A Project Report on

Equity Research and Technical Analysis of Information

Technology and Tyre Industry

Prepared at:

Birla Sunlife Insurance Company Limited (BSLI)

Ghatkopar, Mumbai.

Submitted by,
Mr. Karan H. Salla
MMS (Finance)
Batch 2014-16

N.L. DALMIA INSTITUTE OF MANAGEMENT STUDIES AND

RESEARCH,
MIRA ROAD (EAST), MUMBAI.
 Declaration
I, Karan H. Salla, declare that the project titled “Equity Research and Technical Analysis of
Information Technology and Tyre Industry” studied at Birla Sunlife Insurance Company Limited
(BSLI) is a record of independent research work carried out by me during the academic year 2014-
15, under the guidance of Mr. Nikesh Ruparel – Senior Business Mentor.

I also declare that the details and analysis provided in the report is true to the best of my knowledge.

Karan H .Salla

MMS Finance 2014-16

N.L.Dalmia Institute Of Management Studies And Research

 Acknowledgement

I would like to show my sincere gratitude by adding a few words on each of the people who
extended their support and co-operation in a numerous way contributing towards the completion
of the project.

I would like to thank Birla Sunlife Insurance Company Limited. for giving me an opportunity for
learning and contributing through the project. I would like to thank Mr. Nikesh Ruparel – Senior
Business Mentor - who gave me the opportunity to work with him and provided with all the support
that was required. I express sincere thank him being my project guide, who trained and guided me
throughout the project. This project would not have been possible without him. His valuable and
thoughtful comments and conceptual insights helped me in all ways possible in completing the
project.

I would like to acknowledge the support of , , for providing me with the credentials, the suggestions
and the encouragement to do the best in the internship.

Last but not the least, I would like to thank my colleagues and other people who were directly or
indirectly involved in the preparation of the project.
 Executive Summary
VUCA is an acronym used to describe or reflect on the volatility, uncertainty, complexity and
ambiguity of general conditions and situations. Considering Indian Capital markets, it entails all
the 4 factors. This is because Indian Capital Markets are not only exposed to domestic geography
but also Global capital market cycles. Any world crisis, Significant large events or any news gets
immediately reflected in the Markets and everything known about the future is discounted in the
markets today itself. This is know as Markets being efficient. If the Markets are truly efficient,
from the long term perspective, the Returns given by the market will be in line with the Risk.

Historically, Markets have provided a returns of 17 to 18% kind of returns on a CAGR basis which
is much Higher than the returns provided by Fixed Income securities in the economy. But the only
cost of the High returns is High Risk.

In order to enter the market, an individual must have thorough understanding of the macro
economic factors and Global Economic factors that have direct bearing on the capital markets
along the knowledge about the Fundamentals of the company. Thus an Equity research report
provides a broader picture about the performance of the company and how it has been affected by
Macro Economic factors and Global environment.

This gives an investor an idea before investing in a company and whether he should invest a
company considering the Risk appetite i.e. willingness to take the Risk. Understand, a risk can
never be completely eliminated. It can be diversified by investing in Non-Correlated instruments
(i.e. instruments which have different Risk profile)

An investment has Systematic risk and Unsystematic Risk. Systematic Risk are those risk which
is applicable to all sectors and those which cannot be diversified e.g. Interest Rate Risk and
Currency Risk. Unsystematic risk are those risk which are sector or company specific and those
which can be easily diversified through investing in different sectors e.g. Raw material price,
Company’s performance. Understand, Markets only reward for Systematic Risk and not for
Unsystematic risk as they can be easily taken care of by diversifying.

The objective of the report is to understand the nuances of Equity research and how to maximize
the return and minimize the risk in the long term. Research gives a direction along with backup of
information to get success in right direction. The purpose is to understand and educate about the
consequences in future and risk involved in such stock before taking any decision to invest in the
stock market.

A Security can be analyzed Fundamentally or Technically. Fundamental Analysis looks at the core
factors which determine the performance of the company over a period of time. Technical Analysis
looks at the previous patterns of the movement and tries to predict future movements. An important
assumption in technical analysis is Every news and information about is security is discounted in
the price. It is not necessary that Fundamental Analysis and Technical analysis provide same
verdict on the stock. Therefore the investment decision depends on the preference of investor.
I choosed to invest in Companies which has strong fundamentals in the sectors – Information
Technology and Tyre.
Introduction

The Aditya Birla Group

The Aditya Birla Group is one of India's largest business houses. Global in vision, rooted in Indian
values, the Group is driven by a performance ethic pegged on value creation for its multiple
stakeholders.

The Group operates in 26 countries – India, UK, Germany, Hungary, Brazil, Italy, France,
Luxembourg, Switzerland, Australia, USA, Canada, Egypt, China, Thailand, Laos, Indonesia,
Philippines, UAE, Singapore, Myanmar, Bangladesh, Vietnam, Malaysia, Bahrain and Korea.
A US $29 billion corporation in the League of Fortune 500, the Aditya Birla Group is anchored
by an extraordinary work force of 130,000 employees, belonging to 40 different nationalities. Over
60 per cent of its revenues flow from its operations across the world.

The Aditya Birla Group is a dominant player in all its areas of operations viz; Aluminum, Copper,
Cement, Viscose Staple Fiber, Carbon Black, Viscose Filament Yarn, Fertilizers, Insulators,
Sponge Iron, Chemicals, Branded Apparels, Insurance, Mutual Funds, Software and Telecom. The
Group has strategic joint ventures with global majors such as Sun Life (Canada), AT&T (USA),
the Tata Group and NGK Insulators (Japan), and has ventured into the BPO sector with the
acquisition of TransWorks, a leading ITES/BPO company.

Aditya Birla Financial Services Group (ABFSG)

Aditya Birla Financial Services Group (ABFSG) ranks among the top 5 fund managers in India
(excluding LIC) with an AUM of Rs. 1,64,995 Crore. Having a strong presence across the life
insurance, asset management, NBFC, private equity, retail broking, distribution & wealth
management, and general insurance broking businesses, ABFSG is committed to serve the end-to-
end financial services needs of its retail and corporate customers.

The seven companies representing ABFSG are: Birla Sun Life Insurance Company Ltd., Birla Sun
Life Asset Management Company Ltd., Aditya Birla Finance Ltd., Aditya Birla Capital Advisors
Pvt. Ltd., Aditya Birla Money Ltd., Aditya Birla Money Mart Ltd. and Aditya Birla Insurance
Brokers Ltd.

In FY 2014-15, ABFSG reported consolidated revenue from these businesses close to Rs. 7,926
Crore and earnings before tax of approximately Rs. 849 Crore. Anchored by about 12,000
employees and trusted by over 6.5 million customers, ABFSG has a nationwide reach through
1,500 points of presence and about 200,000 agents / channel partners.
Birla Sun Life Asset Management Company Ltd. (BSLAMC)

Birla Sun Life Asset Management Company Ltd. (BSLAMC), the investment manager of Birla
Sun Life Mutual Fund, is a joint venture between the Aditya Birla Group and the Sun Life Financial
Inc. of Canada. The joint venture brings together the Aditya Birla Group's experience in the Indian
market and Sun Life's global experience.
Birla Sun Life Asset Management Company has one of the largest team of research analysts in the
industry, dedicated to tracking down the best companies to invest in. BSLAMC strives to provide
transparent, ethical and research-based investments and wealth management services.

Birla Sunlife Mutual Fund

Established in 1994, Birla Sun Life Mutual fund has emerged as one of India's leading flagships
of Mutual Funds business managing assets of a large investor base.
Their solutions offer a range of investment options, including diversified and sector specific equity
schemes, fund of fund schemes, hybrid and monthly income funds, a wide range of debt and
treasury products and offshore funds.

Birla Sunlife Insurance Company Limited (BSLI)

Birla Sun Life Insurance Company Limited (BSLI) is a joint venture between the Aditya Birla
Group, a well-known Indian conglomerate and Sun Life Financial Inc., one of the leading
international financial services organizations from Canada. With an experience of over a decade,
BSLI has contributed to the growth and development of the Indian life insurance industry, and
currently is one of the life insurance companies in the country. BSLI offers a complete range of
offerings, comprising of protection solutions, children's future solutions, wealth with protection
solutions, health and wellness solutions, as well as retirement solutions; it has an extensive
distribution reach of over 500 cities through its network of over 550 branches, over 1,05,000
empanelled advisors, and over 100 partnerships with corporate agents, brokers and banks. Birla
Sun Life Insurance has total assets under management of Rs.26,813 Crores and a robust capital
base of over Rs.2,170 Crores, as on 30th Jun, 2014
Products

Birla Sun life mutual fund and insurance services are a part of Aditya Birla Financial Services
(ABFS).
They offer a range of financial solutions across our nine lines of businesses.
 Asset Management
 Broking
 General Insurance Broking
 Life Insurance
 NBFC
 Online Money Management
 Private Equity
 Project & Structured Finance
 Wealth Management & Distribution

Mutual Funds
Mutual Funds gives access to Indian equity and debt securities. They offer you advice on the entire
universe of mutual funds:
• Equity funds – growth or capital appreciation
• Debt funds – capital preservation

PMS - Portfolio Management System is a unique way to build a customized portfolio of Indian
equities. At Aditya Birla Money, they act as authorized distributors for various PMS providers to
meet the growing needs of investors and expand a portfolio beyond equities and bonds.

Direct Equity - Aditya Birla Money offers you convenient, simple and efficient trading in Indian
equities. They provide with a seamless platform to invest in the Indian secondary
markets. Customer’s Wealth Management advisor will provide them with a valuable advice based
on our in-house research.

Structured Products – ABM brings customized investment solutions, giving access to various
asset classes. Unlike most other structures, returns can be linked to a variety of asset types such as
equity indices, basket of stocks, and commodities.

Alternate Asset Products - Even if the interests lie beyond the stock market, Aditya Birla Money
has a solution. Through their distribution tie-ups, they offer a wide range of Private Equity Fund
(which invest in unlisted securities) to give customer the opportunity of investing in the growing
Indian economy. With these products and investment strategy, customer can preserve your capital,
ensure risk protection, leverage and diversify.

Real Estate - If customer interests lie in real estate, they offer niche property investment services.
They bring in a combination of in-depth market knowledge and real estate industry expertise to
offer a range of specialized real estate investment services. They provide expert advice and
innovative real estate solutions tailor made to your needs and objectives

Loan against Securities and Mutual Funds – The tie-up with Aditya Birla Finance lets
customers use your share investments as security against borrowing. This way, they are able to
investment more, and increase the size of your overall portfolio.

Gold - A healthy portfolio is about diversification and risk management. To this end, they offer
multiple avenues of investing in gold. Holding gold in a portfolio can provide distinct benefits, as
it is not correlated with most other assets.

Life Insurance - While offering solutions for building and preserving capital, your Relationship
Manager will offer you comprehensive advice on how best to provide for financial protection to
loved ones and cover risks and uncertainties.
The affiliation with Birla Sun Life Insurance provides the opportunity to obtain even more
favorable offers, which can result in lower costs and greater benefits. Their Policy Analyst ensures
that the planning you’ve previously done remains current and competitive.

Services Offered
Research – The quality research provides clients with the information they need to make informed
investment decisions. The Aditya Birla Money research team is dedicated to keeping you updated
with access to the latest publications and a wide range of industry happenings including: market
depth, breaking commentary, long-term forecasts, detailed daily updates and the latest financial
news.

Highly proactive services - The services includes Daily Market Update, Weekly update on mutual
Funds and Event Based SMS to keep you completely informed on the markets.

Online Portfolio Access - Wherever customers are, the network works for them. The online
portfolio ensures every detail of your investments is at customer fingertips. Customer can
constantly monitor the composition of their portfolio, so they always know if their long term
objectives are being met.

Financial planning – They offer a comprehensive financial planning session to help devise their
investment strategy. This is followed by complimentary personalized report outlining specific
recommendations on the step-by-step actions customer need to take to achieve their financial
goals.

Regular Portfolio Reviews - Customer portfolio undergoes regular reviews to ensure their money
is constantly working in their best interest, keeping their personal financial goals in sight and
towards their personal financial goal.
SWOT analysis

Strength:-
1.) Backed By Aditya Birla and Sun life financial services
2.) Emphasis on Customer Satisfaction through Transparent Functioning
3.) Strong Capital Base

Weakness:-
1.) Low Presence in Rural Market
2.) Lesser advertising as compared to competitors

Opportunity:-
1.) Growing potential in the Rural Market
2.) Alignment with Government Schemes
3.) Better awareness amongst people for getting insurance

Threats:-
1.) Economic crisis and economic instability
2.) Entry of new NBFCs in the sector
Introduction

Equity Research

Equity Research is an important aspect of investment and portfolio management. If one wants to
have growth in the investment, one needs to make smart investments in a constantly changing
market environment. Stock prices can easily fluctuate throughout any given week. Some good
news and a stock can shoot up dramatically. Hints of bad news and the stock falls. To offset risk
and capitalize on opportunity, one needs expert equity research to make sound investment
decisions.

Value Investments brings back High Returns and Value. It is crucial for any organization or
business to Invest for growth. You might be confident of your investment plans but there is always
a doubt about the company in which you are investing which is the Risk Factor. Risk can be
positive or Negative. Proper Equity research helps you minimizing the downside risk of an
Investment and maximizes the Upside potentials of an Investment.

A quality Equity Research report suggests Future beneficial investments. This report captures the
returns and the risks involved, thus making us more confident about our present investment
decisions. Companies globally are adopting equity research before taking critical decisions before
investing.

