non-food credit growth will be weaker than the previous years. On an average, banks expect the pace of growth at 17% in line with the central bank's projection. However, it would expand at 18 per cent in FY2013-14. Agriculture loan is going to be key driver of industry credit growth and is likely to grow at 23 per cent this year buoyed by near normal monsoon. However, the delay in repayments continues to haunt banks. Most of the surveyed banks have recorded a sharp deterioration in asset quality in the current year, as reported by an increase in their non-performing and
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restructured loan accounts. As per the survey findings, 88 per cent of the respondent banks anticipate a rise in their restructured loans. "The credit downgrade of big Indian banks is seen as a warning signal of stress on asset quality facing the Indian banking sector. According to the Reserve Bank of India (RBI), the gross NPAs of the Indian banking system (as a percentage of gross advances) at 3.1 per cent during FY12 (end March 2012) were the highest in the last six years, rising from 2.5 per cent in FY07," the survey pointed out. In between April and September 2012-13, the corporate debt restructuring (CDR), a platform to draw scheme of restructuring between lenders and borrowers, recorded a nearly 50 per cent rise in proposals received for restructuring aggregate debt, from Rs 1.64 lakh crore to Rs 2.46 lakh crore on a year-on-year basis.

Deposit growth Deposits would rather grow at a slower pace at just 14% as against the projected 16% by RBI. The deregulation of savings rate coupled with higher rate of deposits offered by banks would fail to garner public deposits, cheap source of funds for lenders.

4.4 BANKING STRUCTURE IN INDIA

The banking institutions in the organized sector, commercial banks are the oldest institutions, some of them having their genesis in the nineteenth century. Initially they were set up in large numbers, mostly via corporate bodies with shareholding with private individuals. In the sixties of the 20th century a large number of smaller and weaker banks emerged in the country. Subsequently there has been a drift towards state ownership and control. Today 27 banks constitute a strong Public Sector in Indian Commercial Banking. Commercial Banks operating in India fall under the different sub categories on the basis of their ownership and control over management. 1. Public Sector Banks: Public Sector Banks emerged in India in three stages. First, the conversion of the then existing Imperial Bank of India into State Bank of India in 1955,followed by the taking over of the seven associated banks as its subsidiary. Second, the nationalization of 14 major commercial banks in 1969and last the nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitute the Public Sector Banks. 2. New Private Sector Banks: After the nationalization of the major banks in the private sector in1969 and 1980, no new bank could be setup in India for about two decades .The Narasimham Committee on financial sector reforms recommended the establishment of new banks of India. RBI thereafter issued guidelines for setting up of new private sector banks in India in January 1993.These guidelines aim at ensuring that new banks are financially viable and technologically up to date from the start. They have to work in a professional manner, so as to improve the image of commercial banking system and to win the confidence of the public. Eight private sector banks have been established including banks sector by financially institutions like IDBI, ICICI and UTI and so on.

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Banking Structure in India

50

3. Local Area Banks: Such Banks can be established as public limited companies in the private sector and can be promoted by individuals, companies, trusts and societies. The minimum paid up capital of such banks would be 5 crores with promoters contribution at least Rs. 2 crores. They are to be set up in district towns and the area of their operations would be limited to a maximum of 3 districts. At present, four local area banks are functional, one each in Punjab, Gujarat, Maharashtra and Andhra Pradesh.

4. Foreign Banks: Foreign Commercial banks are the branches in India of the joint stock banks incorporated abroad.

5. Cooperative Banks: Besides the commercial banks, there exists in India another set of banking institutions called cooperative credit institutions. These have been made in existence in India since long. They undertake the business of banking both in urban and rural areas on the principle of cooperation. They have served a useful role in spreading the banking habit throughout the country. Yet, their financial position is not sound and a majority of cooperative banks has yet to achieve financial viability on a sustainable basis. The cooperative banks have been set up under various Cooperative Societies Acts enacted by State Governments. Hence the State Governments regulate these banks. In 1966, need was felt to regulate their activities to ensure their soundness and to protect the interests of depositors. Consequently, certain provisions of the Banking Regulation Act 1949 were made applicable to the cooperative Banks as well. These Banks have thus fallen under dual control viz., that of the State Government and tat of the RBI which exercises control over them so far as their banking Operations are concerned.

