A REPORT ON

STUDY OF FUNDAMENTAL
& TECHNICAL ANALYSIS

Submitted by
PRANAV JOSHI 09-725

DEPARTMENT OF MANAGEMENT STUDIES

SUBMITTED TO
Vidyalankar Institute of Technology

Wadala (E), Mumbai – 400 037

UNIVERSITY OF MUMBAI
*** 2010 – 2011 ***
 Title

This is a study report which basically focusses on investment philosophies adopted

by investors. There are two independent investment theories which investors
typically make use of while making investment decisions.

They are – Fundamental analysis & Technical analysis.

This report studies these two theories in detail and applies them practically to
analyse the stocks of a few companies.

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Certificate

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 Acknowledgement
I thank Prof. Hemant Joshi (Head of the Department, MMS, Vidyalankar
Institute of Technology) for the help extended to me for the project completion.
Also grateful thanks to Ms. Smita Mukherjee for her valuable help towards the
completion of this report.

I thank Mr. Nikesh Ruparel & Mr. Jitendra Baphna from Birla SunLife Insurance
company Ltd. for all the training and guidance provided to me during the period
of my summer internship.

My foremost thanks to all staff members, non-teaching staff & all my colleagues
for giving me a helping hand.

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 Table of Contents

Page No.

1. Company Profile 06

2. Executive Summary 08

3. Objective,Scope,Assumptions,Limitations 09

4. Literature Review 10

5. Fundamental Analysis 11

6. Technical Analysis 28

7. Sectoral Analysis 53

8. Conclusion 73

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Birla SunLife Insurance Company - Profile

Established in 2000, Birla Sun Life Insurance Company Limited (BSLI) is a joint
venture between the Aditya Birla Group, a well known and trusted name globally
amongst Indian conglomerates and Sun Life Financial Inc, leading international
financial services organization from Canada.
With an experience of over 9 years, BSLI has contributed significantly to the
growth and development of the life insurance industry in India.
Known for its innovation and creating industry benchmarks, BSLI has several
firsts to its credit. It was the first Indian Insurance Company to introduce “Free
Look Period” and the same was made mandatory by IRDA for all other life
insurance companies. Additionally, BSLI pioneered the launch of Unit Linked Life
Insurance plans amongst the private players in India. BSLI also enjoys the
prestige to be the originator of practice to disclose portfolio on monthly basis.
These category development initiatives have helped BSLI be closer to its policy
holders’ expectations, which gets further accentuated by the complete bouquet of
insurance products (viz. pure term plan, life stage products, health plan and
retirement plan) that the company offers.
It has an extensive reach through its network of 600 branches and 1,75,000
empanelled advisors. This impressive combination of domain expertise, product
range, reach and ears on ground, helped BSLI cover more than 2 million lives
since it commenced operations and establish a customer base spread across
more than 1500 towns and cities in India. Such services are well supported by
sound financials that the company has. As on March 31, 2009, the company has
a robust capital base of Rs. 2000 crs.

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Vision

To be a leader and role model in a broad based and integrated financial

services business.
Mission
To help people mitigate risks of life, accident, health, and money at all stages
and under all circumstances
Enhance the financial future of customers including enterprises

A US $28 billion corporation, the Aditya Birla Group is in the league of Fortune
500 worldwide. It is anchored by an extraordinary force of 100,000 employees,
belonging to 25 different nationalities. The group operates in 25 countries across
six continents – truly a multinational corporation.

Aditya Birla Group through Aditya Birla Financial Services Group

(ABFSG), has a strong presence across various financial services verticals that
include life insurance, fund management, distribution & wealth management,
security based lending, insurance broking, private equity and retail broking. The
seven companies representing ABFSG are Birla Sun Life Insurance Company,
Birla Sun Life Asset Management Company, Aditya Birla Money, Aditya Birla
Finance, Birla Insurance Advisory & Broking Services, Aditya Birla Capital
Advisors and Apollo Sindhoori Capital Investment. In FY 2008-09, the
consolidated revenues of ABFSG from these businesses crossed Rs. 4763
crores
Sun Life Financial is a leading international financial services organisation
providing a diverse range of protection and wealth accumulation products and
services to individuals and corporate customers. Chartered in 1865, Sun Life
Financial and its partners today have operations in key markets worldwide,
including Canada, the United States, the United Kingdom, Ireland, Hong Kong,
the Philippines, Japan, Indonesia, India, China and Bermuda.

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 Executive Summary

The Indian Economy, one of the emerging markets of the world, today has a
record rate of return which is substantially better when compared to the markets
of developed western economies. Thus Indian equity markets today are
attracting investors from around the world to take advantage of India’s growth
story.

However the participation of retail investors in the Indian markets is less than 5%,
which means that the Indian investor is not able to extract the maximum
advantage out of India’s growth, and thus is nor the centre point of India’s growth
story as far as investments in equity markets are concerned.

Investors can use investment route of secondary markets to hedge future risk of
inflation and create wealth in the long term.

The reason for this can be attributed to the image of Equity markets being
speculative in the eyes of the investors. This is because they are not adequately
educated to make their investment decisions in the equity market. Also, the
Indian investor on an average has a low to moderate risk appetite which is also
one of the reasons why the participation of retail investors in equities is relatively
less.

This report is meant to narrow down this gap between retail investors and equity
markets by simplifying the basic investment strategies and give a basic
understanding of how stocks are analysed for investment using the the theories
of fundamental and technical analysis.

Objective, Scope, Assumption and Limitations of the Project

Objective :

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The Objective of the project is to study and apply the two co-existing but
somewhat conflicting investment philosophies of Fundamental analysis and
Technical analysis adopted by retail investors for investing in Secondary Market

Scope :

The scope of project is limited to understanding the basics of Fundamental

analysis and Technical analysis and apply it to take a decision of investing in
stocks.

Assumptions :

The project assumes that the Indian investor of today would like to be a part of
India’s growth story and take its benefit through secondary markets and use his
investments to create wealth in the long term.

Limitations :

The project has been limited to investment analysis of stocks of pharmaceutical

and cement sectors only.

Literature Review

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The process of investment starts with analyzing a sector, understanding its
growth prospects, then analyzing companies in the chosen sector using
fundamental and technical analysis.

Sector analysis is done using the model of the Five Competitive Forces
developed by Michael E. Porter in his book “Competitive Strategy: Techniques
for Analyzing Industries and Competitors“

The Five Competitive Forces are typically described as follows:

1. Bargaining Power of Suppliers

2. Bargaining Power of Customers
3. Threat of New Entrants
4. Threat of Substitutes
5. Competitive Rivalry between Existing Players

After deciding onto a sector, the companies in that sector are to be analyzed
using fundamental and technical analysis.

Fundamental Analysis

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Fundamental analysis maintains that markets may misprice a security in the short
run but that the "correct" price will eventually be reached. Profits can be made by
trading the mispriced security and then waiting for the market to recognize its
"mistake" and reprice the security.

Fundamental analysis is a stock valuation method that uses financial and economic
analysis to predict the movement of stock prices.

The fundamental information that is analyzed can include a company's financial

reports, and non-financial information such as estimates of the growth of demand
for products sold by the company, industry comparisons, and economy-wide
changes, changes in government policies etc..