The Equity Research combined with the awareness of the strengths and weaknesses of the
company is highly beneficial. It provides with a clear picture for investments. The team of analysts
conducts thorough research. They collect comprehensive information and critical data. They
conduct a rigorous research and analysis to provide us with details such as the company financial
reputation, history, about their market shares and company news and other useful information.
This also includes sector reports and market estimates. Due to vast geographical reach, they have
good knowledge of the various industries and the market. They find out all the highs and lows and
the future growth rate of a company which we are investing in.
Mutual Funds:
A mutual fund is a type of professionally managed collective investment schemes that pools
money from many investors to purchase securities. While there is no legal definition of the term
mutual fund, it is most commonly applied only to those collective investment vehicles that are
regulated and sold to the general public. They are sometimes referred to as "investment companies"
or "registered investment companies".

Mutual fund units are investment vehicles provide a means of participation in the stock market for
people who have neither the time, nor the money, nor perhaps the expertise to undertake direct
investment in equities successfully. The basic idea of mutual fund is simple; a large number of
investors pool their money in order to obtain a spread professionally managed stock exchange
investments that they cannot obtain individually. The advantage is that the investor in a mutual
fund is taking much less of a risk than a direct equity investor, because increase in the number of
stocks held obviously reduces the effect that any one stock can have on overall performance of the
equity portfolio.

Professional management has 2 main benefits, it provides:

1. Specialized investment expertise which should ensure greater success than the
inexperienced investor can achieve on his own.
2. Systematic Risk of market is eliminated by diversified portfolio.
3. Reduction in the administration burden of investment.

Mutual Fund Structure

Mutual fund is set up in the form of a trust, which has a sponsor, trustees, an asset management
company (AMC), and a custodian.
Generally any mutual fund requires an Asset Management Company to handle there asset, a
custodian who carries all the security with him, and a board of trustees which takes all the big
decision for the fund. Since a MF is set up in the form of a trust it needs a trustee or a board of
trustees depending upon the size of the fund.
Literature Review

NAV: In the context of mutual funds, NAV per share is computed once a day based on the closing
market prices of the securities in the fund's portfolio. All mutual funds' buy and sell orders are
processed at the NAV of the trade date. However, investors must wait until the following day to
get the trade price.

Mutual funds pay out virtually all of their income and capital gains. As a result, changes in NAV
are not the best gauge of mutual fund performance, which is best measured by annual total return.

Equity Funds: Stock or equity funds invest in common stocks which represent an ownership share
(or equity) in corporations. They may focus on a specific industry or sector.

A stock fund may be sub classified along two dimensions:

(1) Market Capitalization and
(2) Investment style (i.e., Growth vs. Value).

Market capitalization ("cap") indicates the size of the company in terms of Capital. A Company's
market capitalization equals the number of shares outstanding times the market price of the stock.
Market capitalizations are typically divided into the following categories:

 Small cap
 Mid cap
 Large cap

While the specific definitions of each category vary with market conditions, large cap stocks
generally have market capitalizations of at least Rs. 5000 Crores, Mid Cap stocks have Market
capitalization between Rs.500 Crores to Rs.5000 Crores and Small cap stocks have market
capitalizations below Rs. 500 Crores. Funds are also classified in these categories based on the
market caps of the stocks that it holds.

Stock funds are also sub classified according to their investment style: Growth, Value or Blend (or
core). Growth funds seek to invest in stocks of fast-growing companies. Value funds seek to
invest in stocks that appear cheaply priced. Blend funds are not biased toward either growth or
value.
Problem on Hand

We had given a task to build a Mutual fund and track it’s with the performances with an Index as
a Benchmark .

Before selling a mutual fund or saying a mutual fund is better option for investment, it is required
to know the function and working of mutual funds. The whole point of investing in a fund is to
leave the investment management function to a professional. Therefore, the quality of the fund
manager is one of the key factors to consider when analyzing the investment quality of any
particular fund.

Our task is to make a mutual fund or a fund, and to show its growth with comparison with a
Benchmark. Fund managers make the investment decisions and try to increase the value of a fund:
where a group of people (shareholders) pool their savings to invest in financial assets, typically
securities or shares. Fund Manager work in the financial sector managing equity funds, currency
or property on behalf of clients looking for the best return on their investment.

Our main work is to be acquainted with the functionality of a fund manager and to show
performance of our fund. We have formed group of 10 people and each one have selected one/two
sectors and created a Fund. We had been given a Corpus of Rs.100 crores for the total fund and
the total number of Units are 10 Crores. Each analyst had been given an amount of Rs 10 Crores
(1 Crores Units) to invest in the Sector in which he/she is specialized.

We have to compare the Performance of funds’ NAV with the Benchmark on a Daily basis.

Among the choices of different sectors, I choosed to invest in Information Technology and Tyre
sector.
Objectives of the Project


 To create a Mutual fund by investing in Equity segment which maximizes Investors returns

 Fundamental Analysis of Indian Information Technology and Tyre Sector.

 To identify Topline and the Bottom-line of the companies under the Specified sector and
factors that affect them

 The analysis of stocks of both the sector by classifying it as a Value Investment and which
is a Growth investment.

 To understand how is the Fund managed by a fund manager.

 To understand the basics of equity research

 To understand the movement in the stocks using Technical analysis

 To provide an overview of Information Technology and Tyre Sector

Entire Modus Operandi and Process

We understood all the funds which are offered by Birla Asset Company which are -
 Assured Fund,
 Income Advantage Fund,
 Protector Fund,
 Builder Fund,
 Balancer Fund,
 Enhancer Fund,
 Magnifier Fund

There are three types of Mutual Funds- Value funds, Growth funds and Blend funds.
The mutual fund can also be Pure Debt Oriented, Completely Invested in Equity or Balance of
Both Debt and Equity.

Our mutual fund comprises of Investment in Equity segment. These investments are only in the
companies have market capitalization above Rs.5000 crores i.e. Large Cap Stocks.

The Next step was to choose a Sector, for which each individual would be studying the companies
in that sector in detail and accordingly make sound investment. For analysis purpose, I choose to
analyze Large Cap companies in Information Technology and Tyre Sector and invest in the
company in the companies which seems profitable.

For analysis, we started first by looking at the average P/E of large Cap companies and allocating
funds in these sector. For this I took large cap companies (those stocks whose market capitalization
are more than 5000cr and listed in A or B category in BSE stock Exchange) and estimated P/E
valuation by taking EPS and MPS. After calculating it, it was compared with Industry P/E through
which we came to know if a Share is overvalued and undervalued.
For overvalued shares we calculated the PEG ratio. If PEG ratio is below or equal to 1 then it
means that particular share is good to buy.

The steps in creating the Mutual fund are explained as below –

1) Identifying and selecting the large cap companies stock, in terms of Market Capitalization, in
Information Technology and Tyre sector.

2) Calculating the Average Consolidated P/E Ratio of the Large Cap stocks.

3) The Consolidated P/E of all the stocks is individually compared with the Sector Average
Consolidated P/E. The Stock for which Consolidate P/E is more than the Sector’s Average
Consolidated P/E is termed as an Overvalued Stock, and the Stock for which Consolidated P/E is
less than the Sector’s Average Consolidate P/E is termed as an Undervalued stock.

4) The undervalued stocks will be the Value picks for the Mutual fund.

5) We look at the Market Price per share for Undervalued stocks on the day when we are starting
the Mutual fund.

Market Price Per Share

6) We find the Earnings per share as follows -
Consolidated PE Ratio of Stock

7) We find the Long Term Price Target (LTPT) for a Stock as follows –
Calculated EPS of the Stock x Consolidated Sector Average P/E

8) We find the Percentage Growth in Share price as follows –

LTPT − Market Price per Share
𝑥 100
Market Price per Share

9) We give weights for Percentage Growth in Share price for each individual stock as follows –
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒
∑ 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒

10) For Overvalued stock, we would be finding PEG ratio for these companies.
For calculating PEG ratio, we found the EPS for Next 3 years using information provided on
Bloomberg and found the Compounded Annual Growth Rate in EPS.

MPSToday
11) For finding PEG ratio, We divided the Trailing P/E Ratio ( ) by the Estimated
EPSPrevious Year
CAGR for EPS for Next 3 Years.
Trailing PE Ratio
PEG Ratio =
CAGR of EPS x 100

If, the PEG Ratio for a company is less than 1, it is considered a sound investment as the Stock
deserves a Higher PE multiple because of Higher Growth. These stocks will be a Growth Pick.

12) The LTPT for Growth pick will be calculated as follows –

We have following Information – PEG Ratio, Earnings Current, CAGR.
Hence we can find LTPT as follows –
LTPT = PEG Ratio x CAGR x Earnings
13) The overvalued stocks are selected on the basis of growth basis.

14) The top line and bottom line factors are also analyzed for the stocks.
For Information Technology Sector, the evaluating parameters to analyze the performance of a
company are – Attrition Rate and Order book i.e. Sales in American and Europe Region.
The companies will be rated on the basis of these parameters.
If the Percentage of Attrition Rate is Higher compared to Industry standards and Order Book for
this year has declined compared to Previous year, then this would be considered an adverse factor
for company and vice versa.

For Tyre Sector, itthe Topline Factor will be Total Tonnage Sold and Bottomline Factor will be
Natural Rubber Price.

15) For investment purpose, the group has been allotted a Virtual corpus of Rs.100 Crores i.e. Rs
10 crores of amount per Analyst.
Each analyst will be investing in the stock of the sector which he is analyzing.

16) Beginning NAV is calculated as follows –

Rs 100 crores
For Mutual Fund - = Rs. 10
10 crore units

Rs 10 crores
For an Analyst - = Rs. 10
1 crore units

17) The NAV is calculated daily after the market ends and Returns for NAV is compared with the
Returns given by the Benchmark – Nifty.

18) Additionally, Technical analysis is done for the selected stocks. This helps concluding whether
the stocks are technically strong or not after analyzing them fundamentally.

Source of Data: We collected data from Bloomberg for the gathering Information about Nifty, for
the market capitalization of companies, and for daily Price movement of the Stocks. The
information related to Salary, Attrition Rate and Order book are gathered from respective annual
report of the company. The technical graphs of the companies are gathered from Bloomberg.

Sample selection: The Universe population is every Companies having operations in India.
Samples have following attributes –
- Information Technology and Tyre Companies
- Market Capitalization more than Rs.5000 crores
- Companies listed on NSE
Analysis of Data

Fundamental Analysis
The underlying theme in fundamental analysis is that the true value of the firm can be related to
its financial characteristics -- its growth prospects, risk profile and cash flows. Any deviation from
this true value is a sign that a stock is under or overvalued. It is a long term investment strategy,
and the assumptions underlying it are:
(a) The relationship between value and the underlying financial factors can be measured.
(b) The relationship is stable over time.
(c) Deviations from the relationship are corrected in a reasonable time period.

Valuation is the central focus in fundamental analysis. Some analysts use discounted cash
flow models to value firms, while others use multiples such as the price earnings and price-book
value ratios. Since investors using this approach hold a large number of 'undervalued' stocks in
their portfolios, their hope is that, on average, these portfolios will do better than the market.

Fundamental analysis includes:

1. Economic analysis
2. Industry analysis
3. Company analysis

On the basis of these three analyses, the intrinsic value of the shares are determined. This is
considered as the Fair value of the share. If the Intrinsic value is higher than the Market price it is
recommended to buy the share. If it is equal to market price then hold the share and if it is less
than the market price than it is recommended to Sell the shares.

Stock valuation:

In financial markets, stock valuation is the method of calculating theoretical values of companies
and their stocks. The main use of these methods is to predict future market prices, or more
generally, potential market prices, and thus to profit from price movement – stocks that are found
to be undervalued (with respect to their theoretical value) are bought, while stocks that are found
to overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value,
while overvalued stocks will, on the whole, fall.

In the view of fundamental analysis, stock valuation based on fundamentals aims to give an
estimate of their intrinsic value of the stock, based on predictions of the future cash flows and
profitability of the business. Fundamental analysis may be replaced or augmented by market
criteria – what the market will pay for the stock, without any necessary notion of intrinsic value.
This can be combined as "predictions of future cash flows/profits (fundamental)", together with
"what will the market pay for these profits?". These can be seen as "Supply and Demand" sides –
what underlies the Supply (of stock), and what drives the (market) Demand for stock.

Stock valuation methods:

Analysts use a wide range of models to value assets in practice, ranging from the simple to
the sophisticated. These models often make very different assumptions about pricing, but they do
share some common characteristics and can be classified in broader terms. There are several
advantages to such a classification -- it makes it easier to understand where individual models fit
into the big picture, why they provide different results and when they have fundamental errors in
logic.
In general terms, there are three approaches to valuation.
I- Discounted Cash flow valuation, relates the value of an asset to the present value of
expected future cash flows on that asset.
II- Relative valuation, estimates the value of an asset by looking at the pricing of 'comparable'
assets relative to a common variable such as earnings, cash flows, book value or sales.
III- Contingent claim valuation uses option pricing models to measure the value of assets that
share option characteristics. Some of these assets are traded financial assets like warrants,
and some of these options are not traded and are based on real assets – projects, patents
and oil reserves are examples. The latter are often called real options. There can be
significant differences in outcomes, depending upon which approach is used. One of the
objectives in this book is to explain the reasons for such differences in value across
different models and to help in choosing the right model to use for a specific task.