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CHAPTER 5

ANALYSIS

52

53

This section which comprises of the analysis of banks is based on the secondary data and references.

Brief Company Profile: ICICI BANK

ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year ended March 31, 2012. The Bank has a network of 3,100 branches and 10,486 ATMs in India, and has a presence in 19 countries, including India. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

Key Executives Mr. Kundapur Vaman Kamath-Chairman Mr. N. S. Kannan-Chief Financial Officer Mrs. Chanda Kochhar -Managing Director & CEO

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ICICI BANK: Performance Highlights

Particulars (cr) NII Pre-prov. profit PAT 3QFY13 3,499 3,452 2,250 2QFY13 % chg (qoq) 3QFY12 3,371 3.8 2,712 3,193 8.1 2,687 1,956 15.0 1,728 % chg (yoy) 29.0 28.5 30.2

For 3QFY2013, ICICI bank delivered a strong performance, both on the operating as well as on the asset quality front. The bank witnessed a growth 24.1% yoy growth in its operating income, in-line with our expectations. However, lower-than-expected provisioning, as the bank managed to broadly hold on to its good asset quality, enabled it to deliver strong earnings growth of 30% yoy. Advance growth healthy; NIMs improve by 7bp qoq: During 3QFY2013, the banks advances grew by 16.5% yoy, aided by a strong growth of 26.6% and 23.9% yoy in the corporate book and the SME book, respectively. The growth in the retail portfolio came in healthy at 17.2% yoy. As of 3QFY2013, CASA ratio improved sequentially by 24bp to 40.9%. The reported overall NIM improved by 7bp sequentially at 3.1%, mainly on account of 9bp qoq improvement in international NIM to 1.31% (due to reduction of excess liquidity on large bond redemption in October, 2012) and also due to 4bp sequential improvement in the reported domestic NIM to 3.47%. During 3QY2013, the banks gross NPA levels came off sequentially by 2.7%, on an absolute basis, aided by better than expected recoveries/upgrades and sequentially lower slippages. Recoveries/upgrades came in better than expected and remained healthy at 570cr, compared to `558cr in 2QFY2013. Outlook and valuation: The banks substantial branch expansion in the past three to four years is expected to sustain a far more favourable deposit mix going forward. Moreover, a lower risk balance sheet has driven down NPA provisioning costs, which we believe will drive a 22.8% CAGR in net profit over FY2012-14E and enable a RoE of 15.9% by FY2014E (with further upside from financial leverage). At the current market price, the banks core banking business (after adjusting `153/share towards value of the subsidiaries) is trading at 2.0x FY2014E ABV (including subsidiaries, the stock is trading at 1.9x FY2014E ABV). We value the banks subsidiaries at rs.153/share and the core bank at `1,251/share (2.5x FY2014E ABV). We maintain a Buy rating on the stock with a target price of Rs.1404. BUY Current Market Price (CMP) Target Price (TP) Investment Period is 12 months Stock Information Sector Market Cap (Rs. In Crores) Beta 52 week high/low Average Daily Volume Face value (Rs)

Rs. 1171 Rs.1404

Banking 134,651 1.3 1231/767 324,160 10

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Shareholding Pattern Promoters - nil MF / Banks / Indian Fls -24.8 FII / NRIs / OCBs -66.5 Indian Public / Others- 8

Key Financials Y/E March (Rs. In Crores) NII % chg Net Profit % chg NIM (%) EPS (Rs.) P/E (x) P/ABV (x) RoA (%) RoE (%) FY 2011 9017 11.1 5151 40.9 2.6 44.7 26.2 2.4 1.3 11.7 FY 2012 10734 19.0 6465 25.5 2.7 56.1 20.9 2.2 1.3 12.8 FY 2013 (E) 13794 28.5 8305 28.5 2.9 72.0 16.3 2.1 1.5 14.9 FY 2014 (E) 16523 19.8 9752 17.4 3.0 84.6 13.8 1.9 1.5 15.9