To a fundamentalist, the market price of a stock tends to move towards it's “real
value” or “intrinsic value”. If the “intrinsic/real value” of a stock is above the current
market price, the investor would purchase the stock because he knows that the
stock price would rise and move towards its “intrinsic or real value”

If the intrinsic value of a stock was below the market price, the investor would sell
the stock because he knows that the stock price is going to fall and come closer to
its intrinsic value.

To start finding out the intrinsic value, the fundamentalist analyzer makes an
examination of the current and future overall health of the economy as a whole.

After analysing the overall economy, you have to analyze firm you are interested in.
You should analyze factors that give the firm a competitive advantage in it’s sector
such as management experience, history of performance, growth potential, low cost
producer, brand name etc.

RATIO ANALYSIS

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Ratio Analysis:-

Ratio analysis is the process of determining and presenting the relationship of

items and group of items in the statements. It is helpful to know about the
liquidity, solvency, capital structure and profitability of an organization. It is helpful
tool to aid in applying judgement, otherwise complex situations.

ADVANTAGE OF RATIO ANALYSIS

1. Helpful in analysis of Financial Statements.

2. Helpful in comparative Study.

3. Helpful in locating the weak spots of the business.

4. Helpful in Forecasting.

5. Estimate about the trend of the business.

6. Fixation of ideal Standards.

7. Effective Control.

8. Study of Financial Soundness.

LIMITATIONS OF RATIO ANALYSIS

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 1. Comparison not possible if different firms adopt different
accounting policies.

2. Ratio analysis becomes less effective due to price level

changes.

3. Ratio may be misleading in the absence of absolute data.

4. Limited use of a single data.

5. Lack of proper standards.

6. False accounting data gives false ratio.

7. Ratios alone are not adequate for proper conclusions.

8. Effect of personal ability and bias of the analyst.

CLASSIFICATION OF RATIOS

Ratio may be classified into the four categories as follows:

 Liquidity Ratio

a. Current Ratio

b. Quick Ratio or Acid Test Ratio

 Leverage or Capital Structure Ratio

a. Debt Equity Ratio

b. Debt to Total Fund Ratio

c. Proprietary Ratio

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 d. Fixed Assets to Proprietor’s Fund Ratio

e. Capital Gearing Ratio

f. Interest Coverage Ratio

Profitability Ratio (Based on Investment) -

 Return on Capital Employed (ROCE)

The Return on Capital Employed ratio (ROCE) tells us how much profit we
earn from the investments the shareholders have made in the company. It is
calculated as profit before interest and tax divided by the difference between total
assets and current liabilities. The resulting ratio represents the efficiency with
which capital is being utilized to generate revenue.

 Return on Shareholder’s Funds :

a. Return on Total Shareholder’s Funds

b. Return on Equity Shareholder’s Funds

c. Earning Per Share

d. Dividend Per Share

e. Dividend Payout Ratio

f. Earning and Dividend Yield

g. Price Earning Ratio

LEVERAGE OR CAPITAL STRUCTURE RATIO

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Leverage or Capital Structure Ratio - This ratio discloses the firm’s ability to
meet the interest costs regularly and Long term indebtedness at maturity.

These ratio include the following ratios :

a. Debt Equity Ratio:- This ratio can be expressed as:

This ratio expresses the relationship between long term debts and
shareholder’s fund.

Formula -

Debt Equity Ratio = Long term Loans/Shareholder’s Funds or Net Worth

Long Term Loans:- These refer to long term liabilities which mature after one
year. These include Debentures, Mortgage Loan, Bank Loan, Loan from
Financial institutions and Public Deposits etc.

Shareholder’s Funds :- These include Equity Share Capital, Preference Share

Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and
Credit Balance of Profit & Loss Account.

b. Debt to Total Funds Ratio : This Ratio is a variation of the debt equity ratio
and gives the same indication as the debt equity ratio. In the ratio, debt is
expressed in relation to total funds, i.e., both equity and debt.

Formula:

Debt to Total Funds Ratio = Long-term Loans/Shareholder’s funds + Long-term

Loans

c. Proprietary Ratio:- This ratio indicates the proportion of total funds provide by
owners or shareholders.

Proprietary Ratio = Shareholder’s Funds/Shareholder’s Funds + Long term loans

Significance :- This ratio should be 33% or more than that. In other words,
the proportion of shareholders funds to total funds should be 33% or more.

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 A higher proprietary ratio is generally treated an indicator of sound financial
position from long-term point of view, because it means that the firm is less
dependent on external sources of finance.

If the ratio is low it indicates that long-term loans are less secured and they
face the risk of losing their money.

d. Fixed Assets to Proprietor’s Fund Ratio :- This ratio is also know as

fixed assets to net worth ratio.

Fixed Asset to Proprietor’s Fund Ratio = Fixed Assets/Proprietor’s Funds

Significance - The ratio indicates the extent to which proprietor’s (Shareholder’s)

funds are sunk into fixed assets. Normally , the purchase of fixed assets should
be financed by proprietor’s funds. If this ratio is less than 100%, it would mean
that proprietor’s fund are more than fixed assets and a part of working capital is
provided by the proprietors. This will indicate the long-term financial soundness
of business.

e. Capital Gearing Ratio:-

This ratio establishes a relationship between equity capital (including all reserves
and undistributed profits) and fixed cost bearing capital.

Formula:

Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance/ Fixed
cost Bearing Capital

Whereas, Fixed Cost Bearing Capital = Preference Share Capital + Debentures

+ Long Term Loan

Significance:- If the amount of fixed cost bearing capital is more than the equity
share capital including reserves an undistributed profits), it will be called high
capital gearing and if it is less, it will be called low capital gearing.

The high gearing will be beneficial to equity shareholders when the rate of
interest/dividend payable on fixed cost bearing capital is lower than the rate of
return on investment in business.

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 Thus, the main objective of using fixed cost bearing capital is to maximize the
profits available to equity shareholders.

f. Interest Coverage Ratio:-

This ratio is also termed as ‘Debt Service Ratio’. This ratio is calculated as
follows:

Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed
Interest Charges

Significance :- This ratio indicates how many times the interest charges are
covered by the profits available to pay interest charges.

This ratio measures the margin of safety for long-term lenders.

This higher the ratio, more secure the lenders is in respect of payment of interest
regularly. If profit just equals interest, it is an unsafe position for the lender as well
as for the company also , as nothing will be left for shareholders.

An interest coverage ratio of 6 or 7 times is considered appropriate.

ACTIVITY RATIO OR TURNOVER RATIO

Activity Ratio or Turnover Ratio :-

These ratio are calculated on the bases of ‘cost of sales’ or sales, therefore,
these ratio are also called as ‘Turnover Ratio’. Turnover indicates the speed or
number of times the capital employed has been rotated in the process of doing
business. Higher turnover ratio indicates the better use of capital or resources
and in turn lead to higher profitability.

It includes the following :

a. Stock Turnover Ratio-

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 This ratio indicates the relationship between the cost of goods during the year and
average stock kept during that year.

Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Here, Cost of goods sold = Net Sales – Gross Profit

Average Stock = Opening Stock + Closing Stock/2

Significance:- This ratio indicates whether stock has been used or not. It shows
the speed with which the stock is rotated into sales or the number of times the
stock is turned into sales during the year.