Earnings Per Share

EPS is the net income available to common shareholders of the company divided by the number
of shares outstanding. Usually there will be two types of EPS listed: a GAAP (Generally Accepted
Accounting Principles) EPS and a Pro Forma EPS, which means that the income has been adjusted
to exclude any one time items as well as some non-cash items like amortization of goodwill or
stock option expenses. The most important thing to look for in the EPS figure is the overall quality
of earnings. Also, look at the growth in EPS over the past several quarters / years to understand
how volatile their EPS is, and to see if they are an underachiever or an overachiever. In other
words, have they consistently beaten the expectations or are they constantly restating and lowering
their forecasts?
We also look at the Estimates in EPS for Next 3 to 5 years which will give an idea about the Future
growth.
The EPS number that most analysts use is the pro forma EPS. To compute this multiple, analysts
use the Net Income that excludes any one-time gains or losses and excludes any non-cash expenses
like stock options or amortization of goodwill. This is then divided by the number of Fully Diluted
shares outstanding.
Earnings Per Share =

Net Profit Available for Equity Shareholders − Preference Dividend

Number of Shares

Price to Earnings (P/E) Multiple

Price to Earnings Ratio is calculated by dividing the Current Market Price of the stock by its
Earnings per Share (EPS). It indicates the sum of money an Investor is ready to pay for each rupee
worth of the earnings of the company.

Market Price Per Share

P/E Ratio =
Earnings Per Share

How does PE help?

Understanding P/E ratio gives the investors an idea if the stock has sufficient growth potential.
Stocks with low PE can be considered good bargains as their growth potential is still unknown to
the market.
If the P/E ratio is high, it warns of an over-priced stock. It means the stock's price is much higher
than its actual growth potential. So these stocks are more liable to correct.
This will allow savvy investors to sell their holdings before the stock price crashes.

Now that the analyst has several EPS figures (historical and forecasts), the analyst will be able to
look at the most common valuation technique using the Price to Earnings ratio, or P/E. To compute
this figure, one divides the stock price by the annual EPS figure. For example, if the stock is trading
at $10 and the EPS is $0.50, the P/E is 20 times. A complete analysis of the P/E multiple includes
a look at the Trailing and Forward ratios.

Trailing P/E ratio is computed by taking the current price divided by the Summation of EPS for
the last four quarters, or for the previous year. Historical trends of the P/E should also be
considered by viewing a chart of its historical P/E over the last several years. Specifically consider
what range the P/E has traded in so as to determine whether the current P/E is high or low versus
its historical average.
Market Price Current Year
Trailing P/E Ratio =
Earnings Per Share in Previous Year
Forward P/E Ratio reflects the future growth of the company into the future. Forward P/E ratio is
computed by taking the current stock price divided by the sum of the EPS estimates for the next
four quarters, or for the EPS estimate for next calendar or fiscal year or two.

Market Price Current Year

Forward P/E Ratio =
Earnings Per Share for Next Year

Growth rate
Valuations are very sensitive and depends crucially on the expected Growth rate of a company.
One must look at the historical growth rate of both sales and Net Operating income to get a feel
for the type of future growth expected. However, company’s activities are constantly changing, as
well as the economy. Therefore, solely using historical growth rates to predict the future is not an
acceptable form of valuation. Instead, they are used as guidelines for what future growth could
look like if similar circumstances are encountered by the company.

Calculating the future growth rate requires investment research. This may take form in interpreting
the company's quarterly conference meeting or information from a press release or other company
article that discusses the company's growth guidance. However, although companies are in the best
position to forecast their own growth, they are often far from accurate, and unforeseen events could
cause rapid changes in the economy and in the company's industry.

For any valuation technique, it is important to look at a range of forecast values. For example, if
the company being valued has been growing earnings between 5 and 10% each year for the last 5
years, but believes that it will grow 15 –20% this year, a more conservative growth rate of 10–
15% would be appropriate in valuations.

Another example would be for a company that has been going through restructuring. It may have
been growing earnings at 10–15% over the past several quarters or years because of cost cutting,
but their sales growth could be only 0–5%. This would signal that their earnings growth will
probably slow when the cost cutting has fully taken effect. Therefore, forecasting an earnings
growth closer to the 0–5% rate would be more appropriate rather than the 15–20%. Nonetheless,
the growth rate method of valuations relies heavily on personal judgments to make a forecast which
leads to Bias in Valuation. This is why analysts often make inaccurate forecasts, and also why
familiarity with a company is essential before making a forecast.

PEG Ratio

This multiple has really become popular over the past decade. It is better than just looking at a P/E
ratio because it takes three factors into account; the Price, Earnings, and Growth Rates in Earnings.

To compute the PEG ratio, the Trailing P/E is divided by the Expected earnings growth rate for next 3
to 5 Years. This multiple is interpreted as follows – As the multiple rises over 1.5 the stock becomes
more and more overvalued, and if the PEG ratio falls below 1.5 the stock becomes has Required
Growth which it deserves to command a higher P/E multiple.

The theory is based on a belief that P/E ratios should approximate the long-term growth rate of a
company's earnings. Whether or not this is true will never be proven and the theory is therefore just a
rule of thumb to use in the overall valuation process.

Trailing PE Ratio
PEG Ratio =
Growth x 100

Here is an example of using PEG ratio to compare stocks. Stock A is trading at a Trailing P/E ratio
of 15 times and expected to grow at CAGR of 20% for Next 3 years. Stock B is trading at a Trailing
P/E of 30 times and expected to grow at CAGR of 25% for Next 3 years. The PEG ratio for Stock
A is 0.75 (15/20) and for Stock B is 1.2 (30/25). According to the PEG ratio, Stock A is a better
purchase because it has a lower PEG ratio, or in other words, an Investor can purchase its future
earnings growth for a lower relative price than that of Stock B.

Beta

Beta is a statistical tool that measures the sensitivity of the stock to that of the Index.
If Beta is 1, if the Index moves 10% then the stock will move by 10% in the same direction. If
Beta is 1.2, if the Index moves 10% then the stock will move by 12% in the same direction. If Beta
is 0.8, if the Index moves 10% then the stock will move by 8% in the same direction.
Mathematically, Beta is expressed as the covariance between the return on the stock and the return
on the market, divided by the variance of the return on the market.
Beta = COVARIANCE (Rj, Rm)
VARIANCE (Rm)
Rj is the return on stock “j” and Rm is the return on the market.
Beta is also expressed as the correlation between the return on the stock and the return on the
market multiplied by the standard deviation of the return on the stock divided by the standard
deviation of the return on the market.
Beta = Correlation (Rj, Rm) * Standard Deviation (Rj)
Standard Deviation (Rm)
Understanding Topline and Bottom-line

What is topline?

Every company has a business model that it follows to generate revenue, first line of profit
and loss book of a company has this revenue figure which is known as topline. Top line factors
are the critical factors which leads to growth in the topline of the company. These factors drives
the growth in the revenue.
What is Bottom-line?

Companies’ net profit is its bottom line, so altogether it can be said as top line less all the
expenses. Net profit of the firm mainly depends on the operating expenses and fixed expenses of
the company. Hence bottom line factors are very important because they gives profitability of the
firm.
Why these factors are important?

Comparing these factors over the period of time we can actually figure out how the
company is performing. Problems and flaws in Business model are easily found out and
accordingly investor can invest in best business model which guarantees best results for his
investment. As investor cannot improve these figures for a given firm but he can obviously
compare different companies altogether and choose best amongst them in given sector. Every
sector has different top line and bottom-line factors, making it difficult to standardize for two differ
sectors.
Below are the some example of topline and bottom-line factors for the different sectors.

Sectors Top-line factors Bottom-line factors

Cement Industries Tons sales Per Bag Realization

Infrastructure Order Book Steel and cement prices
IT sector US and Europe order book Salary hike, Attrition rate
Automobiles Units sold Steel prices
Tire sector Total tonnage sold Rubber price
Banking Sector Net Interest Income Net Interest Margin
Technical Analysis

Technical analysis is a financial term used to denote a security analysis discipline for forecasting
the direction of prices through the study of past Market data, primarily Price and Volume.
Behavioral Economics and Quantitative Analysis incorporate Technical analysis, which being an
aspect of active management stands in contradiction to much of modern portfolio theory.

Technical analysis employs models and trading rules based on price and volume transformations,
such as the Relative Strength Index, Moving Averages, Regressions, Inter-Market And Intra-
Market Price Correlations, Business Cycles, Stock Market Cycles or, classically, through
recognition of chart patterns.

Technical analysis stands in contrast to the fundamental analysis approach to security and stock
analysis. Technical analysis Analyzes Price, Volume and Other Market Information, whereas
Fundamental Analysis looks at the actual facts of the Company, Market, Currency Or Commodity.

Most large brokerage, trading group, or financial institutions will typically have both a technical
analysis and fundamental analysis team.

Concepts –

 Resistance — A price level that may prompt a net increase of selling activity

 Support — A price level that may prompt a net increase of buying activity

 Breakout — The concept whereby prices forcefully penetrate an area of prior support or
resistance, usually, but not always, accompanied by an increase in volume.

 Trending — The phenomenon by which price movement tends to persist in one direction for
an extended period of time

 Average true range — Averaged daily trading range, adjusted for price gaps

 Chart patterns— Distinctive pattern created by the movement of security prices on a chart

 Momentum — The rate of price change

Chart Types

There are three main types of charts that are used by Analysts, 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

1. Line Chart -
The most basic of the three charts is the Line charts. It represents 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.

2. Bar Chart -
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.
3. Candlestick charts - The candlestick chart is similar to a bar chart, but it differs in the way that
it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line
showing the period’s trading range. The difference comes in the formation of a wide bar on the
vertical line, which illustrates the difference between the open and close. And, like bar charts,
candlesticks also rely heavily on the use of colors to explain what has happened during the trading
period. There are two color constructs for days up and one for days that the price falls. When the
price of the stock rises up and closes above the opening trade, the candlestick will usually be White
or clear. If the stock closes down for the period, then the candlestick will usually be Red or Black.
If the stock's price has closed above the previous day’s close but below the day's open, the
candlestick will be Black or filled with the color that is used to indicate an up day.
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 Head and shoulders top 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 is used to signal a reversal in a downtrend.

Cup with handle

A cup with 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.
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.
Triangles
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

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.
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.
Triple Tops and Triple 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.

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 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.

Bump and Run Reversal

The bump-and-run reversal top is a chart pattern that is a very good performer in both bull and
bear markets, judging by the low break even failure rate and high average decline after the
breakout.

Characteristic Discussion
Arithmetic Use the arithmetic chart, not the semi logarithmic one because you will use it to
scale measure vertical distances.
A trendline connecting the price valleys rises upward at 30 to 45 degrees, but
Rising
this varies with scaling. Do not use horizontal or near-horizontal trendlines and
trendline
avoid patterns with steep (over 60 degrees) trendlines.
The lead-in is the section at the start of the pattern and it precedes the bump
Lead-in phase phase. Price follows a rising trendline. The figure to the lower right shows an
example.
The tallest distance in the first quarter of the chart pattern, measured vertically,
is the lead-in height. Must be at least $1, but preferably $2 or more. The chart
Lead-in height
on the right shows the measure between the two blue dots, vertically, from
trendline to price low.
Lead-in
At least a month.
duration
Price rises in the bump phase following a steeper trendline (45 to 60 degrees) on
high volume usually after a favorable event (earnings report, rating upgrades).
Bump phase
Price rounds over and eventually returns to the lower, 30-degree trendline setup
in the lead-in phase. The chart on the right shows an example.
 Measured from the peak to the 30-degree trendline, it must be at least twice the
Bump height lead-in height. The chart on the right shows an example between the two blue
dots.
After price returns to the 30-degree trendline, price may bump up and form
Downhill run additional bumps or slide along the trendline before plunging lower in a downhill
run. The figure to the right shows one bump up followed by the downhill run.
High at the start of the pattern, at the bump start, and at the downward breakout
Volume
(where price pierces the 30-degree trendline).
The pattern confirms as a valid one when price closes below the 30-degree
Confirmation
trendline.

We have finished our look at some of the more popular chart patterns. We should now be able to
recognize each chart pattern as well the signal it can form for chartists. We will now move on to
other technical techniques and examine how they are used by technical traders to gauge price
movements.

Fundamental analysis Technical analysis

Definition Value calculated using Uses price movements and
various economic factors. patterns on charts to predict
future price movements.

Data from Economic reports, News Chart analysis

events, Industry statistics

Asset Bought (Sold) When price falls below ( When trader sees a price
above ) intrinsic value formation that has a high
probability of moving into
profit in the near future.

Type of trader Usually longer term position Generally swing traders and
traders short term day traders

Time Horizon Offer holding for days, Can be long term, but most
weeks or even months. take positions for days,
minutes ,or even seconds.

Concept Utilized Report expectations vs Trend lines, support and

actual outcomes, current resistance (supply &
news events compared to demand), Dow theory, price
historical events. patterns.
Information Technology Sector

Introduction

India is the world's largest sourcing destination for the information technology (IT) industry,
accounting for approximately 52 per cent of the US$ 124-130 billion market. The industry employs
about 10 million Indians and continues to contribute significantly to the social and economic
transformation in the country.
The IT industry has not only transformed India's image on the global platform, but has also fuelled
economic growth by energizing the higher education sector especially in engineering and computer
science. India's cost competitiveness in providing IT services, which is approximately 3-4 times
cheaper than the US, continues to be its unique selling proposition in the global sourcing market.
The Indian IT and ITeS industry is divided into four major segments – IT services, Business
Process Management (BPM), Software Products and Engineering Services, and Hardware.
The IT-BPM sector in India grew at a compound annual growth rate (CAGR) of 25 per cent over
2000-2013, which is 3-4 times higher than the global IT-BPM spend, and is estimated to expand
at a CAGR of 9.5 % to US$ 300 billion by 2020.