Exhibit 1: 3QFY2013 performance (Standalone)

Particulars (` cr) Interest earned - on Advances / Bills - on investments - on balance with RBI & others - on others Interest Expended Net Interest Income Other income Other income excl. treasury - Fee income - Treasury income - Other income Operating income Operating expenses - Employee expenses - Other Opex 3QFY13 2QFY13 % chg (qoq) 10,138 7,066 2,742 136 194 6,639 3,499 2,215 10,026 6,849 2,745 149 284 6,655 3,371 2,043 1.1 3.2 (0.1) (8.5) (31.8) (0.2) 3.8 8.4 3QFY12 % chg (yoy) 9MFY13 9MFY12 % chg (yoy) 8,592 5,686 2,473 134 299 5,880 2,712 1,892 18.0 24.3 10.9 1.6 (35.3) 12.9 29.0 17.1 29,710 20,370 8,189 409 742 19,647 10,063 6,138 24,368 16,002 7,069 363 935 16,739 7,629 5,274 21.9 27.3 15.8 12.5 (20.6) 17.4 31.9 16.4

1,964 1,771 251 193 5,714 2,261 941 1,321

1,871 1,709 172 162 5,414 2,221 966 1,255

5.0 3.6 45.9 18.9 5.5 1.8 (2.6) 5.2

1,957 1,701 (65) 256 4,604 1,917 837 1,080

0.3 4.1 (486.2) (24.7) 24.1 18.0 12.4 22.3

5,736 5,127 402 609 16,201 6,606 2,894 3,712

5,444 4,979 (170) 465 12,904 5,629 2,412 3,217

5.3 3.0 (336.5) 30.8 25.6 17.4 20.0 15.4 56

Pre-provision Profit Provisions & Contingencies PBT Provision for Tax PAT Effective Tax Rate (%)

3,452 369 3,084 834 2,250 27.0

3,193 508 2,685 729 1,956 27.2

8.1 (27.4) 14.8 14.3 15.0 (13)bp

2,687 341 2,346 618 1,728 26.3

28.5 8.1 31.4 34.9 30.2 69bp

9,595 1,343 8,253 2,231 6,021 27.0

7,275 1,114 6,161 1,598 4,563 25.9

31.9 20.5 33.9 39.7 39.7 111bp

Exhibit 3: 3QFY2013 performance analysis (Standalone)

Particulars Balance sheet Advances (cr) Deposits (cr) Credit-to-Deposit Ratio (%) Current deposits (cr) Saving deposits (cr) CASA deposits ( cr) CASA ratio (%) CAR (%) Tier 1 CAR (%) Profitability Ratios (%) Reported NIM Cost-to-income ratio Asset quality Gross NPAs (cr) Gross NPAs (%) Net NPAs (cr) Net NPAs (%) Provision Coverage Ratio (%) Provision exps. to avg. assets (%) 3QFY13 2QFY13 % chg (qoq) 3QFY12 % chg (yoy)

286,766 286,418 100.1 35,674 81,463 117,137 40.9 19.5 13.3

275,076 281,438 97.7 33,800 80,618 114,418 40.7 18.3 12.8

4.2 1.8 238bp 5.5 1.0 2.4 24bp 125bp 42bp

246,157 260,589 94.5 40,039 73,498 113,537 43.6 18.9 13.1

16.5 9.9 566bp (10.9) 10.8 3.2 (267)bp 65bp 12bp

3.1 39.6

3.0 41.0

7bp (145)bp

2.7 41.6

37bp (206)bp

9,763 3.3 2,182 0.8 77.7 0.3

10,036 3.5 2,134 0.8 78.7 0.4

(2.7) (23)bp 2.2 (2)bp (100)bp (13)bp

9,723 3.8 2,048 0.8 78.9 0.3

0.4 (51)bp 6.5 (7)bp (120)bp (2)bp

Advance growth healthy; NIM improves by 7bp sequentially During 3QFY2013, the banks advances grew by 16.5% yoy (4.2% qoq), aided by a strong 26.6% yoy (5.0% qoq) growth in the corporate book and a 23.9% yoy (4.2% qoq) growth in the SME book. Growth in the
57