The higher the ratio, the better it is, since it indicates that stock is selling quickly. In
a business where stock turnover ratio is high, goods can be sold at a low margin of
profit and even than the profitability may be quit high.

b. Debtors Turnover Ratio :- This ratio indicates the relationship between credit
sales and average debtors during the year :

Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R

While calculating this ratio, provision for bad and doubtful debts is not deducted
from the debtors, so that it may not give a false impression that debtors are
collected quickly.

Significance :- This ratio indicates the speed with which the amount is collected
from debtors. The higher the ratio, the better it is, since it indicates that amount
from debtors is being collected more quickly. The more quickly the debtors pay, the
less the risk from bad- debts, and so the lower the expenses of collection and
increase in the liquidity of the firm.

By comparing the debtors turnover ratio of the current year with the previous year,
it may be assessed whether the sales policy of the management is efficient or not.

c. Average Collection Period :- This ratio indicates the time with in which the
amount is collected from debtors and bills receivables.

Average Collection Period = Debtors + Bills Receivable / Credit Sales per day

Here, Credit Sales per day = Net Credit Sales of the year / 365

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Second Formula :-

Average Collection Period = Average Debtors *365 / Net Credit Sales

Average collection period can also be calculated on the bases of ‘Debtors

Turnover Ratio’. The formula will be:

Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio

Significance :- This ratio shows the time in which the customers are paying for
credit sales. A higher debt collection period is thus, an indicates of the
inefficiency and negligency on the part of management. On the other hand, if
there is decrease in debt collection period, it indicates prompt payment by
debtors which reduces the chance of bad debts.

d. Creditors Turnover Ratio :- This ratio indicates the relationship

between credit purchases and average creditors during the year .

Formula:-

Creditors Turnover Ratio = Net credit Purchases / Average Creditors + Average

B/P.

Significance :- This ratio indicates the speed with which the amount is being
paid to creditors. The higher the ratio, the better it is, since it will indicate that the
creditors are being paid more quickly which increases the credit worthiness of the
firm.

d. Average Payment Period :- This ratio indicates the period which is normally
taken by the firm to make payment to its creditors.

Formula:-

Average Payment Period = Creditors + B/P/ Credit Purchase per day

This ratio may also be calculated as follows :

Average Payment Period = 12 months or 365 days / Creditors Turnover Ratio

Significance :- The lower the ratio, the better it is, because a shorter payment
period implies that the creditors are being paid rapidly.

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 d. Fixed Assets Turnover Ratio :- This ratio reveals how efficiently the fixed
assets are being utilized.

Formula:-

Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets

Here, Net Fixed Assets = Fixed Assets – Depreciation

Significance:- This ratio is particular importance in manufacturing concerns

where the investment in fixed asset is quit high. Compared with the previous
year, if there is increase in this ratio, it will indicate that there is better utilization
of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not
been used as efficiently, as they had been used in the previous year.

e. Working Capital Turnover Ratio :- This ratio reveals how efficiently

working capital has been utilized in making sales.

Formula :-

Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital

Here, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages +

Other Direct Expenses - Closing Stock

Working Capital = Current Assets – Current Liabilities

Significance :- This ratio is of particular importance in non-manufacturing

concerns where current assets play a major role in generating sales. It shows the
number of times working capital has been rotated in producing sales.

A high working capital turnover ratio shows efficient use of working capital and
quick turnover of current assets like stock and debtors.

A low working capital turnover ratio indicates under-utilisation of working capital.

Profitability Ratios or Income Ratios:- The main object of every business

concern is to earn profits. A business must be able to earn adequate profits in

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relation to the risk and capital invested in it. The efficiency and the success of a
business can be measured with the help of profitability ratio.

Profitability ratios are calculated to provide answers to the following questions:

i. Is the firm earning adequate profits?

ii. What is the rate of gross profit and net profit on sales?

iii. What is the rate of return on capital employed in the firm?

iv. What is the rate of return on proprietor’s (shareholder’s) funds?

v. What is the earning per share?

Profitability ratio can be determined on the basis of either sales or investment

into business.

(A) Profitability Ratio Based on Sales :

a) Gross Profit Ratio : This ratio shows the relationship between gross profit
and sales.

Formula :

Gross Profit Ratio = Gross Profit / Net Sales * 100

Here, Net Sales = Sales – Sales Return

Significance:- This ratio measures the margin of profit available on sales.

The higher the gross profit ratio, the better it is. No ideal standard is fixed for this
ratio, but the gross profit ratio should be adequate enough not only to cover the
operating expenses but also to provide for deprecation, interest on loans,
dividends and creation of reserves.

b) Net Profit Ratio:- This ratio shows the relationship between net profit and
sales. It may be calculated by two methods:

Formula:

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Net Profit Ratio = Net Profit / Net sales *100

Operating Net Profit = Operating Net Profit / Net Sales *100

Here, Operating Net Profit = Gross Profit – Operating Expenses such as Office
and Administrative Expenses, Selling and Distribution Expenses, Discount, Bad
Debts, Interest on short-term debts etc.

Significance :- This ratio measures the rate of net profit earned on sales. It
helps in determining the overall efficiency of the business operations. An
increase in the ratio over the previous year shows improvement in the overall
efficiency and profitability of the business.

(c) Operating Ratio:- This ratio measures the proportion of an enterprise cost of
sales and operating expenses in comparison to its sales.

Formula:

Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100

Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages +

Other Direct Expenses - Closing Stock

Operating Expenses = Office and Administration Exp. + Selling and Distribution

Exp. + Discount + Bad Debts + Interest on Short- term loans.

‘Operating Ratio’ and ‘Operating Net Profit Ratio’ are inter-related. Total of both
these ratios will be 100.

Significance:- Operating Ratio is a measurement of the efficiency and

profitability of the business enterprise. The ratio indicates the extent of sales that
is absorbed by the cost of goods sold and operating expenses. Lower the
operating ratio is better, because it will leave higher margin of profit on sales.

(d) Expenses Ratio:- These ratio indicate the relationship between expenses
and sales. Although the operating ratio reveals the ratio of total operating
expenses in relation to sales but some of the expenses include in operating ratio
may be increasing while some may be decreasing. Hence, specific expenses
ratio are computed by dividing each type of expense with the net sales to analyse
the causes of variation in each type of expense.

The ratio may be calculated as :

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(a) Material Consumed Ratio = Material Consumed/Net Sales*100

(b) Direct Labour cost Ratio = Direct labour cost / Net sales*100

(c) Factory Expenses Ratio = Factory Expenses / Net Sales *100

(a), (b) and (c) mentioned above will be jointly called cost of goods sold ratio.

It may be calculated as:

Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales*100

(d) Office and Administrative Expenses Ratio = Office and Administrative Exp./

Net Sales*100

(e) Selling Expenses Ratio = Selling Expenses / Net Sales *100

(f) Non- Operating Expenses Ratio = Non-Operating Exp./Net sales*100

Significance:- Various expenses ratio when compared with the same ratios of
the previous year give a very important indication whether these expenses in
relation to sales are increasing, decreasing or remain stationary. If the expenses
ratio is lower, the profitability will be greater and if the expenses ratio is higher,
the profitability will be lower.

(B) Profitability Ratio Based on Investment in the Business -

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 These ratio reflect the true capacity of the resources employed in the enterprise.
Sometimes the profitability ratio based on sales are high whereas profitability
ratio based on investment are low. Since the capital is employed to earn profit,
these ratios are the real measure of the success of the business and managerial
efficiency.