Market Size
India, the fourth largest base for young businesses in the world and home to 3,000 tech start-ups,
is set to increase its base to 11,500 tech start-ups by 2020, as per a report by NASSCOM and
Zinnov Management Consulting Pvt Ltd.
India’s internet economy is expected to touch Rs. 10 trillion (US$ 161.26 billion) by 2018,
accounting for 5 per cent of the country’s gross domestic product (GDP), according to a report by
the Boston Consulting Group (BCG) and Internet and Mobile Association of India (IAMAI). In
December 2014, India’s internet user base reached 300 million, the third largest in the world, while
the number of social media users and smartphones grew to 100 million.
Public cloud services revenue in India is expected to reach US$ 838 million in 2015, growing by
33 per cent year-on-year (y-o-y), as per a report by Gartner Inc. In yet another Gartner report, the
public cloud market alone in the country was estimated to treble to US$ 1.9 billion by 2018 from
US$ 638 million in 2014. The increased internet penetration and rise of e-commerce are the main
reasons for continued growth of the data center co-location and hosting market in India.
Investments
Indian IT's core competencies and strengths have placed it on the international canvas, attracting
investments from major countries. The computer software and hardware sector in India attracted
cumulative foreign direct investment (FDI) inflows worth US$ 13,788.56 million between April
2000 and December 2014, according to data released by the Department of Industrial Policy and
Promotion (DIPP).
The private equity (PE) deals increased the number of mergers and acquisitions (M&A) especially
in the e-commerce space in 2014. The IT space, including e-commerce, witnessed 240 deals worth
US$ 3.8 billion in 2014, as per data from Dealogic.
India also saw a ten-fold increase in the venture funding that went into internet companies in 2014
as compared to 2013. More than 800 internet start-ups got funding in 2014 as compared to 200 in
2012, said Rajan Anandan, Managing Director, Google India Pvt Ltd and Chairman, IAMA.
Most large technology companies may have so far focused primarily on bigger enterprises, but a
report from market research firm Zinnov highlighted that the small and medium businesses will
present a lucrative opportunity worth US$ 11.6 billion in 2015 and US$ 25.8 billion in 2020.
Moreover, India has nearly 51 million such businesses of which 12 million have a high degree of
technology influence and are looking to adopt newer IT products, as per the report.
Some of the major investments in the Indian IT and ITeS sector are as follows:
 Wipro has won a US$ 400 million, multi-year IT infrastructure management contract from
Swiss engineering giant ABB, making it the largest deal for the technology company.
 Tech Mahindra has signed a definitive agreement to acquire Geneva-based SOFGEN
Holdings. The acquisition is expected to strengthen Tech Mahindra’s presence in the
banking segment.
 Tata Consultancy Services (TCS) plans to set up offshore development centers in India for
Japanese clients in a bid to boost the company's margin in the market.
 Reliance is building a 650,000 square feet (sq ft) data center in India—its 10th data centre
in the country—with a combined capacity of about 1 million sq ft and an overall investment
of US$ 200 million.
 Intel Corp plans to invest about US$ 62 million in 16 technology companies, working on
wearable, data analytics and the Internet of Things (IoT), in 2015 through its investment
arm Intel Capital. The Indian IoT industry is expected be worth US$ 15 billion and to
connect 28 billion devices to the internet by 2020.
 Keiretsu Forum, a global angel investor network, has forayed into India by opening a
chapter in Chennai. With this, the Silicon Valley-based network will have 34 chapters
across three continents.

Government Initiatives
The adoption of key technologies across sectors spurred by the 'Digital India Initiative' could help
boost India's gross domestic product (GDP) by US$ 550 billion to US$ 1 trillion by 2025, as per
research firm McKinsey.
Some of the major initiatives taken by the government to promote IT and ITeS sector in India are
as follows:
 India and the United States (US) have agreed to jointly explore opportunities for
collaboration on implementing India's ambitious Rs 1.13 trillion (US$ 18.22 billion)
‘Digital India Initiative’. The two sides also agreed to hold the US-India Information and
Communication Technology (ICT) Working Group in India later this year.
 India and Japan held a Joint Working Group conference for Comprehensive Cooperation
Framework for ICT. India also offered Japan to manufacture ICT equipment in India.
 The Government of Telangana began construction of a technology incubator in
Hyderabad—dubbed T-Hub—to reposition the city as a technology destination. The state
government is initially investing Rs 35 crore (US$ 5.64 million) to set up a 60,000 sq ft
space, labelled the largest start-up incubator in the county, at the campus of International
Institute of Information Technology-Hyderabad (IIIT-H). Once completed, the project is
proposed to be the world’s biggest start-up incubator housing 1,000 start-ups.
 Bengaluru has received US$ 2.6 billion in venture capital (VC) investments in 2014,
making it the fifth largest recipient globally during the year, an indication of the growing
vibrancy of its startup ecosystem. Among countries, India received the third highest VC
funding worth US$ 4.6 billion.

Prospects
 Internet should be a basic human right, say 87 per cent of internet users in India, compared
with 83 per cent globally, according to a report by Centre for International Governance
Innovation (CIGI).

 India continues to be the topmost offshoring destination for IT companies followed by China
and Malaysia in second and third position, respectively. Emerging technologies present an
entire new gamut of opportunities for IT firms in India. Social, mobility, analytics and cloud
(SMAC) collectively provide a US$ 1 trillion opportunity. Cloud represents the largest
opportunity under SMAC, increasing at a CAGR of approximately 30 per cent to around US$
650-700 billion by 2020. Social media is the second most lucrative segment for IT firms,
offering a US$ 250 billion market opportunity by 2020.

 The US$ 12 billion plus rising Indian e-commerce business market is witnessing a rush of
hiring and may need 100,000 people over the next six months, as per industry experts. The
industry offers a slew of opportunities and scope for innovation thereby attracting the young
mind to push their limits.

 Emerging protectionist policies in the developed world are expected to affect the Indian IT
companies. Due to US restrictions on visas as well as rising visa costs, most Indian IT
companies are increasingly subcontracting onsite jobs to local employees in the US.
Additionally, the new immigration bill is still under consideration in the US which, if
 implemented, will significantly raise employee costs for onsite workers. This would adversely
affect margins of Indian IT companies.

 Indian IT companies are increasingly adopting the global delivery model. They are setting up
development centers in Latin America, South East Asia and Eastern European countries to take
advantage of low cost and also cater to the local market. In the US, such centers will help
mitigate the risks of the new immigration bill and increase the probability of winning projects
in highly regulated sectors such as healthcare, government services, utilities etc.

 ADM services, which used to provide major chunk of revenues to the domestic IT players, are
getting affected due to the falling billing rates. Hence, the companies are now venturing into
new high value services such as IT Consulting, Product Development, and the new digital
SMAC services.

 The integration of IT-BPO contracts is expected to become more common, as clients look out
for end-to-end service providers. Large Indian companies like Infosys, TCS, Wipro, Tech
Mahindra and HCL Technologies, will benefit from this trend.

 Billing rates are expected to remain under pressure in the short term. Therefore companies are
expected to preserve their margins through effective cost containment measures like shifting
more wore work offshore and improving employee utilization. Lessons learnt during the global
financial crisis can benefit them in the long run.

 Billing rates are expected to remain under pressure due to commoditization of traditional
services. Therefore companies are expected to preserve their margins through effective cost
containment measures like shifting more wore work offshore, improving employee utilization
and the increasing use of automation software.

Michael Porter’s 5 Forces Model

Supply
Abundant supply across segments, mainly lower-end, such as ADM. Lower supply in higher-end
areas like IT/Business Consulting, but competition is very tough.

Demand
The global downturn had put considerable pressure on global IT spending but the situation is now
improving.

Barriers to entry
Low, particularly in the ADM & BPO segments as these are prone to relatively easy
commoditization. It's high in value-added services like IT/Business Consulting and R&D where
in-domain expertise creates a barrier. The size of a particular company/scalability and brand-image
also creates barriers to entry; as such firms have built up long-term relationships with major clients.

Competition
Competition is global in nature and stretches across boundaries and geographies. It is expected to
intensify due to the attempted replication of the Indian offshoring model by MNC IT majors as
well as small startups.

Substitution of IT services and products

IT continues to be a driving force towards all aspects connected with our lives. While a particular
technology may become obsolete and a particular company specializing in it may suffer, the
obsolete technology can only get substituted by a newer technology offered by the same/different
player in the IT/ITES industry.

Companies in Information Technology Sector

The initiative of the fund is to have a sustained growth over a long term with stability. Thus it was
decided that only large cap companies shall be shortlisted in the first filtering process of narrowing
down of company names from the IT sector.

So as per the data available on the exchange the following companies in the illustration were
selected. They are arranged in an ascending order.
Table showing market capitalization of companies -

Company Market Capitalization ( Rs. Crores)

Tata Consultancy Services 509,670.81
Infosys 232,703.46
Wipro Ltd 139,091.07
HCL Technologies 132,566.94
Tech Mahindra Ltd. 53,442.62
Oracle Financial Services 29,711.23
MindTree Ltd. 11,743.22
Info Edge (India) 9,628.71
Hexaware Technologies 8,681.20
MphasiS Ltd. 7,887.67
Just Dial 7,755.11
Cyient Ltd. 5,981.54
From the above data its clear the market caps of all the IT companies is very large in fact, TCS
has the largest market cap among all Indian companies listed on the stock exchanges. Hence any
negative expectations for the IT industry can hit the stock markets very badly.

Our aim is to select the most appropriate companies for investment among these 11 companies by
the means of fundamental analysis.

Fundamental Analysis of IT Sector

As earlier explained the big advantage the IT industry of India has over other countries is the cost
advantage of an English speaking workforce. Hence majority of clients the industry provides
services are in America and then followed by Asia or Europe. The IT industry is one of the biggest
exporters in India and so their revenue is directly related to the exchange rate prevailing in the
world. The companies make use of hedging strategies to control the effect of the currency
fluctuations on their topline i.e. revenue. Also the companies having large number of contracts
from Europe could be badly affected due to the current Eurozone crisis but fortunately all
companies have their majority clients in US in some cases even more than 50% of them are US
based thus the crisis has not affected the industry that much.

Thus we cannot filter out companies based on the topline factor of the exchange rates or the
geographical client segmentation since the factors affect them all to a similar extent.
The next factors we can use are the ones which affect their bottom-line i.e. their Net Profit. These
factors are Attrition Rate. The IT industry is an industry which has the highest attrition rates
compared to other industries. Employees leaving means new employees have to be hired every
year to replace them along with new recruits required for expanding operations. This means every
year a huge amount of cost is incurred for the training and development of the new employees
which reduces the net profit. But on the other hand the effective way of retaining the experienced
employees is by giving salary increment every year or maybe other incentives. But giving very
High Salary incentives every year is not practical since the biggest reason for the IT industries
success is the cost factor. Thus a successful company will manage these factors affecting their
bottom-line successfully maintaining an equilibrium between the both. But due to lack of
information we are currently only using the attrition rate for company selection.
Attrition Rate for the Large Cap Information Technology firms –

Attrition Rate means the % of Employees leaving the Firm on an Annual Basis. This Data is for the
Year 2014-15. A Higher Attrition Rate is not desirable for the company.

Attrition Rate
HEXAWARE TECH 16.66%
ORACLE FIN SERV 21%
TCS 15%
PERSISTENT 15.5%
TECH MAHINDRA 19%
CYIENT 17.2%
MINDTREE 14.23%
INFOSYS 18.9%
HCL TECH 16.9%
WIPRO 15.4%
MPSHASIS 20%
INFO EDGE (INDIA) 3%

As observed, the Highest Attrition rate is for Tech Mahindra and lowest is for Info Edge (India) Ltd.
However this won’t be the sole factor for analyzing the performance of the company.
Analysis as per P/E Method

Company Consolidated Valuation MPS EPS LTPT Expected

PE (Rs.) (Rs.) Growth
Infosys 18.87 Undervalued 988.33 52.38 1320.67 33.63%
Wipro Ltd 16.08 Undervalued 537.3 33.41 842.55 56.81%
HCL Technologies 19.23 Undervalued 895.5 46.57 1174.23 31.13%
Tech Mahindra Ltd. 20.34 Undervalued 552.10 27.14 684.44 23.97%
Oracle Financial Services 24.92 Undervalued 3615.15 145.07 3658.00 1.19%
MindTree Ltd. 21.98 Undervalued 1296.25 58.97 1487.05 14.72%
MphasiS Ltd. 11.69 Undervalued 374.35 32.02 807.47 115.70%
Cyient Ltd. 16.94 Undervalued 538.3 31.78 801.27 48.85%
Persistent Systems 20.55 Undervalued 725.8 35.32 890.58 22.70%
TCS 25.67 Overvalued 2512.05 97.86
Info Edge (India) 49.66 Overvalued 819.7 16.51
Hexaware Technologies 26.04 Overvalued 266.1 10.22
Just Dial 55.83 Overvalued 1111 19.90
Sector Average P/E 25.22

Note-

 All Market Price per share mentioned in the Table are as per the date – 12th June, 2015.
 Sector Average P/E is calculated by taking Average of P/E of large Cap stocks.
MPS
 EPS is calculated as -
Stock P/E
 LTPT is Calculated as – EPS x Sector Average P/E Ratio
LTPT−MPS
 Expected Growth is calculated as - x 100
MPS
Analysis as per PEG Ratio

EPS EPS EPS Estimated

PE PEG
MPS (Trailing) 2014 2015 2016 2017 2018 Ratio LTPT
TCS 2512.05 23.44 107.15 119.46 132.57 146.45 179.43 1.61 4767.69
Y-o-Y 11.49% 10.97% 10.47% 22.52%
CAGR 14.52% 22.28% 22.52%

Info Edge 819.7 226.44 3.62 7.25 12.64 17.96 - 2.10 1117.26
Y-o-Y 100.28% 74.34% 42.09%
CAGR 107.82% 42.09%

Hexaware 266.1 20.95 12.7 10.66 12.91 15.49 17.52 1.16 414.56
Y-o-Y -16.06% 21.11% 19.98% 13.11%
CAGR 18.01% 27.60% 13.11%

Notes –

 EPS for the Year 2016, 2017 and 2018 are Estimates as gathered from Bloomberg

 Year on Year Growth (Y-o-Y) for each year is calculated as -

EPS Current Year −EPS Previous Year
EPS Previous Year

 Compound Annual Growth Rate in EPS is calculated as

[(1 + g1) x (1 + g2) x (1 + g3)] ^ (1/3) – 1
Where g is Y-o-Y growth for Next Years

Even if the stocks are underpriced certain companies can be selected for investment if they are
growing at a fast rate for which P/EG ratio method is used to analyze a Security. As per the PEG
Ratio,
Justdial is not considered for calculating PEG ratio as no information of next 3 years about
Estimated EPS is available.