corporate portfolio was due to increased working capital funding, project loans disbursement from existing sanctions, and some short term lending to high quality corporate. The overseas loan book increased marginally by 5.8% yoy (3.8% qoq) on account of INR depreciation. In dollar terms the overseas loan book grew by 2.0% yoy(remained stable sequentially). Moderate growth of 13.2% yoy was witnessed in the rural loan book of the bank. The growth in the retail portfolio came in healthy at 17.2% yoy. Within retail, robust traction was witnessed in housing loans, which grew by 18.6% on a yoy basis, whereas moderate growth of 13.3% yoy was registered in vehicle and credit card loans. Deposits accretion remained moderate with a growth of 9.9% yoy (1.8% qoq). The growth in CASA deposits, stood muted at 3.2% yoy (2.4% qoq). While savings deposits increased by 10.8% yoy (1.0% qoq), the current deposits declined by 10.9% yoy (grew by 5.5% qoq). As of 3QFY2013, the CASA ratio improved sequentially by 24bp to 40.9% (though lower by 267bp yoy). The average CASA during the quarter remained stable sequentially at 37.4%. Going ahead, the Management expects the banks loan book growth in FY2014 to be mainly driven by healthy traction in the retail portfolio (20% plus growth), working capital demand in the corporate segment (20% plus growth) and continued off-take out of the past project sanctions (to continue for next few quarters; after that it will depend upon the incremental sanctions). On the overseas loan book, the growth would be less than that of the domestic loan book, driven largely by the appetite of the borrowers for foreign currency loans over domestic rupee loans. The Management expects international NIM to pick up once again from here and move towards the 1.5% mark over the coming quarters. Also the bank has a clear strategy of focusing on margins rather than chasing balance sheet growth and hence has guided for a healthy overall margin of 3.0% for FY2013.

58

Fee income moderation continues During 3QFY2013, the non-interest income for the bank excluding treasury remained flat on a yoy basis to Rs.1964 cr, as trends of moderation in the fee income continued. Amongst the various fee income streams on the corporate side, while the lending-linked fees, loan processing fees and syndication fees have comedown (due to slowdown in new projects and financial closures), the commercial banking and forex related fees have grown well. Hence, the overall fee income from the corporate segment has declined. On the retail side, the growth in some of the fee income segments like third party distribution and forex income has been in excess of 20%, leading to a healthy growth in the range of 10-20% in various retail fee income streams during 3QFY2013. The bank registered a treasury gain of Rs.251cr (primarily bond gains) compared to a loss of Rs. 65cr in 3QFY2012. Other income of the bank decreased to Rs.193cr, from Rs.256cr in 3QFY2012. The bank has started to witness traction in retail fee income streams. However, improving the fee income performance in-line with advance growth in medium term remains an endeavour for the Management.

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Exhibit 9: Healthy growth in other income, aided by treasury gains

Particulars (in crores) Fee income Treasury Others Other income Other income excl. treasury 3QFY13 1,771 251 193 2,215 1,964 2QFY13 % chg (qoq) 1,709 172 162 2,043 1,871 3.6 45.9 19.1 8.4 5.0 3QFY12 % chg (yoy) 1,701 (65) 256 1,892 1,957 4.1 (486.2) (24.6) 17.1 0.4

Asset quality stable sequentially During 3QFY2013, the bank managed to broadly hold on to its good asset quality, as its gross NPA levels came off sequentially by 2.7%, on an absolute basis, aided by better-than-expected recoveries and upgrades and sequentially lower slippages. Slippages for the quarter stood at `850cr (annualized slippages rate at 1.3%) compared to `1,220cr in 2QFY2013 (annualized slippage rate of 1.9%). Recoveries/upgrades for the quarter came in better than expected and remained healthy at `570cr, compared to `558cr in 2QFY2013. Gross and net NPA ratio came in lower sequentially by 23bp and 2bp qoq to 3.3% and 0.8%, respectively. The PCR for the bank as of 3QFY2013 stands healthy at 77.7%. The bank restructured an additional ~`350cr worth of accounts during the quarter. Despite additional restructuring, the restructured book of the bank as of 3QFY2013 stood largely stable sequentially at `4,169cr, owing to deletions and repayments. The Management expects the restructuring pipeline to be approximately Rs.900-1,000cr.