These ratio may be calculated into two categories:

I. Return on Capital Employed

II. Return on Shareholder’s funds

I. Return on Capital Employed :- This ratio reflects the overall profitability of

the business. It is calculated by comparing the profit earned and the capital
employed to earn it. This ratio is usually in percentage and is also known as
‘Rate of Return’ or ‘Yield on Capital’.

Formula:

Return on Capital Employed = Profit before interest, tax and dividends/

Capital Employed *100

Where, Capital Employed = Equity Share Capital + Preference Share Capital +

All Reserves + P&L Balance +Long-Term Loans- Fictitious Assets (Such as
Preliminary Expenses OR etc.) – Non-Operating Assets like Investment made
outside the business.

Capital Employed = Fixed Assets + Working Capital

Advantages of ‘Return on Capital Employed’ :-

 Since profit is the overall objective of a business enterprise, this ratio is a

barometer of the overall performance of the enterprise. It measures how
efficiently the capital employed in the business is being used.

 Even the performance of two dissimilar firms may be compared with the help
of this ratio.

 The ratio can be used to judge the borrowing policy of the enterprise.

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 This ratio helps in taking decisions regarding capital investment in new
projects. The new projects will be commenced only if the rate of return on
capital employed in such projects is expected to be more than the rate of
borrowing.

 This ratio helps in affecting the necessary changes in the financial policies of
the firm.

 Lenders like bankers and financial institution will be determine whether the
enterprise is viable for giving credit or extending loans or not.

 With the help of this ratio, shareholders can also find out whether they will
receive regular and higher dividend or not.

II. Return on Shareholder’s Funds :-

Return on Capital Employed Shows the overall profitability of the funds supplied
by long term lenders and shareholders taken together. Whereas, Return on
shareholders funds measures only the profitability of the funds invested by
shareholders.

These are several measures to calculate the return on shareholder’s funds:

(a) Return on total Shareholder’s Funds :-

For calculating this ratio ‘Net Profit after Interest and Tax’ is divided by total
shareholder’s funds.

Return on Total Shareholder’s Funds = Net Profit after Interest and Tax / Total
Shareholder’s Funds

Where, Total Shareholder’s Funds = Equity Share Capital + Preference Share

Capital + All Reserves + P&L A/c Balance –Fictitious Assets

Significance:- This ratio reveals how profitably the proprietor’s funds have been
utilized by the firm. A comparison of this ratio with that of similar firms will throw
light on the relative profitability and strength of the firm.

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(b) Return on Equity Shareholder’s Funds:-

Equity Shareholders of a company are more interested in knowing the earning

capacity of their funds in the business. As such, this ratio measures the
profitability of the funds belonging to the equity shareholder’s.

Formula:

Return on Equity Shareholder’s Funds = Net Profit (after int., tax & preference
dividend) / Equity Shareholder’s Funds *100

RATIO ANALYSIS

Where, Equity Shareholder’s Funds = Equity Share Capital + All Reserves +

P&L A/c

Balance – Fictitious Assets

Significance:- This ratio measures how efficiently the equity shareholder’s

funds are being used in the business. It is a true measure of the efficiency of the
management since it shows what the earning capacity of the equity shareholders
funds. If the ratio is high, it is better, because in such a case equity shareholders
may be given a higher dividend.

(c) Earning Per Share (E.P.S.) :- This ratio measure the profit available to the
equity shareholders on a per share basis. All profit left after payment of tax and
preference dividend are available to equity shareholders.

Formula:

Earning Per Share = Net Profit – Dividend on Preference Shares / No. of Equity Shares

Significance:- This ratio helpful in the determining of the market price of the
equity share of the company. The ratio is also helpful in estimating the capacity of
the company to declare dividends on equity shares.

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(d) Dividend Per Share (D.P.S. ):- Profits remaining after payment of tax and
preference dividend are available to equity shareholders.

But of these are not distributed among them as dividend . Out of these profits is
retained in the business and the remaining is distributed among equity
shareholders as dividend. D.P.S. is the dividend distributed to equity
shareholders divided by the number of equity shares.

Formula:

D.P.S. = Dividend paid to Equity Shareholder’s / No. of Equity Shares *100

(e) Dividend Payout Ratio or D.P. :- It measures the relationship between the
earning available to equity shareholders and the dividend distributed among
them.

Formula:

D.P. = Dividend paid to Equity Shareholders/ Total

Net Profit belonging to Equity Shareholders*100

OR

D.P. = D.P.S. / E.P.S. *100

(f) Earning and Dividend Yield :- This ratio is closely related to E.P.S. and
D.P.S. While the E.P.S. and D.P.S. are calculated on the basis of the book value
of shares, this ratio is calculated on the basis of the market value of share

(g) Price Earning (P.E.) Ratio:- Price earning ratio is the ratio between market
price per equity share & earnings per share. The ratio is calculated
to make an estimate of appreciation in the value of a share of a
company & is widely used by investors to decide whether or not to
buy shares in a particular company

Significance :- This ratio shows how much is to be invested in the market in this
company’s shares to get each rupee of earning on its shares. This
ratio is used to measure whether the market price of a share is high
or low.

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 Technical Analysis
Technical analysis is a method of evaluating securities by analyzing the statistics
generated by market activity, such as past prices and volume. Technical analysts
measure a security's value, but instead use charts and other tools to
identify patterns that can suggest future activity.

Just as there are many investment styles on the fundamental side, there are also
many different types of technical traders. Some rely on chart patterns, others use
technical indicators and oscillators, and most use some combination of the two.
In any case, technical analysts' exclusive use of historical price and volume data
is what separates them from their fundamental counterparts. Unlike fundamental
analysts, technical analysts don't care whether a stock is undervalued - the only
thing that matters is a security's past trading data and what information this data
can provide about where the security might move in the future.
Technical Analysis: The Basic Assumptions
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.

1. The Market Discounts Everything

A major criticism of technical analysis is that it only considers price movement,
ignoring the fundamental factors of the company. However, technical analysis
assumes that, at any given time, a stock's price reflects everything that has or
could affect the company - including fundamental factors. Technical analysts
believe that the company's 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.

28
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

The Use Of Trend

One of the most important concepts in technical analysis is that of trend. The
meaning in finance isn't 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.

29
 Figure 1

It isn't hard to see that the trend in Figure 1 is up. However, it's not always this easy to see a
trend:

Figure 2

There are lots of ups and downs in this chart, but there isn't a clear indication of
which direction this security is headed.

30
In any given chart, mostly the prices do not tend to move in a straight line in any
direction, but rather in a series of highs and lows. In technical analysis, it is the
movement of the highs and lows that constitutes a trend. For example,
an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of
lower lows and lower highs.

Figure 3

Figure 3 is an example of an uptrend. Point 2 in the chart is the first high, which
is determined after the price falls from this point. Point 3 is the low that is
established as the price falls from the high. For this to remain an uptrend, each
successive low must not fall below the previous lowest point or the trend is
deemed a reversal.

Types of Trend
There are three types of trend:
 Uptrends
 Downtrends
 Sideways/Horizontal Trends As the names imply, when each
successive peak and trough is higher, it's referred to as an upward trend.
If the peaks and troughs are getting lower, it's a downtrend. When there is
little movement up or down in the peaks and troughs, it's a sideways or
horizontal trend. If you want to get really technical, you might even say
that a sideways trend is actually not a trend on its own, but a lack of a

31
 well-defined trend in either direction. In any case, the market can really
only trend in these three ways: up, down or nowhere.