Hexaware looks an attractive buy as its PEG ratio is less than that of desired PEG ratio i.e. 1.5.
TCS and Info Edge (India) seems an Overvalued stock with Growth not being that high. Thus we
wont be investing in these stocks.
Considering the Attrition Rates, P/E and PEG Valuation for the stocks, we choose to Invest in
following companies and the reason for Investing in these companies is because of the
Performance of the company which is linked to the fundamental factors of the company and these
factors are explained in the further section of the report. One of the example is Order Book i.e. the
Sales to different regions in the world is the most important Topline factor considered while
analyzing IT company

1. Infosys

2. Wipro

3. HCL Technologies

4. Tech Mahindra

5. Oracle Financial Services Software

6. MphasiS Ltd

7. Hexaware Technologies

Out of these companies, Hexaware Technologies will be the Growth Pick for Information
Technology Sector in the Portfolio and rest all the company will be the Value Pick for the sector.
Infosys Ltd.
Infosys expects to achieve revenue of $20 billion by FY20. This includes $1.5 billion contribution
from acquisition and $2 billion from new technologies such as design thinking, artificial
intelligence and platform based offerings. This translates to 13.6% CAGR for existing business.
Infosys aims to achieve 30% margins by 2020 aided by employee productivity improvement.
Employee productivity improvement could be driven by initiatives in 1) New technology and 2)
Automation in commoditized business. Infosys also expects to return to industry leading growth
and margins by FY17 estimated.

Client additions and order bookings continue to be healthy as Infy added 52 clients during the
quarter taking the active client base to 950 vs. 890 as at FY14 end. Large deal signings continue
to be healthy as the company signed deals worth $414 million total contract value (TCV).

From a vertical perspective, all segments declined except transportation & logistics. While energy
& utilities, telecom declined, healthcare & BFS fall was surprising. FSI, manufacturing grew,
while retail logistics, energy & utilities declined.

Infosys reported three consecutive healthy quarters. Though management laid out its 2020 vision
and continues to exude confidence in its strategy, we believe, recovery to industry leading growth
and margins could be prolonged and could accrue.

Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 50,133.00 53,319.00 56,425.00 63,440.00
EBIDTA 13,415.00 14,901.00 15,239.00 17,453.00
EBIDTA Margin (%) 26.76% 27.95% 27.01% 27.51%
PAT 10,648.00 12,329.00 12,575.00 14,279.00
EPS (Rs.) 93 108 110 125
Return on Equity 24.40% 24.10% 21.70% 22.10%

As observed from the table, Revenue, EBIDTA, EBIDTA margins have improved. PAT and EPS
have improved significantly. Return on equity has declined marginally.
Order Book

2013-14 2014-15 Percentage Growth

Revenue 50133 100.0% 53319 100.0% 6.36%
North America 30413 60.7% 32794 61.5% 7.83%
Europe 12250 24.4% 12829 24.1% 4.73%
Rest of World 6176 12.3% 6412 12.0% 3.82%
India 1294 2.6% 1284 2.4% -0.77%

As observed, revenues have improved moderately out of which the major growth is contributed by
US which has major proportion in the Revenue.
Hence this stock seems an attractive buy.

Wipro Ltd
Though earnings commentary suggests an optimistic demand environment, Wipro’s constant
currency revenue growth guidance appears softer than anticipated led by weakness in energy, BFSI
verticals. Wipro highlighted that a significant fall in commodity prices may create near-term IT
spending headwinds for these customers but may create significant opportunities in cost
optimization deals, in longer term.
Client metric continues to be healthy
The client metric was healthy with 16 clients added to >$1 million category. Clients contributing
>$100 million, >$50 million in revenue on an LTM basis increased by one each while >$20 million
increased by two. Eight, six clients were added to >$5 million, >$3 million category while five
clients were added to $1-3 million category, respectively.
Utilization recovers sharply both Q-o-Q, Y-o-Y
Utilization (ex-trainees) increased helped by automation initiatives in the traditional ADM
business.
Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 43,763.00 47,318.00 48,497.00 52,269.00
EBIDTA 10,046.00 10,825.00 11,267.00 12,284.00
EBIDTA Margin (%) 22.96% 22.88% 23.23% 23.50%
PAT 7,797.00 8,653.00 8,888.00 9,979.00
EPS (Rs.) 31.7 35.1 36 40.5
Return on Equity 24.90% 23.00% 20.50% 20.40%

As observed from the table, Revenue has improved significantly, EBIDTA has improved
marginally, EBIDTA margins have declined. PAT and EPS have improved significantly. Return
on equity has declined slightly.

Order Book

2013-14 2014-15 Percentage Growth

Revenue 43423.8 100.0% 46951 100.0% 8.12%
USA 20034.3 45.8% 22732.8 48.0% 13.47%
Europe 12086.8 27.6% 12452.3 26.3% 3.02%
Rest of the World 7018.2 16.0% 7551.7 16.0% 7.60%
India 4622.6 10.6% 4575.3 9.7% -1.02%

As observed, revenues have improved moderately out of which the major growth is contributed by
US which has major proportion in the Revenue. Europe also has a significant proportion of Sales
to total sales which could a risk factor because of Eurozone crisis.
Hence this stock seems an attractive buy.
HCL Technologies
Infrastructure business (35% of revenues) growth accelerated led by deal wins and ramp-ups but
in line with its eight quarter average growth of 5%. Application service (~41%) continues to be
weak and grew below company average while enterprise system integration grew. Industry
application services reported a modest decline. Overall, application services reported a soft 7.7%
Y-o-Y growth (CC) led by softness in both, enterprise SI (8%) and industry application services
(7.5%).
ER&D (19% of revenues) growth was tepid. HCLT signed deals worth >$1 billion TCV – eleventh
consecutive quarter with a significant proportion likely in IMS – and could aid HCLT’s overall
growth trajectory.
Margins continue to slide
Margins were impacted by higher business investments, visa costs and SG&A expenses partially
offset by currency tailwinds and utilization improvement. Overall, for FY15, HCL reported
margins of 22.3%. The management continues to target an EBIT margin band of 21-22% for
FY16E. It is expected margins to decline to 21.5% primarily led by wage hikes and business re-
investments.
Bookings steady but conversions continue to be tepid
HCLT likely signed new deals worth $1 billion TCV during Q4 taking LTM order bookings to $5
billion plus. Noticeably, this is the eleventh consecutive quarter where the company signed deals
in excess of $1 billion. However, the pipeline likely continues to favor infrastructure deals leading
to a concentrated growth profile.

Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 32,917.00 37,061.00 42,707.00 48,681.00
EBIDTA 8,666.00 8,701.00 9,695.00 11,294.00
EBIDTA Margin (%) 26.33% 23.48% 22.70% 23.20%
PAT 6,369.00 7,254.00 7,910.00 9,184.00
EPS (Rs.) 45.1 51.4 56 65
Return on Equity 32.60% 29.30% 26.10% 24.90%
As observed from the table, Revenues has improved significantly, EBIDTA has improved
moderately, EBIDTA margins has declined. PAT and EPS have improved significantly. Return on
equity has declined slightly.

Order Book

2013-14 2014-15 Percentage Growth

Revenue 100.0% 100.0% 15.10%
USA 57.5% 57.5% 14.10%
Europe 31.0% 31.4% 18.70%
Rest of World 11.5% 11.2% 10.30%

As observed, revenues have improved significantly out of which the growth contributed by US is
significant which has major proportion in the Revenue. Europe also has a significant proportion of
Sales to total sales which could a risk factor because of Eurozone crisis. However Europe
contribution to Growth is highest.
Hence this stock seems an attractive buy.
Tech Mahindra
Top client weakness, foreign exchange drags organic growth
TechM reported disappointing earnings. Constant currency revenues declined led by weakness in
1) telecom, 2) enterprise business, 3) weakness in manufacturing especially in aerospace, defence
and energy sub-verticals. Top customers weakness persisted for the second consecutive quarters
are top 5, 10 customer revenues declined. Management commentary suggests that recovery from
ongoing restructuring is at least two quarters away despite healthy deal pipeline. TechM signed
deals worth ~$2.1 billion in TCV in the past eight quarters as it continues to see good traction in
the network services segment.
Margins erosion worrying
At 15.2%, EBITDA margins were significantly below led by wage hikes, acquisitions integration,
cross currency headwinds and higher SG&A expenses. Further, the margins were lower than
average led by reasons mentioned above. Finally, the management expects to partially recoup
margins in FY16 led by utilization, higher offshore, better margins in LCC which had partially
offset by visa costs and seasonal weakness in Comviva.
LCC aids client additions; mining moderated
During the quarter, active clients rose by 93 to 767 largely helped by LCC and SOFGEN, which
together added 87 clients. Across buckets, $1 million+, $5 million+, $10 million+ and $20 million+
categories saw additions of 37, eight, five and three clients, respectively, helped by LCC and
SOFGEN. Client mining adjusted for acquisition revenue and client additions continues to
moderate as revenue/client stood at $1.30 million.
Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 18,831.00 22,621.00 26,987.00 31,115.00
EBIDTA 4,184.00 4,153.00 4,587.00 5,600.00
EBIDTA Margin (%) 22.22% 18.36% 17.00% 18.00%
PAT 3,029.00 2,628.00 3,064.00 3,832.00
EPS (Rs.) 34.9 26.7 32 40
Return on Equity 37.80% 24.50% 22.80% 24.00%
As observed from the table, Revenues have improved significantly, EBIDTA has declined
moderately, EBIDTA margins have declined. PAT and EPS have declined moderately. Return on
equity has declined slightly.

Order Book

2013-14 2014-15 Percentage Growth

Revenue 18831.4 100.0% 22621.3 100.0% 20.13%
USA 8632.7 45.8% 10732.6 47.4% 24.32%
Europe 5834.5 31.0% 6961.9 30.8% 19.32%
Rest of the World 4364.2 23.2% 4926.8 21.8% 12.89%

As observed, revenues have improved significantly out of which the major growth contributed by
US which has major proportion in the Revenue. Europe also has a contributed significant
proportion of Growth in Sales.
Hence this stock seems an attractive buy.
Oracle Financial Services Software Ltd

Oracle Financial Services Software Ltd reported strong license signings of $25million, with 13
new product customer additions for the quarter. The sustained strong momentum in products
revenue led to an OPM expansion.
New license sale though was lower than the expectations, is much better qualitatively (eight
signings in large economies), hinting at signs of revival in the CBS space in the medium term. The
commentary on deals remains confident as are the factors of growth (banks shifting to CBS is long
due considering the incremental regulatory pressures, suppressed Return on Equity for banks post
GFC and improved outlook on IT spending in developed economies).
It is expected that OFSS to benefit from the same driven by its strong sales efforts, innovative
modular approach (OBP) and unmatched competitive positioning in the segment, and expect the
stock to re-rate further given its improving financials, strong dividends and structural positive
build-up in its business.
Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 3,741.32 3,904.91 4,474.42 5,078.42
EBIDTA 1,399.46 1,550.80 1,782.62 2,055.80
EBIDTA Margin (%) 37.41% 39.71% 39.84% 40.48%
PAT 1,359.32 1,192.32 1,394.17 1,609.3
EPS (Rs.) 161.64 141.3 165.222 190.685
Return on Equity 16.80% 19.51%

As observed, the Revenues have increased along with the EBIDTA and EBIDTA margins.
However the profits and EPS have declined. However Return on Equity have improved.

Order Book

2013-14 2014-15 Percentage Growth

Revenue 3474.00 100.0% 3741.32 100.0% 7.69%
United States 1060.94 30.5% 1239.23 33.1% 16.80%
Asia Pacific 1070.79 30.8% 967.78 25.9% -9.62%
Europe 670.43 19.3% 730.52 19.5% 8.96%
Middle East, India & Africa 583.79 16.8% 689.19 18.4% 18.05%
Latin America & Carribean 88.06 2.5% 114.62 3.1% 30.16%
As observed from above table, Oracle has performed well in United States and Latin America
which are also accounts for Largest share in sales.
MphasiS
Management maintained strong commentary and confidence on the business going forward driven
by strong deal TCV additions and deal traction in its key focus segment of GRC/Digital. The
company has been adding deals in the digital risk portfolio both in the origination (recurring) and
forensic/quality check (project driven). The management has indicated better OPM FY 16 despite
likely wage hike due and effective 3QFY16. The confidence on profitability is driven by improved
business traction, exit from low-margin India voice BPO business and recovery in the digital risk
segment.
Deal traction was strong across the key segment of GRC/Digital. The company added new deal
TCV of $76mn for the quarter. India voice business that has been sold to Hinduja Global/Karvy
data services would be effective from 2QFY16, provided it gets clearance from the regulatory
bodies.
Mphasis has received a total consideration of Rs198mn and would lead to a reduction in headcount
by over 9,000 employees. The company would continue to invest in sales and marketing with
S&M cost in the range of 6-7% of sales.
Mphasis has proposed to issue 2.5mn RSU shares that will be acquired from the market. This
would lead to an investment of ~Rs1bn at current prices and be passed through P&L. It would
affect profits as it will be issued to employees at face value but would reduce the equity base akin
to a share buyback. If approved during the AGM, it would be brought into effect systemically over
the next three years.
Salary hikes would be effective by 3QFY16, though the quantum is not yet decided.

Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 2,594.00 5,795.00 6,259.00 6,822.00
EBIDTA 440.00 870.00 1,139.00 1,242.00
EBIDTA Margin (%) 16.96% 15.01% 18.20% 18.21%
PAT 309.00 678.00 794.00 858.00
EPS (Rs.) 34.8 32.5 38 41.1
Return on Equity 34.70% 12.80% 14.00% 14.30%

As observed in above table, Revenues, EBIDTA and PAT have improved significantly. However
the EPS have declined. Return on Equity has declined significantly.
Order Book

2013-14 2014-15 Percentage Growth

Revenue 5,796.3 100.0% 5,794.8 100.0% -0.03%
USA 4,222.9 71.5% 4,131.0 71.5% -2.18%
EMEA 789.5 13.4% 720.1 12.5% -8.79%
India 487.2 8.3% 551.8 9.5% 13.25%
APAC 404.6 6.9% 377.4 6.5% -6.71%

The overall revenues have declined all over the world. Only the revenues in India have improved
but since its weightage is very small, the improvement is insignificant. United States being a major
importer for MphasiS, the revenues have declined significantly.
Hence the stock doesn’t seem attractive. It is suggested that the proportion of the stock in the
portfolio should be reviewed when Portfolio is reviewed are 2 months looking at the Quarterly
Results.
Hexaware Technologies Ltd.
Key focus of management is on Automation, Digitalization and Data.

There is a large opportunity to acquire new clients by providing solutions that can reduce total cost
of ownership for clients. This is likely to be achieved through automation of multiple processes
within a service. The above process may lead to a more than 40% correction in TCV but the deal
could be still of large size with perspective of HEXW and profitable due to implementation of
automation. Management agreed that automation is a slow process and it will impact some of its
own services but the benefits are likely to outsize the impact on current revenue base.
Within IMS, the costs of network, storage and computing has declined significantly. However,
cost of operations have not declined to the similar magnitude. Automation is likely to cause a
larger decline in the cost of operations.

Within BPO services, multiple deal wins had been through displacement of an incumbent within
the customer’s preferred vendors. The deals had been profitable despite a near shore delivery. The
structure of the deal have not led to a pricing drop but a reduction in volume compared to earlier
delivery by erstwhile vendor.

Management has introduced an ESOPs scheme for more than 200 senior management employees
which will lead to more than 8.2mn share issuance. The vesting of ESOPs is linked to long term
performance goals. These goals are linked to outgrowing larger peers in terms of revenue and
profitability over a three to five year period.

S&M investments are made in creation of product and account teams that are empowered to create
products and solutions for clients, training sales staff on new products and solutions and help cross
selling and improve client mining.
Hexaware has also created a team of hunters that would help acquired new clients that will be
sizeable over a medium term.

Management expects margins to improve over the medium term and key margin levers include (1)
Utilization, but the current utilization is likely to be maintained as HEXW needs to be prepared
for high growth; and (2) Operating leverage from S&M investments.
Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 2,581.68 2,868.04 3,014.53 3,434.85
EBIDTA 477.56 522.02 550.71 636.96
EBIDTA Margin (%) 18.50% 18.20% 18.27% 18.54%
PAT 320.15 355.52 401.59 479.85
EPS (Rs.) 10.66 11.81 12.99 15.54
Return on Equity 31.55% 25.72%

As observed, the Revenues, EBIDTA, PAT, EPS have improved and it is expected to improve
going forward. However Return on equity has declined moderately.

Order Book

2013-14 2014-15 Percentage Growth

Revenue 6,441.8 100.0% 7,717.4 100.0% 19.80%
USA 5,102.4 79.2% 6,250.4 81.0% 22.50%
Europe 892.9 13.9% 1,020.5 13.2% 14.29%
Rest of the World 446.5 6.9% 446.5 5.8% 0.00%

The Sales to US region which accounts for largest share in Revenue have improved significantly
while growth in Europe region has also been substantial.

Hence the stock does seem an attractive stock.

Fund Allocation
Considering all the Topline, Bottom line, Fundamental factors, Company performances within
India and its Exports, and Management outlook, we have allocated Rs 6.25 Crores to Information
Technology Sector on 12th June, 2015.
Buy Price Amount Invested
Pick Company Number of Shares
(Rs.) (Rs.)
Infosys Ltd 12,546 988.33 1,24,00,000
Wipro Ltd 24,259 537.3 1,30,34,301
HCL Technologies 7,974 895.5 71,41,011
Value
Tech Mahindra Ltd. 9,961 552.1 54,99,268
Oracle FSS 3,460 3615.15 1,25,09,500
MphasiS Ltd. 26,713 374.35 1,00,00,000
6,05,84,080

Growth Hexaware Technologies 7,200 266.1 19,15,920

19,15,920
6,25,00,000

The Share Price is the Price as on 12th June,2015 as quoted on National Stock Exchange.
Technical Analysis
We will be analyzing the stocks using the patterns such as Trendiness, Head and Shoulders,
Rounding Bottom, Cup with Handle, Bump and Run Reversal - used to analyze long term
movements. This is because we are creating a portfolio for a Long period. However, if the
Technical Analysis suggest the other way round view for stock, it wont budge our decision to
invest in a particular stock based on fundamental analysis.

Infosys Ltd.
The Line chart of Infosys Ltd. for the period June 2010 to June 2015 is given as follows –

The Price of Infosys showed Head and Shoulders Pattern from the year 2010 to Mid year 2011.
There was a down trend in the Price once the Price broke the Neckline at the level of Rs. 717. In
order to make Profit, Infosys should had been Shorted and again bought in 2012.
The Price of Infosys showed Rounding Bottom, Up Trend, and Bump and Run Reversal pattern
from period of Beginning 2014 till Mid Year 2015. The Trend line is created using more than 3
Points to form a straight line, from the most lowest point of the Rounding Bottom and is extended
till stock falls below the Trendline.. Stock was in Uptrend till Mid 2015, so it should had been
bought at the Lowest level of Rounding Bottom – Rs 754 and should had been sold when the Stock
fell below the Trendline i.e. Rs.1066.

Presently, this stock is forming a Rounding Bottom and it could possible show an Uptrend from
the level of Rs. 971.
Wipro Ltd.
The Line chart of Wipro Ltd. for the period June 2010 to June 2015 is given as follows –

The Price of Wipro showed Rounding Bottom, Up Trend, and Bump and Run Reversal pattern in
the period of Mid Year 2013. The Trend line is created using more than 3 Points to form a straight
line, from the most lowest point of the Rounding Bottom and is extended till stock falls below the
Trendline. Stock was in Uptrend till Beginning of 2015, so it should had been bought at the Lowest
level of Rounding Bottom – Rs 325 and should had been sold when the Stock fell below the
Trendline i.e. Rs.538.

Currently, the Stock is in Downtrend and it is very close to breaking the Down trend line. Therefore
it is possible that Wipro may rise going further looking at the pattern.

HCL Technologies Ltd

The Line chart of HCL Technologies Ltd. for the period June 2010 to June 2015 is given as follows
–

The price of HCL showed and Uptrend from the period of Mid 2013 to Mid 2014. So the stock
should had been bought at the price of Rs. 340 and sold at the level when the price fell below the
Trendline i.e. 700. A support was created at the level of Rs 750 and current the Stock is showing
an Uptrend.
The Trend line is created using more than 3 Points which form a straight line and is extended till
stock falls below the Trendline.
Tech Mahindra Ltd

The Line chart of Tech Mahindra Ltd. for the period June 2010 to June 2015 is given as follows
–

The Price of Tech Mahindra showed Rounding Bottom, Upper Trend, and Bump and Run Reversal
pattern in the period of Mid Year 2013. The Trend line is created using more than 3 Points to form
a straight line, from the most lowest point of the Rounding Bottom and is extended till stock falls
below the Trendline. Stock was in Uptrend till Mid 2015, so it should had been bought at the
Lowest level of Rounding Bottom – Rs 238 and should had been sold when the Stock fell below
the Trendline i.e. Rs.550.

Presently, this stock is forming a Rounding Bottom and it could possible show an Uptrend from
the level of Rs. 474.
Oracle Financial Services Software Ltd.
The Line chart of Oracle Financial Services Ltd. for the period June 2010 to June 2015 is given as
follows –

The Price of Oracle Financial Services showed Rounding Bottom pattern in the period of
Beginning 2014. The Trend line is created using more than 3 Points to form a straight line, from
the most lowest point of the Rounding Bottom and is extended till stock falls below the Trendline.
Stock is still in Uptrend, so it should had been bought at the Lowest level of Rounding Bottom –
Rs 2808 and should be sold when the Stock fell below the Trendline.

Presently, this stock is showing a strong Positive trend and it should be Bought or held as a long
term investment.
MphasiS Ltd
The Line chart of MphasiS Ltd. for the period June 2010 to June 2015 is given as follows –

The stock was in Down Trend from Mid 2014 till Mid 2015. The Trend line is created using more
than 3 Points to form a straight line, from the most Highest point and is extended till stock rises
above the Trendline. Currently the Stock has broken the Down trend and it is very likely that Stock
could be showing a Positive trend going forward. It has shown a Support at the level of Rs. 360.
Therefore it is suggested to Buy or Hold the stock and keep the Stop loss level at Rs. 360.
Hexaware Technologies Ltd
The Line chart of Hexaware Technologies Ltd. for the period June 2010 to June 2015 is given as
follows –

A cup with handle chart is a Bullish continuation pattern in which the upward trend is paused for
sometime but will continue in an upward direction once the pattern is confirmed when the Share
price rises above the Level of Handle.

The Price of Hexaware Ltd showed Head and Shoulders Pattern in the First half of the Year 2015.
There could be a down trend in the Price once the Price broke the Neckline.

Presently the Share price is very close to Neckline. Hence it is recommended that if Investor is in
a Long position, it should be appropriately hedged by Shorting the Future of a stock.
Tyre Industry
The Structure of Indian Tyre Industry can be illustrated as follows –

Indian Tyre Industry

Commercial Passenger
Others
Vehicles Vehicles

Medium and
Heavy Farm Vehicle
Commercial Cars
Vehicle

Heavy
Motorcycles / Off the Road
Commerical
Scooters
Vehicle

Light Industrial
Commercial Vehicle
Vehicle
Demand Cycle for Tyre Industry
The Demand cycle for Tyre Industry is illustrated as below-

The fortunes of the Tyre sector are closely linked to those of the auto sector. Demand swings in
any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary
demand. Demand is derived from original equipment manufacturers (OEM) as well as the
replacement market.
Margins in the replacement market are higher than the OEM market. The OEM market is very
competitive and component manufacturers have to compromise on margins to bag bulk orders.
Moreover, delivery schedules and quality standards have to be adhered to very strictly.
Fundamental analysis of Tyre Industry
Tyre Industry Size – Rs. 520 Billion (FY 2015)
CAGR in Revenues – 12.6% (From FY 2011 to FY 2015)

SEGMENT MIX (TONNAGE) FY 2015

Exports, 10%

Replacement, 30%

OEM, 60%

PRODUCT MIX (TONNAGE) FY 2015

Tractors, 9% Others, 1%
OTR, 1%
2 Wheeler, 6%

PV, 23% Commercial Vehicle,

60%
Domestic tyre industry expected to grow by 4%-8% over the next three years: The domestic
tyre industry is estimated to have grown by 10%-12% during 2014-15, supported by growth in
OEM segment and replacement segment. It is expected that tyre industry to report a growth of 4%-
8% over the next three years, supported by pick up in auto OE demand across segment. Headwinds
from the motorcycle and tractor segments, weaker exports and Chinese imports would however
persist over the next 12 months.
Tyre imports surge in 2014-15 led by sharp inflow of two wheeler (2W) tyres: Tyre imports,
after recording a sequential annual decline of during the period 2011-2014, grew by a sharp
(volumes) in 2014-15 led primarily by surge in 2W tyres. It is expected that the trend of rising
imports to continue over the near term with issues of capacity constraints in the 2W tyre segment
and rerouting of US bound Chinese exports to India, with the recent imposition of anti dumping
duty on Chinese tyres in the US. Further, the anticipated spike in Truck and Bus (T&B) imports in
2015-16 - with the February-15 sunset of the erstwhile Anti Dumping Duty (ADD) on T&B
imports – is also expected to drive imports.
Tyre exports (value) de-grew by 0.7% for 2014-15; monthly volume trends suggest
weakening demand in key export destinations: Exports on the other hand, de-grew by 3%-6%
(in volume) across segments owing to weak off-take on the back of subdued global auto demand,
especially in Africa and parts of Asia. The global shift towards radials is also leading to a drop in
exports as India primarily exports cross plys. It is expected that 4%-5% degrowth in tyre exports
(value and volumes) from India during 2015-16, assuming stable currency levels. That said, the
levy of preliminary ADD by US on Chinese tyres may provide some opportunities for Indian tyre
exporters too.
Large scale capital expenditure in full swing across several product categories: In line with
the expectations, the tyre industry witnessed commencement of several large scale capex
programmes during 2015-16. ICRA estimates that the industry is currently witnessing investments
in projects worth over Rs. 56 billion – wherein these capacities are likely to come on-stream over
the next 12 – 24 months (full ramp up in the next 12-18 months following commercial production).
Over the medium term, it is anticipated that, while TBR capacities are expected to be absorbed in
whole (gradually), utilizing of redundant bias capacities could be a concern.
Favorable input costs drive industry margins to all time high: The industry is currently
experiencing one of the best periods recording sharp expansion in profits driven by low input costs.
While Natural Rubber (NR) prices trended up in Q4 2014-15 following policy measures, they are
currently trading lower at Rs. 120-130 (per kg) levels. Crude linked derivatives such as synthetic
rubber, carbon black and rubber chemicals too, despite rising in line with in crude oil prices during
Q1 2015-16, remain favourable. However, it is expected tha the depleting NR stock and demand
driven inflation to lead to higher input costs over the next 12-18 months which would lead to
correction in profit margins to more sustainable levels.
Global tyre industry to grow by 1%-2% during CY2015: Growth in the global automotive
demand is expected to moderate to 2.8% in CY2015, from 3.5% in CY2014, according to Moody’s
Investor Services. While growth prospects in India and USA are improving, European, China and
other emerging markets are likely to see a slowdown or de-growth in demand. As a consequence,
ICRA expects the global tyre industry to grow by 1%-2% in the current calendar year (CY2015).