60

Investment arguments Well positioned to garner strong market share gains in CASA deposits In our view, the banks substantial branch expansion from 955 branches at the end of 3QFY2008 to 2,895 branches by 3QFY2013, and strong capital adequacy, at 19.5% (Tier-I at 13.3%) has positioned it to gain both CASA and credit market share, respectively. In fact, the bank has again been gaining market share in savings accounts since FY2010. Over FY2010-12, the bank improved its market share of savings deposits by 14bp, capturing a substantial 5.6% incremental market share. Improved deposit mix to lead to better NIM The banks strategic transformation has expectedly resulted in a significantly better balance sheet and earnings quality. The distinguishing feature of the banks performance in FY2010 was the improvement in the CASA ratio to above 42.1% (transformative considering that the ratio was as low as 22% at the end of FY2007 and 29% even as recently as FY2009). The CASA ratio has remained healthy at 40.9% even in 3QFY2013. Apart from the paradigm shift in the deposit mix reflected in its 40.9% CASA ratio, the bank has largely exited unattractive business segments such as small-ticket personal loans in the domestic segment and most nonIndia related exposures in its international business. Asset quality trends remain healthy The banks asset quality continues to show improvement, with a stable to declining trend in additions to gross as well as net NPAs. The slippage ratio of the bank has remained comfortable so far. For 9MFY2013 the annualized gross slippages ratio was higher at ~1.5% compared to 1.4% in FY2012, as it included a chunky exposure of `500cr to a media account. Also, the provisioning coverage ratio for the bank remained comfortable at 77.7% as of 3QFY2013. The restructured book has remained stable over FY2013 and for 3QFY2013; it was lower than the levels witnessed as of FY2012 end. The reduction in risk profile of advances has expectedly resulted in a commensurate decline in NPA provisioning costs and reflected in improved RoA from 1.0% in FY2010 to 1.3% in FY2012. Further, the Management expects to improve its RoA to 1.7% by FY2014E.

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Income statement

Y/E March (` cr) Net Interest Income - YoY Growth (%) Other Income - YoY Growth (%) Operating Income - YoY Growth (%) Operating Expenses - YoY Growth (%) Pre - Provision Profit - YoY Growth (%) Prov. & Cont. - YoY Growth (%) Profit Before Tax - YoY Growth (%) Prov. for Taxation - as a % of PBT PAT - YoY Growth (%)

FY09 9,092 10.9 7,783 (12.3) 16,875 (1.2) 7,045 (13.6) 9,830 10.1 5,048 30.4 4,782 (5.4) 1,359 28.4 3,423 (17.7)

FY10 8,114 (10.8) 7,108 (8.7) 15,223 (9.8) 5,860 (16.8) 9,363 (4.7) 4,390 (13.0) 4,973 4.0 1,317 26.5 3,656 6.8

FY11 9,017 11.1 6,648 (6.5) 15,665 2.9 6,617 12.9 9,048 (3.4) 2,290 (47.8) 6,758 35.9 1,606 23.8 5,151 40.9

FY12 10,734 19.0 7,503 12.9 18,237 16.4 7,850 18.6 10,386 14.8 1,589 (30.6) 8,797 30.2 2,332 26.5 6,465 25.5

FY13E 13,794 28.5 8,523 13.6 22,317 22.4 9,080 15.7 13,237 27.4 1,858 16.9 11,379 29.3 3,074 27.0 8,305 28.5

FY14E 16,523 19.8 9,694 13.7 26,217 17.5 10,623 17.0 15,594 17.8 2,135 14.9 13,460 18.3 3,708 27.5 9,752 17.4

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Balance sheet

Y/E March (` cr) Share Capital - Equity - Preference Reserve & Surplus Deposits - Growth (%) Borrowings Tier 2 Capital Other Liab. & Prov. Total Liabilities Cash Balances Bank Balances Investments Advances - Growth (%) Fixed Assets Other Assets Total Assets - Growth (%)