 Trend Lengths
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 uptrend, the correction is considered to be
an intermediate trend. The short-term trends are components of both major and
intermediate trends. Take a look a Figure 4 to get a sense of how these three trend
lengths might look.

Figure 4

When analyzing trends, it is important that the chart is constructed to best reflect
the type of trend being analyzed. To help identify long-term trends, weekly charts
or daily charts spanning a five-year period are used by chartists to get a better

32
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 the
longer the trend, the more important it is; for example, a one-month trend is not
as significant as a five-year trend.

 Trendlines
A trendline is a simple charting technique that adds a line to a chart to
represent the trend in the market or a stock. Drawing a trendline is
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 following figure, an upward trendline 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
up by this support. This type of trendline helps traders to anticipate the
point at which a stock's price will begin moving upwards again. Similarly, a
downward trendline 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.

33
 Figure 5

 Channels
A channel, or channel lines, is the addition of two parallel trendlines that
act as strong areas of support and resistance. The upper trendline
connects a series of highs, while the lower trendline 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.

34
 Figure 6

Figure 6 illustrates a descending channel on a stock chart; the upper trendline

has been placed on the highs and the lower trendline is on the lows. The price
has bounced off of these lines several times, and has remained range-bound for
several months. As long as the price does not fall below the lower line or move
beyond the upper resistance, the range-bound downtrend is expected to
continue.

 Support And Resistance

This is a major concept. The so-called battle between bulls & bears is revealed by
the prices a security seldom moves above (resistance) or below (support).

35
 Figure 1

As you can see in Figure 1, support is the price level through which a stock or
market seldom falls (illustrated by the 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 support and resistance 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 the case of a support) or
sell it (in the case of resistance). When these trendlines are broken, the supply
and demand and the psychology behind the stock's movements is thought to
have shifted, in which case new levels of support and resistance will likely be
established.

Round Numbers and Support and Resistance

One type of universal support and resistance that tends to be seen across a
large number of securities is round numbers. Round numbers like 10, 20, 35, 50,
100 and 1,000 tend be important in support and resistance levels because they
often represent the major psychological turning points at which many traders will
make buy or sell decisions.

36
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.
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 moved above 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.
Being aware of these important support and resistance points should affect the
way that you trade a stock. This is because in many cases, the price never
actually reaches the whole number, but flirts with it instead. So if you're bullish on
a stock that is moving toward an important support level, do not place the trade
at the support level. Instead, place it above the support level, but within a few
points. On the other hand, if you are placing stops or short selling, set up your
trade price at or below the level of support.

Volume
Volume is simply the number of shares or contracts that trade over a given period of time,
usually a day. The higher the volume, the more active the security. To determine the movement
of the volume (up or down), chartists look at the volume bars that can usually be found at the
bottom of any chart. Volume bars illustrate how many shares have traded per period and show
trends in the same way that prices do.

37
Importance of Volume

Volume is an important aspect of technical analysis because it is used to confirm

trends and chart patterns. Any price movement up or down with relatively high
volume is seen as a stronger, more relevant move than a similar move with weak
volume. Therefore, if you are looking at a large price movement, you should also
examine the volume to see whether it tells the same story.

If volume is high during the day relative to the average daily volume, it is a sign
that the reversal is probably for real. On the other hand, if the volume is below
average, there may not be enough conviction to support a true trend reversal.
Volume should move with the trend. If prices are moving in an upward trend,
volume should increase (and vice versa). If the previous relationship between
volume and price movements starts to deteriorate, it is usually a sign of
weakness in the trend. For example, if the stock is in an uptrend but the up
trading days are marked with lower volume, it is a sign that the trend is starting to
lose its legs and may soon end.

38
Charts

In technical analysis, charts are similar to the charts that you see in any business
setting. A chart is simply a graphical representation of a series of prices over a
set time frame. For example, a chart may show a stock's price movement over a
one-year period, where each point on the graph represents the closing price for
each day the stock is traded:

Figure 1

Figure 1 provides an example of a basic chart. It is a representation of the price

movements of a stock over a 1.5 year period. The bottom of the graph, running
horizontally (x-axis), is the date or time scale. On the right hand side, running
vertically (y-axis), the price of the security is shown

Technical Analysis: Chart Types

39
 There are four main types of charts that are used by investors and traders
depending on the information that they are seeking and their individual skill
levels. The chart types are: the line chart, the bar chart, the candlestick chart and
the point and figure chart. In the following sections, we will focus on the S&P 500
Index during the period of January 2006 through May 2006. Notice how the data
used to create the charts is the same, but the way the data is plotted and shown
in the charts is different.

Line Chart
The most basic of the four charts is the line chart because it represents only the closing
prices over a set period of time. The line is formed by connecting the closing prices over the time
frame. Line charts do not provide visual information of the trading range for the individual points
such as the high, low and opening prices. However, the closing price is often considered to be the
most important price in stock data compared to the high and low for the day and this is why it is
the only value used in line charts.

Figure 1: A line chart

40
 Bar Charts
The bar chart expands on the line chart by adding several more key pieces of information
to each data point. The chart is made up of a series of vertical lines that represent each data
point. This vertical line represents the high and low for the trading period, along with the
closing price. The close and open are represented on the vertical line by a horizontal dash.
The opening price on a bar chart is illustrated by the dash that is located on the left side of
the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if
the left dash (open) is lower than the right dash (close) then the bar will be shaded black,
representing an up period for the stock, which means it has gained value. A bar that is
colored red signals that the stock has gone down in value over that period. When this is the
case, the dash on the right (close) is lower than the dash on the left (open).

Figure 2: A bar chart

Point and Figure Charts

The point and figure chart is not well known or used by the average investor
but it has had a long history of use dating back to the first technical traders.

41
This type of chart reflects price movements and is not as concerned about
time and volume in the formulation of the points. The point and figure chart
removes the noise, or insignificant price movements, in the stock, which can
distort traders' views of the price trends. These types of charts also try to
neutralize the skewing effect that time has on chart analysis.

Figure 4: A point and figure chart

When first looking at a point and figure chart, you will notice a series of Xs
and Os. The Xs represent upward price trends and the Os represent
downward price trends. There are also numbers and letters in the chart;
these represent months, and give investors an idea of the date. Each box on
the chart represents the price scale, which adjusts depending on the price of
the stock: the higher the stock's price the more each box represents.. The
other critical point of a point and figure chart is the reversal criteria. This is
usually set at three but it can also be set according to the chartist's
discretion. The reversal criteria set how much the price has to move away
from the high or low in the price trend to create a new trend or, in other
words, how much the price has to move in order for a column of Xs to
become a column of Os, or vice versa. When the price trend has moved from

42
 one trend to another, it shifts to the right, signaling a trend change.
Thus charts are one of the most fundamental aspects of technical analysis. It
is important that you clearly understand what is being shown on a chart and
the information that it provides. Now that we have an idea of how charts are
constructed, we can move on to the different types of chart patterns.

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 Figure 1, 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.

Figure 1: 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 that there are four main
parts: two shoulders, a head and a neckline. Also, each individual head and
shoulder is comprised of a high and a low. For example, in the head and

43
shoulders top image shown on the left side in Figure 1, 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. 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 in which the upward trend
has paused but will continue in an upward direction once the pattern is
confirmed.