Market is dominated by few large players, with MRF remaining the leader: Over the years,
MRF has been the dominant player in the country (estimated based on turnover) by virtue of its
strong product capabilities apart from focused branding efforts backed by a deep distribution
network panning across India and steady exports. However, several players (Apollo, JK and CEAT
in particular) have challenged its market share in recent years through prudent brand management
backed by sizeable investments in product development / capacities. Global majors like Goodyear
and Bridgestone have also increased their share in India in recent years. Over the medium term, it
is expected that the competitive intensity in the industry to rise with expected on-streaming of
several Greenfield and Brownfield capacities by domestic as well as international players.
Market Share Based on FY 2014 Sales-

1%
1%
1%
4% 3%
3%

4% 29%

5%

7%

12%

17%

13%

MRF Apollo JK Tyres CEAT Balkrishna Birla Bridgestone

Goodyear TVS Srichakra Falcon ATC Ralson Metro
Prospects
 There has been a conscious effort by manufacturers to improve productivity of the suppliers in
the past few years. Though the number of active vendors has declined significantly for auto
manufacturers, technology transfer and fresh fund infusions have resulted in improved
productivity in the remaining ones. Relaxation of FDI norms for the small-scale sector could
emerge as one of the key growth drivers in the long run. The Indian automotive components
industry has lined up sizeable investment schedules for the next few years.

 The automobile sector is cyclical and dependent on the growth of the economy and
improvement in infrastructure. Factors like increased public spending, favorable interest rates
and general improvement in per capita income point towards higher demand for automobiles
in the future. Also, government's initiatives in the infrastructure sector such as the Golden
Quadrilateral project and NHDP (National Highway Development Programme) are likely to
give boost to four-wheeler sales especially CVs. Just to put things in perspective, we expect
CV segment to grow by 7% to 8%, 2-wheeler demand to increase by around 12% to 15% and
passenger car sales growth at 10% to 12% over the medium to long term. This is a positive for
auto ancillary manufacturers.

 In the long term, the growth of this sector will depend partly on pace of indigenization levels
across all segments. The prospects look bright as most companies are increasing the indigenous
components, in an effort to reduce their currency losses and remain competitive. Also, the fact
that auto manufacturers like Ford, Hyundai and Maruti are exporting cars, make the prospects
look encouraging.

 The growing number of Free and Preferential trade agreements being signed by India with
countries like Thailand, Singapore and other ASEAN countries will hurt the cost
competitiveness of Indian companies as Indian players play significantly higher duties than
their Asian counterparts. Therefore, Indian companies might lose out on big orders if the duty
structure is not rationalized.
Companies in Tyre Industry

The initiative of the fund is to have a sustained growth over a long term with stability. Thus it was
decided that only large cap companies shall be shortlisted in the first filtering process of narrowing
down of companies from the Tyre sector.

So as per the data available on the National exchange, following companies in the illustration were
selected. They are arranged in an ascending order.
Table showing market capitalization of companies

Company Market Capitalization ( Rs. Crores)

MRF 14,127.16
Apollo Tyres 8,419.27
JK Tyre & Ind 6,764.17

Analysis as per P/E Method

Company Consolidated Valuation MPS EPS LTPT Expected

PE (Rs.) (Rs.) Growth
Apollo Tyres Ltd 8.61 Undervalued 164.25 19.08 217.22 32.25%
MRF Ltd 11.74 Overvalued 31861.6 2713.94
JK Tyres and Industries 13.81 Overvalued 87.2 6.31
Sector Average P/E 25.22

Note-

 All Market Price per share mentioned in the Table are as per the date – 12th June, 2015.
 Sector Average P/E is calculated by taking Average of P/E of large Cap stocks.
MPS
 EPS is calculated as -
Stock P/E
 LTPT is Calculated as – EPS x Sector Average P/E Ratio
LTPT−MPS
 Expected Growth is calculated as - x 100
MPS
Analysis as per PEG Ratio

EPS EPS EPS Estimated

PE PEG
MPS 2014 2015 2016 2017 2018 LTPT
(Trailing) Ratio
MRF 31861.6 16.68 1910 2140 2360 2990 3430 0.98 35715.36
Y-o-Y 12.04% 10.28% 26.69% 14.72%
CAGR 17.03% 35.70% 14.72%

J K Tyres 87.2 6.81 12.81 15.68 17.93 20.26 - 0.32 108.12

Y-o-Y 22.40% 14.35% 12.99%
CAGR 21.55% 12.99%

Notes –

 EPS for the Year 2016, 2017 and 2018 are Estimates as gathered from Bloomberg

 Year on Year Growth (Y-o-Y) for each year is calculated as -

EPS Current Year −EPS Previous Year
EPS Previous Year

 Compound Annual Growth Rate in EPS is calculated as

[(1 + g1) x (1 + g2) x (1 + g3)] ^ (1/3) – 1
Where g is Y-o-Y growth for Next Years

Even if the stocks are underpriced certain companies can be selected for investment if they are
growing at a fast rate for which P/EG ratio method is used to analyze a Security. As per the PEG
Ratio, both stocks looks an attractive buy as its PEG ratio is less than that of desired PEG ratio i.e.
1.5.
Considering the P/E and PEG Valuation for the stocks, we choose to Invest in following companies
and the reason for Investing in these companies is because of the Performance of the company
which is linked to the fundamental factors of the company and these factors are explained in the
further section of the report.

1. Apollo Tyres Ltd

2. MRF Ltd

3. JK Tyre and Industries Ltd

Out of these companies, Apollo Tyres Ltd will be the Value Pick for Tyre Sector in the Portfolio
and MRF Ltd and JK Tyre and Industries Ltd will be the Growth Pick for the sector.

Apollo Tyres Ltd

Strong global player – good business diversification across geographies.
A quick glance at Apollo’s consolidated performance shows an increase in contribution of the
European subsidiary from FY10, especially on profitability front. With a further capacity
expansion planned for ~€500 million in Eastern Europe, we expect a consistent increase in
revenues and profitability for Vredestein in the next three or four years.
Revenue growth to pick up as demand improves from second half of Financial year 2015
(Estimated).
EBITDA margins to remain strong as Raw Material price outlook soft
Looking at a pick-up in margins on the back of a reduction in natural rubber prices, despite the
low demand growth, it is believed margins will remain at ~14% as demand is expected to pick up
on the back of a revival in the economy
Strong capital structure in capital intensive, cyclical business.
Despite the capital intensiveness and cyclicality of the business, Apollo has managed to maintain
decent balance sheet strength. With net D/E at comfortable ~0.2 levels, it is believed this is
Apollo’s greatest strength in the good RoCE business.
Strong Cash flow generation to lead to low debt levels despite capex plans
From ~ 295 crore in FY11, CFO has increased to ~| 1500 crore with a decline in rubber prices and
pricing discipline maintained by the industry.
Profitability to remain at elevated levels as demand returns
With a demand revival on the cards, we expect volumes to improve as OE demand increases. This
would help maintain steady profits even as margins decline. The major reason for the increase in
profitability has been a reduction in raw material prices coupled with a reduction in debt and,
thereby, interest outgo and stable depreciation (due to low capex).

Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 12,795 13,413 13,898 15,304
EBIDTA 1,457 1,876 1,945 2,082
EBIDTA Margin (%) 11.39% 13.99% 13.99% 13.60%
PAT 612.6 1,006 1,035 1,101
EPS (Rs.) 12.2 20 20.5 21.8
Return on Equity 18% 22% 18.6% 16.7%

As it is observed from the Table, Sales have improved moderately. However EBIDTA, EBIDTA
margins, PAT, EPS and Return on Equity have improved significantly.
Hence here the Revenues have increased (Topline) and it is expected to increase going forward.
Profits (Bottomline) have also increased and it is expected to increase going forward.
Factor Analysis

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Total Tonnage Sold (MT) 3,99,026 4,04,181 4,33,429 4,78,916
Y-o-Y Growth 1.29% 7.24% 10.49%
Realization Per Kg (Rs.) 213 212 211 212
Natural Rubber Price (Rs./Kg) 198 179 165 168

Interpreting above table, Total Tonnage Sold in Respect of Metric tonne (Topline Factors) has
increased compared to previous years and it is expected that it is going to increase going forward.
Realization Per Kg (Rs.) has declined but it is expected to increase going forward.
Natural Rubber Price (Rs./Kg) (Bottomline Factor) has declined and it is expected to decline going
forward. Hence this is Beneficial for Bottomline.
Considering all the Economic, Industry and Company factors, it can be concluded that the Stock
is fundamentally strong and it can be bought for long term investment.

MRF Tyres Ltd

Slow recovery in OEM demand; replacement market demand affected by Chinese imports:
Recovery in demand from OEMs has been slower than expected. Additionally, surge in import of
cheaper Chinese tyres is eating into the share of domestic players, including MRF, in the
replacement market. However, although volumes are expected to continue to remain under
pressure in the near term, we expect MRF to sustain itself against the Chinese imports and maintain
a stable position in the replacement market owing to its diversified product mix and leading
position in the segment.

Demand from OEMs slower than expected

The auto industry has witnessed a dip in production across most segments resulting in bleak
demand from OEMs. Although there has been some rebound in MHCVs, Passenger cars and 2Ws
other segments have disappointed. While demand from OEMs is recovering at a slower pace, the
India tyre companies will have to fight off intrusion of cheaper Chinese imports. Imported tyres
are nibbling into the Indian replacement market; These tyres are mainly present in the replacement
segment and not in the OEM segment. We believe that MRF has a diversified product mix
along with leading position in the replacement tyre market which should enable it to
maintain its market share and ride the bumpy road in the near term.

Lower rubber prices to help in sustaining EBITDA margin

MRF’s EBITDA margin expansion in the past year and current quarter has been on the back of
steady decline in raw material prices. Domestic natural rubber prices have followed the global
trend, i.e. having declined due to excess production by rubber producing countries - Thailand,
Indonesia and Malaysia, and drop in demand from China. Additionally, with declining oil prices
and a decline in the price of styrene butadiene rubber (SBR) which is also used for manufacturing
tyres, raw material costs are expected to remain at lower levels. Although the Thai government
has made efforts to increase their domestic rubber prices, this has had no impact on the global
prices of Natural Rubber. As per the International Rubber Study Group, the surplus in natural
rubber and synthetic rubber is expected to reach 1mn tonne and 3mn tonne, respectively.
Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 13,453 14,649 15,012 16,029
EBIDTA 1,767 1,928 2,520 2,620
EBIDTA Margin (%) 13.13% 13.16% 16.79% 16.35%
PAT 802 898 1272 1316
EPS (Rs.) 1,892 2,117 2,999 3,103
Return on Equity 25% 22% 24.70% 20.50%

As it is observed from the Table, Revenues and EBIDTA have grown significantly. The EBIDTA
margins have shown marginal improvement. PAT, EPS have improved significantly. However
Return on Equity has declined.
Hence here the Revenues have increased (Topline) and it is expected to increase going forward.
Profits (Bottomline) have also increased and it is expected to increase going forward.

Top-line below the expectation.

MRF’s top-line grew Marginally. The flat top-line growth can be possibly attributed to weaker
volume growth in the passenger, tractor and two-wheeler (2W) segment and due to stiffer
competition from the cheaper Chinese imports.
Margins impress resulting in higher bottom-line
The raw material cost benefit continued for this year; the raw material cost as a percentage of sales
declined. Natural rubber (domestic) prices for the year were at the levels of 179/kg as against prices
of 198/kg in Previous year. Additionally, other raw materials which are derived from crude oil are
trading at lower levels owing to weaker crude prices. Employee expense and other expenses both
increased by 17.31% and 6.82% respectively. Aided by lower raw material costs, the EBITDA
margin witnessed a increase. On the back of strong operational performance, the net profit
increased by 12%.

Considering all the Economic, Industry and Company factors, it can be concluded that the Stock
is fundamentally strong and it can be bought for long term investment.
JK Tyre and Industries Ltd
Revenues to remain on uptrend on demand recovery, enhanced capacity
Despite the slowdown in the overall auto industry, JK Tyres has been able to maintain decent
volume growth on account of sustained replacement demand. Also, increasing trend of
radialisation in the truck and bus segment has helped JK garner volumes as it remains the leader
in TBR segment.
EBITDA margins strong as mix improves, costs remain controlled
The major difference in this cycle vis-à-vis previous business cycles has been the pricing
discipline shown by the industry, which has led to an increase in profitability for the overall
industry. JKTIL’s margins have also improved significantly to double digit levels due to the
favorable impact of operating leverage as radial capacity utilization levels stands > 80%. Going
ahead, with an economic revival, capacity utilization for most players on the radial side is
expected to remain high. Thus, the industry pricing discipline trend is not expected to get
disrupted. It is expected that rubber prices to remain benign for immediate future as global
demand trends remains subdued. We expect margins to improve further in FY16E, FY17E as an
increase in TBR demand and in operating leverage in both Mexico and India could aid
profitability.
Profitability to remain at elevated levels
With an increase in revenues and operating margins, we expect profits to increase. This is largely
on account of an improvement in margins in the domestic business and increase in OEM traction
in the Mexican business.
Net debt peaks out, as most capex to be met by Cash Flow
With strong CFO generation meeting most capex needs, it is believed that net debt levels have
peaked out and the following years are likely to see debt on a lower trajectory. This would also
strengthen the balance sheet as the debt-equity improves to 1.1 in FY17E from current level of
1.9 (reduced from 2.3 levels of FY14).