FY09 1,463 1,113 350 48,420 218,348 (10.7) 67,324 25,482 18,265 379,301 17,536 12,430 103,058 218,311 (3.2) 3,802 24,164 379,301 (6.3)

FY10 1,465 1,115 350 50,503 202,017 (7.5) 63,447 30,467 15,501 363,400 27,514 11,359 120,893 181,206 (17.0) 3,213 19,215 363,400 (4.4)

FY11 1,502 1,152 350 53,939 225,602 11.7 72,813 36,391 15,987 406,234 20,907 13,183 134,686 216,366 19.4 4,744 16,347 406,234 12.1

FY12 1,503 1,153 350 59,252 255,500 13.3 102,200 37,615 17,577 473,647 20,461 15,768 159,560 253,728 17.3 4,615 19,515 473,647 17.1

FY13E 1,503 1,153 350 64,663 296,380 16.0 125,402 36,674 18,752 543,373 20,006 18,123 178,272 299,399 18.0 5,145 22,430 543,373 14.9

FY14E 1,503 1,153 350 71,006 361,584 22.0 152,143 35,757 22,072 644,065 21,695 21,533 202,991 365,266 22.0 5,929 26,651 644,065 18.8

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Ratio analysis

Y/E March Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR - Tier I Asset Quality (%) Gross NPAs Net NPAs Slippages Loan Loss Prov. /Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS (75% cover.) DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis NII (-) Prov. Exp. Adj. NII Treasury Int. Sens. Inc. Other Inc. Op. Inc.

FY09

FY10

FY11

FY12

FY13E

FY14E

2.6 41.7 0.9 9.2

2.4 38.5 1.0 9.7

2.6 42.2 1.3 11.7

2.7 43.0 1.3 12.8

2.9 40.7 1.5 14.9

3.0 40.5 1.5 15.9

28.7 100.0 15.5 11.8

41.7 89.7 19.4 14.0

45.1 95.9 19.5 13.2

43.5 99.3 18.5 12.7

42.2 101.0 18.1 11.9

41.5 101.0 16.0 10.9

4.3 2.1 2.2

5.1 2.1 1.5

4.5 1.1 1.5

3.6 0.7 1.3

3.7 0.9 1.7

3.8 1.0 1.7

1.0 52.8

1.2 59.5

0.5 76.0

0.2 80.4

0.3 77.5

0.3 75.0

30.7 425.7 11.0

32.8 449.8 12.0

44.7 478.3 14.0

56.1 524.0 16.5

72.0 570.9 22.5

84.6 624.6 26.5

38.1 2.8 0.9

35.7 2.6 1.0

26.2 2.4 1.2

20.9 2.2 1.4

16.3 2.1 1.9

13.8 1.9 2.3

2.4 1.3 1.1 0.5 1.5 1.6 3.1

2.3 1.2 1.0 0.2 1.2 1.8 3.0

2.4 0.6 1.8 (0.1) 1.7 1.7 3.5

2.5 0.4 2.1 (0.0) 2.1 1.6 3.7

2.8 0.4 2.4 0.1 2.5 1.4 3.9

2.9 0.4 2.5 0.1 2.5 1.4 4.0 64

Opex PBT Taxes RoA Leverage RoE

1.9 1.3 0.4 0.9 10.1 9.2

1.6 1.4 0.4 1.0 9.5 9.7

1.8 1.7 0.4 1.3 9.2 11.7

1.8 1.9 0.5 1.3 9.6 12.8

1.8 2.1 0.6 1.5 10.0 14.9

1.8 2.1 0.6 1.5 10.7 15.9

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

Hence, the investor should invest in the stock of the company at the current market price of Rs. 1171 for a period of 12 months targeting a price of Rs. 1404.

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