44
 Figure 2
As you can see in Figure 2, 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 downward/sideways movement in the security's 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 chartists 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.

Figure 3: A double top pattern is shown on the left, while a double bottom pattern is

45
shown on the right.

In the case of the double top pattern in Figure 3, 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.

Triangles
These 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.

46
 Figure 4

The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge

toward 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 trendline is flat, while the bottom trendline is upward sloping. This is
generally thought of as a bullish pattern in which chartists look for an upside
breakout. In a descending triangle, the lower trendline is flat and the upper
trendline is descending. This is generally seen as a bearish pattern where
chartists look for a downside breakout.

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.

47
 Figure 5

As you can see in Figure 5, 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 trendlines, 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 the trendlines. In both cases, the
trend is expected to continue when the price moves above the upper trendline.

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 longer periods, usually between three and six months.

48
 Figure 6

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 Figure 6, we have a falling
wedge in which two trendlines are converging in a downward direction. If the
price was to rise above the upper trendline, it would form a continuation pattern,
while a move below the lower trendline 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. 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.

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.

49
 Figure 7

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.

50
 Figure 8
A rounding bottom chart pattern looks similar to a cup and handle pattern but
without the handle. The long-term nature of this pattern and the lack of a
confirmation trigger, such as the handle in the cup and handle, makes it a difficult
pattern to trade.
.

Indicators And Oscillators

Indicators are calculations based on the price and the volume of a security that
measure such things as money flow, trends, volatility and momentum. Indicators
are used as a secondary measure to the actual price movements and add
additional information to the analysis of securities. Indicators are used in two
main ways: to confirm price movement and the quality of chart patterns, and to
form buy and sell signals.

51
There are two main types of indicators: leading and lagging. A leading indicator
precedes price movements, giving them a predictive quality, while a lagging
indicator is a confirmation tool because it follows price movement. A leading
indicator is thought to be the strongest during periods of sideways or non-
trending trading ranges, while the lagging indicators are still useful during
trending periods.
There are also two types of indicator constructions: those that fall in a
bounded range and those that do not. The ones that are bound within a range
are called oscillators - these are the most common type of indicators. Oscillator
indicators have a range, for example between zero and 100, and signal periods
where the security is overbought (near 100) or oversold (near zero). Non-
bounded indicators still form buy and sell signals along with displaying strength
or weakness, but they vary in the way they do this. The two main ways that
indicators are used to form buy and sell signals in technical analysis is
through crossovers and divergence. Crossovers are the most popular and are
reflected when either the price moves through the moving average, or when two
different moving averages cross over each other. The second way indicators are
used is through divergence, which happens when the direction of the price trend
and the direction of the indicator trend are moving in the opposite direction. This
signals to indicator users that the direction of the price trend is
weakening. Indicators that are used in technical analysis provide an extremely
useful source of additional information.

Sectoral Analysis

Indian Pharma Sector – An Overview

The Indian pharma industry is instrumental in providing affordable health care for
the general Indian populace, and is generally considered a success story. One of
the biggest hallmarks of the Indian pharma sector is the affordability it has bought

52
for life saving and other necessary drugs, with the result that India is one of the
countries with the cheapest available medicines. Over 95% of the country’s
demand for pharmaceutical products is met by the Indian industry, and only the
remainder 5% is dependent on imports. Another notable feature of the Indian
pharma industry is the high indigenousness – over 75% of the industry is
constituted by Indian players, the remaining being foreign MNCs.
The overall Indian pharmaceuticals market size in 2009 was estimated at USD
21.8 billion, with 60% of this figure being accounted by the domestic market
alone. As far as exports are concerned, a major proportion is constituted by bulk
drugs. At a global level, Indian pharma industry is 4th largest in volume terms
and 13th in value (US Dollar) terms. The industry has grown at well over 10%
over the last few years, and is expected to maintain the growth rate for the next
few years also.

The Indian pharma industry is highly fragmented, with the top player accounting
for less than 7% market share, and the top 250 players constituting only 70% of
the market share. Over 20,000 units produce the total annual supply of drugs in
India, and the industry remains a significant employer, with close to 30 lakh
people finding employment in the pharma sector.
Traditionally, the Indian pharma industry had operated in an extremely protected
environment. The process patent regime was in force till 2005 in India, which
meant that any drug manufacturer could produce a patented drug through a
different process. This encouraged the trend of reverse engineering, which
became the hall mark of the Indian pharma industry. This also led to the
emphasis on production of generic drugs, with a very minuscule contribution, if
any, from new molecules and discoveries. However, Indian companies have
acquired considerable expertise in production of generic drugs. Obviously, there
was very little incentive for research and development and new drug discovery.
After India acceded to WTO norms and enforced products patent, the situation has undergone a
modest change. There is realization that product innovation has to move beyond mere reverse

53
engineering. As a result, there is a renewed focus on R&D, and discovery of new molecules.
Admittedly, the trend is still in its infancy, and only leading companies like Ranbaxy and Dr
Reddy’s Labs are making any progress on this front. Another positive effect has been the growth
of the biotechnology sector in India, though the linkages between biotech and pharma still
remain very tenuous, as opposed to nations with highly evolved pharmaceutical industries.
Key Points
Supply Higher for traditional therapeutic segments, which is typical
of a developing market. Relatively lower for lifestyle
segment.

Demand Very high for certain therapeutic segments. Will change as

life expectancy, literacy increases.

Barriers to entry Licensing, distribution network, patents, plant approval by

regulatory authority.

Bargaining power Distributors are increasingly pushing generic products in a

of suppliers bid to earn higher margins.

Bargaining power High, a fragmented industry has ensured that there is

of customers widespread competition in almost all product segments.
(Currently also protected by the DPCO).

Competition High. Very fragmented industry with the top 300 (of 24,000
manufacturing units) players accounting for 85% of sales
value. Consolidation is likely to intensify.

Indian Pharma Industry – Future Scenario

The Indian pharma industry is still trying to come to terms with the new patent
regime. It is estimated that the Indian companies will lose close to USD 1 billion
in potential revenues, since many of the drugs currently produced will become
protected by patents. A curious phenomena has also resulted, with the industry
clearly divided into two segments – Indian manufacturers and MNCs. The Indian
companies continue to play to their traditional strengths in generic and bulk
drugs, and focus on the medium and lower ends of the consumer market. On the

54
other hand, the MNCs have chosen to maintain their focus on the high end of the
market.
Over the next five years, the Indian pharma industry will continue to grow by at
least twice the rate of global growth, which is close to 6%. With the rapid
economic growth and the rise of affluence in selected consumer segments, there
will be a greater movement towards formulation drugs, and this market is
expected to reach a figure of USD 14 billion by 2013. The generics segment,
however, will continue to dominate the scene.
The pharmacy retail segment will be the fastest growing segment in the overall
pharma industry, and will achieve high growth rates of almost 25% over the next
few years. The entry of corporate entities such as Apollo and Max into the field
has led to organization in the segment. Another notable trend will be forward
integration into retail by the manufacturers, such as Himalaya Drug Company.
There will be a significant increase in the clinical trials and diagnostics
outsourcing, and this segment will experience a grow of about 20%. Though R&D
will still remain sluggish, some lading players such as Ranbaxy and DRL will
remain at forefront of research for new formulations and molecules.
A significant window of opportunity will be available to the Indian pharma industry
by the expiring patents, which will create an opportunity worth USD 80 billion by
2013. It is estimated that the Indian pharma industry will attain a market size of
about USD 50 billion by 2020, and break into the Global Top 10.