Financial Performance Highlights

(Amount in Rs. Crores)

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Revenue 6,999 7,651.8 7,383.7 7,532.3
EBIDTA 631.7 871.3 930.8 995.6
EBIDTA Margin (%) 9.03% 11.39% 12.61% 13.22%
PAT 203.3 329.7 372.5 453.3
EPS (Rs.) 8.96 11.6 14.5 16.4
Return on Equity 25% 24% 23.30% 21.60%
As it is observed from the Table, Revenues and EBIDTA have grown significantly. The EBIDTA
margins have shown marginal improvement. PAT, EPS have improved significantly. However
Return on Equity has declined.
Hence here the Revenues have increased (Topline) and it is expected to increase going forward.
Profits (Bottomline) have also increased and it is expected to increase going forward.

Factor Analysis

Estimated
Particulars 2013-14 2014-15 2015-16 2016-17
Total Tonnage Sold (MT) 2,56,071 2,84,633 3,14,623 3,53,885
Y-o-Y Growth 11.15% 10.54% 12.48%
Realisation Per KG (Rs.) 233 229 226 228
Natural Rubber Price (Rs./Kg) 181 174 166 169

Interpreting above table, Total Tonnage Sold in Respect of Metric tonne (Topline Factors) has
increased compared to previous years and it is expected that it is going to increase going
forward.
Realization Per Kg (Rs.) has declined but it is expected to decline going further.
Natural Rubber Price (Rs./Kg) (Bottomline Factor) has declined and it is expected to decline
going forward. Hence this is Beneficial for Bottomline.

Considering all the Economic, Industry and Company factors, it can be concluded that the Stock
is fundamentally strong and it can be bought for long term investment.
Fund Allocation
Considering all the Topline, Bottom line, Fundamental factors, Company performances within
India and its Exports, and Management outlook, we have allocated Rs 3.75 Crores to Tyre Sector
on 12th June, 2015.

Number of Buy Price

Pick Company Amount Invested (Rs.)
Shares (Rs.)
Value Apollo Tyres Ltd 76,104 164.25 1,25,00,000
1,25,00,000

MRF Ltd 392 31,861.6 1,25,00,000

Growth JK Tyre and
1,43,349 87.2 1,25,00,000
Industries Ltd
2,50,00,000
3,75,00,000

The Share Price is the Price as on 12th June,2015 as quoted on National Stock Exchange.
Technical Analysis
Apollo Tyres Ltd
The Line chart of Apollo Tyres Ltd. for the period June 2010 to June 2015 is given as follows –

The Price of Apollo Tyres LTd showed Rounding Bottom pattern in the period of Mid 2013. The
Trend line is created using more than 3 Points to form a straight line, from the most lowest point
of the Rounding Bottom and is extended till stock falls below the Trendline. Stock is still in
Uptrend, so it should had been bought at the Lowest level of Rounding Bottom – Rs 57 and should
be sold when the Stock fell below the Trendline.

Presently, this stock is showing a strong Positive trend and it should be Bought or held as a long
term investment.

MRF Tyres Ltd

The Line chart of MRF Tyres Ltd. for the period June 2010 to June 2015 is given as follows –
The Price of Apollo Tyres LTd showed Rounding Bottom pattern in the period of Mid 2013. Stock
is still in Uptrend, so it should had been bought at the Lowest level of Rounding Bottom – Rs
12900 and should be sold when the Stock fell below the Trendline.

Presently, this stock is showing a strong Positive trend and it should be Bought or held as a long
term investment.

JK Tyre and Industries Ltd

The Line chart of JK Tyre and Industries Ltd. for the period June 2010 to June 2015 is given as
follows –

The price of JK Tyre and Industries Ltd showed and Uptrend from the period of Beginning 2013
to Mid 2015. So the stock should had been bought at the price of Rs. 28.05 and sold at the level
when the price fell below the Trendline i.e. 98.

Presently, this stock is showing an End of Rounding bottom and Beginning of strong Positive
trend. It is recommended that this stock should be Bought or held as a long term investment.
Fund Performance
Following are the details of the Return given by the Portfolio as on 11th August, 2015
Comparing Returns
Following Chart gives a Comparison of the Returns given by the Portfolio to the Benchmark –
NIFTY index of National Stock Exchange.

Portfolio Performance
24.00%

21.00%

18.00%

15.00%

12.00%

9.00%

6.00%

3.00%

0.00%

NAV Nifty
Expected Returns
Following are Expected Returns for the Portfolio -
Expected Expected Portfolio Returns
Sector Pick Stock Weights Returns (%)
Infosys 0.124 33.63% 4.17%
Wipro Ltd 0.130 56.81% 7.41%
HCL Technologies 0.071 31.13% 2.22%
Value
Tech Mahindra Ltd. 0.055 23.97% 1.32%
I.T. Oracle Financial Ser 0.125 1.19% 0.15%
MphasiS Ltd. 0.100 115.70% 11.57%

Hexaware
Growth
Technologies 0.019 55.79% 1.07%

Value Apollo Tyres 0.125 32.25% 4.03%

Tyre
MRF 0.125 12.10% 1.51%
Growth
JK 0.125 24.00% 3.00%

36.45%

Expected Returns is calculated using the formula –

LTPT−Market Price as on 12th June
x 100
Market Price as on 12th June

Expected Return for Portfolio is calculated using the Formula –

∑ Expected Returns for Stock x Weight of Stock

Beta of the Portfolio
Beta of Individual stock is calculated by taking Monthly returns for 5 years from period of 12th
June 2010, to 12th June 2015 and Regressing it with Monthly returns of Nifty for same period.
2 1
Adjusted Beta is calculated as - 3 x Raw Beta + 3 x Market Beta

Beta for the Market i.e. is always 1.

Beta is calculated to find out the risk of the Portfolio.

Adjusted Weight x Adjusted

Sector Pick Stock Amount Weight
Beta Beta
Infosys 1,24,00,000 0.124 0.756 0.094
Wipro Ltd 1,30,34,301 0.130 0.654 0.085
HCL Technologies 71,41,011 0.071 0.628 0.045
Value
Tech Mahindra Ltd. 54,99,268 0.055 0.808 0.044
Oracle Financial Ser 1,25,09,500 0.125 0.733 0.092
I.T.
MphasiS Ltd. 1,00,00,000 0.100 0.731 0.073
6,05,84,080

Hexaware
Growth 19,15,920 0.019 0.777 0.015
Technologies
19,15,920
6,25,00,000

Value Apollo Tyres 1,25,00,000 0.125 1.117 0.140

Tyre
MRF 1,25,00,000 0.125 0.902 0.113
Growth
JK 1,25,00,000 0.125 1.322 0.165
37500000

10,00,00,000 1 0.866

Weighted Beta for the Portfolio is 0.866.

The means that if Nifty moves in either direction by X %, the Portfolio will move in that
respective direction by X% x 0.866.
Generally a lower Beta is desirable, as it indicates less Riskiness.
Analyzing Portfolio using Statistical techniques
We have Data about the NAV of Portfolio for a period of 43 working days i.e. from 12th June 2015
to 11th August, 2015 and Information about NIFTY for the same period. Using this information
we can compare the performance of the Portfolio with the Performance of NIFTY using various
statistically techniques.
Following are the steps that are performed to analyze a portfolio -
1) List the NAV of the Portfolio and NIFTY index date wise.
2) Calculate Daily Returns of NAV of the Portfolio using the formula –
NAVToday − NAVYesterday
x 100
NAVYesterday

Calculate Daily Returns of NIFTY Index using the formula –

NIFTYToday − NIFTYYesterday
x 100
NIFTYYesterday

3) Calculate Mean of the Returns of NAV of Portfolio by-

∑ 𝐷𝑎𝑖𝑙𝑦 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 𝑜𝑓 𝑁𝐴𝑉
𝜇𝑌 =
𝑁𝑜 𝑜𝑓 𝑂𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛

Where, Number of Observation will be 40

Calculate Mean of the Returns of Nifty Index by-
∑ 𝐷𝑎𝑖𝑙𝑦 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 𝑜𝑓 𝑁𝐼𝑓𝑡𝑦 𝐼𝑛𝑑𝑒𝑥
𝜇𝑋 =
𝑁𝑜 𝑜𝑓 𝑂𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛

4) Calculate Standard Deviation of Returns of NAV of Portfolio by –

𝑦𝑖 − 𝜇 𝑌
𝜎𝑌 = √ 𝑁

Calculate Standard Deviation of Returns of NIFTY Index by –

𝑥𝑖 − 𝜇𝑥
𝜎𝑋 = √ 𝑁

Standard Deviation is a measure that is used to quantify the amount of variation or dispersion of
a set of data values.
5) Calculate Covariance between the Returns of NAV of Portfolio and Returns of NIFTY index

𝑁 (𝑥𝑖 − 𝜇𝑥 )(𝑦𝑖 − 𝜇𝑌 )
COV (X,Y) = ∑𝑖=1
𝑁
Covariance is a measure of how much two random variables change together. It can range from
value of Negative Infinity to Positive Infinity.
6) Calculated Correlation coefficient by-
𝑐𝑜𝑣 (𝑋,𝑌)
𝜌𝑋𝑌 =
𝜎𝑋 𝜎𝑌
Correlation is a statistical technique that can show whether and how strongly pairs of variables are
related. The main result of a correlation is called the correlation coefficient (or "r"). It ranges
from -1.0 to +1.0. The closer r is to +1 or -1, the more closely the two variables are related.

7) Calculated Coefficient of Determination

𝑅2 = 𝜌𝑋𝑌 2

The findings can be summarized as below –

Portfolio Nifty
Mean 0.3173% 0.1360%
Standard Deviation 1.1639% 0.7536%
Covariance 0.4147
Correlation 0.4843
Coefficient of Determination 23.45%

Mean – it means average of the daily returns given for given by a security. Nifty has given a return
of 0.136% on an Average whereas the Portfolio has given an Average return of 0.3173%.
Standard Deviation – Returns of the Portfolio are expected to deviate by 1.1639% from the mean
and Returns of the Nifty are expected to deviate by 0.7536% from the mean.
Covariance - A positive Covariance indicates that the Portfolio and the Nifty move in same
direction. However it doesn’t tell anything about strength of relation.
Hence Coefficient of Determination is calculated to determine the strength of a relation. Here
19.54% indicates, 23.45% movement in Portfolio is explained by movement in Nifty. Rest
movement is other than Nifty. This could include Company specific or sector specific factors. For
Example for Information Technology, it will be Sales to Regions such as United States or Europe,
or Attrition Rate. For Tyre Sector, it could be Natural Rubber Prices, Rubber Output or Company’s
own Revenues, Margins or Operating Profits.
Limitation of the Study
Following are the limitations of the fund –
1) The fund is created with an assumption that Objective of the Investor is to maximize Returns
or Growth Objective. However in real life an investor might have different objectives.

2) The fund is created by investing in only Large cap companies. However in real life it is
desirable to have a more diversified class of assets in portfolio. For E.g. A mix of Debt,
Commodities.

3) The investment decision is based on only the P/E, PEG and fundamental analysis. However it
is desirable to conduct a deeper analysis and using different methods to make an investment
decisions.

4) The Beta or the risk of the portfolio is calculated using the Historic Price data. However the
future Price movement can be significantly different from the past. Hence the Risk can also
change.
RECOMMENDATIONS

Mutual fund distributors & advisors should target young generation & and middle aged people
at the height of their career in order to increase awareness about mutual funds & increase
penetration of mutual funds.

Selling of mutual funds require well trained people, who can explain the concept, risk
associated & return which can be expected from mutual funds. Hence, mutual fund companies
should encourage its distributors to get trained in financial planning concepts.

Mutual fund companies could sponsor management events which take place in management
institutes. This could lead to promotion of their products as well as students would become
aware about it.

Investors must seriously consider mutual fund as an investment option, since it is managed by
an expert. Also, equity is the asset class which provides maximum return over the long term
beats inflation & thus helps in maximizing one’s wealth.

Young investors should start investing early through systematic investment plans for long term
& should increase their investments as their income increases. This would result in magnified
benefits & corpus at the end of investment horizon due to the power of compounding.
CONCLUSION

The mutual fund industry in India has prospered due to transparency & disclosures. Most fund
houses provide information about the investment particulars, credit ratings, market value of
investments, etc. A fund house normally comes out with various publications which contain the
scheme’s objectives, fund manager’s commentary on the portfolio, market outlook, etc. The aim
is to help an investor take an informed decision to invest, stay invested or redeem out of the fund.
It is up to the investor i.e. you, to make the best use of it.

Past performance is one of the key criteria when it comes to identifying the right mutual fund.
However, it has to be studied over a long period of time. Investors often get taken by one year
returns that do not reflect the real picture. A fund may have delivered staggering returns over the
past year, but a longer history may reveal heavy underperformance. Several funds that top the
performance charts during a bull run tend to disappear from them, as soon as the market turns
edgy.

To select a fund, you should look at its performance over the past 3-5 years, at least. Such a
timeframe typically covers an entire market cycle, giving you a better insight into the ability of the
fund to perform under different market conditions. Within this time-frame, you may also look at
the fund's yearly performance.

Above study has made an attempt to understand the financial behavior of investors in
connection with the preferences towards equity. It is observed that many people have the fear in
investing in mutual fund; they think that their money will not be secure in mutual fund; they need
the knowledge of mutual funds and other related terms.