Expenditure on Research & Development

The R&D spend of the top five companies is about 5% to 10% of revenues.
Despite growing at a CAGR of over 50% over the last four years, the ratio is still
way below the global average of 15% to 20% of sales. However, despite the
relatively low R&D spending, Indian companies are stepping up their research
activities to make themselves more self sufficient in terms of product
development, now that the product patent regime has come into force.

55
Prospects of Pharmaceutical sector –

The product patents regime heralds an era of innovation and research resulting
in the launch of new patented product launches. In the longer run, domestic
companies would face fresh competition from MNCs, as they would make
aggressive new launches. However, the latter would most likely be subject to
price negotiation. Drugs having estimated sales of over US$ 108 bn are expected
to go off patent between CY09 and CY13. With the governments in the
developed markets looking to cut down healthcare costs by facilitating a speedy
introduction of generic drugs into the market, domestic pharma companies will
stand to benefit. However, despite this huge promise, intense competition and
consequent price erosion would continue to remain a cause for concern. The life
style segments such as cardiovascular, anti-diabetes and anti-depressants will
continue to be lucrative and fast growing owing to increased urbanisation and
change in lifestyles. Growth in domestic sales in the future will depend on the
ability of companies to align their product portfolio towards the chronic segment
Contract manufacturing and research (CRAMS) is expected to gain momentum
going forward. India’s competitive strengths in research services include English-
language competency, availability of low cost skilled doctors and scientists, large
patient population with diverse disease characteristics and adherence to
international quality standards. As for contract manufacturing, both global
innovators and generic majors are finding it profitable to outsource production.
Currently, India has the highest number of US FDA approved plants outside the
US at 75 plus..

Companies considered for Stock Analysis

 AVENTIS PHARMA LTD.

Key ratios

P/E 29.05

ROE (%) 18.2

56
ROCE (%) 27.9

Dividend Yield (%) 1.0

Shareholding Pattern

Particular no. of shares(Mn) %

Foreign 2.20 (9.6%)

Domestic 4.33 (18.8%)

Non Promoter Corporate

1.25 (5.4%)
Holding

Promoters 13.91 (60.4%)

Public & others 1.34 (5.8%)

Total 23.03 (100%)

Technical Analysis

57
 Analysis
In this chart, a clear uptrend in the share price is seen. It indicates that the company
enjoys a good level of investor confidence.

Fundamental Analysis would reveal that this stock is over priced, given the P-E
ratio.The company’s returns are also quite moderate.

Here there is a contrast in the results given by fundamental & technical analysis.

Though fundamental analysis will view this as an average stock for investment,the
chart pattern shows that this stock has given remarkable results in the past year.

 SUN PHARMA LTD.

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Key ratios

P/E 40.45

ROE (%) 27.0

ROCE (%) 27.4

Dividend Yield (%) 0.8

Shareholding Pattern

Particular no. of shares(Mn) %

Foreign 42.23 (20.4%)

Domestic 11.36 (5.5%)

Non Promoter Corporate

10.28 (5.0%)
Holding

Promoters 131.97 (63.7%)

Public & others 11.27 (5.4%)

Total 207.12 (100%)

Technical Analysis

59
Analysis

This chart shows an overall uptrend, though occasional ups & downs are
observed.

An analysis of the company ratio reveals that the P-E ratio is quite high,indicating
that the stock is over-priced & it may face market corrections.

With moderate values of ROE & ROCE, investing in this stock would not yield
optimum returns.

An investment in this stock would be a relatively safe bet,with fairly moderate

returns.

 Divis Laboratories

60
Key ratios

P/E 29.89

ROE (%) 39.8

ROCE (%) 40.9

Dividend Yield (%) 0.4

Shareholding Pattern

no. of
Particular %
shares(Mn)

Foreign 21.79 (16.5%)

Domestic 18.50 (14.0%)

Non Promoter Corporate

9.76 (7.4%)
Holding

Promoters 69.20 (52.4%)

Public & others 12.89 (9.9%)

Total 132.14 (100%)

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Technical Analysis

Analysis
Technically, this chart represents a ‘Cup-and-Handle’ pattern. This stock is seen
to be quite volatile over the past one year.

Though, there is a possibility of this stock being overpriced due to its high P-E
ratio, the returns that the company is getting are quite good.as is evident from the
ratios. Hence, it is advisable for an investor to invest in this stock from the long
term perspective.

Indian Cement industry – An Overview

62
The Indian cement industry has witnessed a phenomenal capacity addition to the
tune of about 52 mn tonnes in the last two financial years which accounted for
about 24% of the industry’s capacity of 218 mn tonnes at the end of FY09. In the
last two financial years, the cement industry has registered a double-digit growth
in capacity addition compared to moderate growth of 3-7% registered during
period FY 03-07. As a result, industry’s capacity utilisation rate which showed a
rising trend upto FY07, has dropped to a level of 83% in FY09.

In FY09, the GDP growth slowed down to 6.7% compared to the 9% growth
reported in FY08. However, cement consumption growth in FY09 at 8.4% has
been able to maintain its multiplier factor with GDP growth at 1.25 times.

In FY09, all the regions except the Western and the Northern region have
outperformed the industry in consumption growth. The Eastern region continued
its buoyant performance and registered the highest cement consumption growth
of 11.3% on yoy basis. The Southern and Central regions also reported
impressive double-digit growth of 10.4% in cement consumption. But, the
Northern region has registered the lowest growth in the cement demand on yoy
basis. Comparatively, poor demand growth registered by the Western region was
on account of high base of the last year and also slightly subdued demand.

With focus on capacity addition, many small/medium players have been able to
capture more market share and consolidate their position in the industry in the
last two years. Market share of top five individual companies taken together show
a decline to a level of 44.3% in FY09 from 46.3% in FY08.

Eventhough the utilisation rate dropped, average cement prices in FY09 rose by
about 5% on yoy basis. But, the growth in cement prices remained slightly
subdued compared to 21% and 14%, registered in FY07 and FY08, respectively.
On the regional front, prices in the Southern region were firm and ruling
consistently at the highest level amongst all the regions in FY09. However, due to
slowdown in the cement offtake and relatively low operating rate, prices in the
Northern region remained at the lowest levels compared to other regions.

In FY09, the cement industry witnessed a fall in profitability. Eventhough,

average realisation for the industry increased by about 4% on yoy basis, cost of
production has increased by 18.5% on yoy basis. Power and fuel cost for many
cement companies increased in FY09 mainly on account of substantial increase
in coal prices. As a result, the operating profit margin of the industry dropped by
about 8-9% in FY09. Also, higher interest rates and depreciation provided on
expanded capacities took its toll on the net profit margin of the industry which
witnessed a decline by about 5% in FY09.

Key Points

63
Supply The demand-supply situation is tightly balanced with the latter
being marginally higher than the former.

Demand Housing sector acts as the principal growth driver for cement.
However, in recent times, industrial and infrastructure sector
have also emerged as demand drivers for cement.

Barriers to High capital costs and long gestation periods. Access to

entry limestone reserves (principal raw material for the manufacture
of cement) also acts as a significant entry barrier.

Bargaining Licensing of coal and limestone reserves, supply of power from

power of the state grid and availability of railways for transport are all
suppliers controlled by a single entity, which is the government. However,
nowadays producers are relying more on captive power, but the
shortage of coal and volatile fuel prices remain a concern.

Bargaining Cement is a commodity business and sales volumes mostly

power of depend upon the distribution reach of the company. However,
customers things are changing and few brands have started commanding
a premium on account of better quality perception.

Competition Due to large number of players in the industry and very little
brand differentiation to speak of, the competition is intense with
players resorting to expanding reach and achieving pan India
presence.

Financial Year '09

 During FY09, the industry maintained volume growth of around 10% YoY. The
industry added nearly 30 MT in FY09 over the previous year taking the total
capacity to nearly 212 MTPA. India owing to its locational advantage has been
catering to the cement requirements of the Middle East and the South East
Asian nations. However, the exports were curtailed in FY09 in order to satisfy
the domestic demand and contain inflation. While demand growth stood at
10% YoY, average industry cement realisations (average of price per bag of
cement) were higher by about 5% YoY. The growth in realisations slowed
down as additional capacities coming on stream eased the supply pressures.

 The overheated real estate sector has cooled off now. Considering the
financial turmoil witnessed globally, financial institutions have tightened their
credit norms. This cautious stance has led to a credit crunch and the same
has impacted upcoming projects. On account of general economic slowdown
and these issues, the demand for cement has moderated. However, stimulus

64
 packages announced by the government and agricultural income gave a fillip
to the demand for the commodity.

 The industry volumes and realisations were higher during FY09 that boosted
topline growth. However, cost of operation did also witnessed northward
movement that exerted pressure on margins. The cement industry on an
average maintains two months inventory of fuel and such costs. The crude
prices have only started cooling off November 2008 onwards, the benefit of
which should start flowing in starting quarter ended March 2009 onwards.
Smooth supply of state grid power is another problem. To ensure smooth
functioning of plants and lower costs, industry has opted to set up captive
power plants based on coal. This has resulted in increase in demand for coal.
But coal linkages for the industry are poor. Recently the ratio has dropped
below 50%. So the players either have to purchase it from open market or
import it. This has increased cost of operation. The industry had lined up huge
capex plans with that depreciation costs have moved up. All of this dented
profitability.

Prospects of cement industry

The industry is likely to maintain its growth momentum and continue growing at
around 8% to 9% in the medium to long term. Government initiatives in the
infrastructure sector and the housing sector are likely to be the main drivers of
growth for the industry.

In the recent past, demand has surpassed supply, resulting in healthy cement
prices across the country. However, this scenario is likely to reverse as the
industry has lined up huge capacity expansion plans. With the growth in the
sector and waning demand supply gap, cement producers have lined up capacity
expansion plans either by brownfield or greenfiled expansion route. The fresh
capacities announced till date will add up 60 MT to the existing capacity (200
MT), and are expected to go on stream by FY10. As the capacities become
operational, which has started taking place, supply may once again outstrip
demand putting downward pressure on margins. Having said that, temporary
relief may be provided if there are delays in any of the proposed expansion
plans.

While infrastructure spending has been a boon, there was also a strong cushion
from the steady growth of the construction sector (read housing). However,
recently the demand has slowed down as real estate and construction activities
in the urban areas have taken a back seat with economic slowdown. The
importance of the housing sector in cement demand can be gauged from the fact

65
that it consumes almost 60%-70% of the country’s cement. If this support wanes,
it would impact the growth in consumption of cement, leading to demand supply
mismatch. Also, the hike in prices of coal and petroleum products could impact
cement companies’ margins.

In the budget, while the government refrained from cutting lowering the burden of
taxes and duties on cement, it imposed customs duty of 7.5% on RMC cement.
Imposition of 7.5% customs duty on concrete batching plants is likely to
negatively impact the ready mix concrete manufacturers. However, it won’t have
a severe impact as RMC constitutes not more than 5% of total cement
consumption. The government has increased budgetary allocation for roads
under NHDP. Further, with more incentives being spelled out for the infrastructure
and housing sector, cement manufacturers will continue to benefit. The budget
measures such as increasing excise duties have proved to be futile and in the
future too, we believe that it is the market dynamics that will determine these
variables.

Good agricultural income has supported demand for the commodity despite
slowdown in real estate sector. Going forward, we believe the government’s
initiatives in the infrastructure and housing sectors are likely to be the main
drivers of growth for the industry in the long run.

Companies considered for Stock Analysis

 ACC Ltd.

Key ratios

P/E 10.13

ROE (%) 29.4

ROCE (%) 40.0

Dividend Yield (%) 2.7

Shareholding Pattern

66
Particular no. of shares(Mn) %

Foreign 24.41 (13.0%)

Domestic 37.26 (19.8%)

Non Promoter Corporate

9.38 (5.0%)
Holding

Promoters 86.73 (46.2%)

Public & others 29.68 (15.8%)

Total 187.74 (100%)

Technical Analysis

Analysis

This chart is giving somewhat mixed signals regarding share price. Technically,
this is a ‘double-top and bottom’ chart.

67
Looking at the chart, it may be said that investing in this stock is advisable only
as long term investments.

The P-E ratios is around 10, which is good as far as the company’s earnings &
stock valuation are concerned. ROE & ROCE values also are fairly adequate.

 AMBUJA CEMENT

Key ratios

P/E 12.97

ROE (%) 20.0

ROCE (%) 23.9

Dividend Yield (%) 2.1

Shareholding Pattern

Particular no. of shares(Mn) %

Foreign 415.50 (27.3%)

68
Domestic 251.50 (16.5%)

Non Promoter Corporate Holding 17.43 (1.1%)

Promoters 707.48 (46.4%)

Public & others 131.80 (8.6%)

Total 1,523.71 (100%)

Technical Analysis

69
Analysis

This chart is showing a sustained up trend in the last six months (Nov’09-May’10)

ROE & ROCE values are somewhat moderate, but a P-E ratio of 12.97 indicates
that the stock is relatively well-priced.This stock is good from the viewpoint of
long term investment.

 INDIA CEMENTS LTD.

70
Key ratios

P/E 10.07

ROE (%) 17.5

ROCE (%) 18.0

Dividend Yield (%) 1.7

Shareholding Pattern

Particular no. of shares(Mn) %

Foreign 98.91 (32.2%)

Domestic 62.64 (20.4%)

Non Promoter Corporate

41.05 (13.4%)
Holding

Promoters 77.34 (25.2%)

Public & others 27.23 (8.9%)

Total 307.18 (100%)

71
Technical Analysis

Analysis

The trend in the above chart resembles a ‘Descending triangle‘ pattern.It

indicates volatility in the stock.

Though the company’s returns are moderate, the P-E ratio indicates that the
stock is well-priced in the market, and hence is stable.The returns are
moderate.This stock is recommended as a long term investment.

72
Conclusion

Similar analysis can be done for all the listed companies. Both the methods of
stock analysis have got their own merits & demerits. Investors have the option of
choosing either of them for taking investment decisions. However, traders prefer
technical analysis as it focusses on demand-supply phenomenon & market –
sentiments.

73