Construction of Balanced Portfolio comprising of Equity and Debt

EXECUTIVE SUMMARY

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Construction of Balanced Portfolio comprising of Equity and Debt

A stock market is a market for the trading of publicly held company stock and associated

financial instruments.

The stock market in India is very volatile and many investors are in a dilemma to invest in the

securities. Not surprisingly, recent market developments have once more focused attention on

the volatility that has come to characterise India’s stock markets. In volatile markets, domestic

speculators too attempt to manipulate markets in periods of unusually high prices.

Keeping in view the above observation about the Indian stock market, a project “Construction

of Balanced Portfolio of Equity and Debt”, with the problem statement being “To test the

significance of excess return to beta and find out whether one can construct a portfolio whose

beta is equal to market beta (beta =1), with returns greater than market returns.”.

Ten sectors were picked randomly consisting of 6 companies I Cement and 4 Companies in

each sector. Also the 10 corporate bonds along with 5 govt. securities are taken. With the help

of all, the statistical measures were calculated and a TRI was constructed. Then again another

portfolio was constructed using a particular sector stocks and this portfolio was compared with

the returns on the index to look at the performance at different combinations.

The Project was carried out at SMC Solutions, stock broking firm situated in Hubli.

Analysis of cement sector and steel sector give an immense insight to invest in these these

stocks. The Report describes the analysis being carried out in project and results obtained.

At the l a s t , the por t fo l i o was cons truc ted w i th h igher re turns than

index re turns w i th sy s t emat i c r i sk o f 1

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Construction of Balanced Portfolio comprising of Equity and Debt

THEORETICAL BACKGROUND

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Construction of Balanced Portfolio comprising of Equity and Debt Fundamental Analysis

The earnings of the company, the growth rate, and risk exposure of the company have a direct

bearing on the price of the share. These factors in turn rely on the host of other factors like

economic environment in which they function, the industry which they belong to, and finally

the companies’ own performance. The fundamental analysis school of thought appraises the

intrinsic value of shares through:

Economic Analysis

Industry Analysis

Company Analysis

Economic Analysis

The level of economic activity has an impact on investment in many ways. If the economy

grows rapidly, the industry can also be expected to show rapid growth and vice-versa. When the

level of economic activity is low, stock prices are low, and when the level of economic activity

is high, stock prices are high reflecting the prosperous outlook for sales and profits of the firms.

The analysis of macro economic environment is essential to understand the behaviour of the

stock prices. The commonly analyzed macro economic factors are as follows:

Gross Domestic Product: GDP indicates the rate of growth of the economy. GDP

represents the aggregate value of the goods and services produced in the economy. GDP

consists of personal consumption expenditure, gross private domestic investment and

government expenditure on goods and services and net export of goods and services.

The growth rate of economy points out the prospects for the industrial sector and return

investors can expect from investment in shares. The higher growth rate is more

favourable to the stock market.

Savings and investment: It is obvious that growth requires investment which in turn

requires substantial amount of domestic savings. Stock market is a channel through

which the savings of the investors are made available to corporate bodies. Savings are

distributed over various assets like equity shares, deposits,

mutual fund units, real estate and bullion. The saving and investment patterns of the public

affect the stock to a great extent.

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Construction of Balanced Portfolio comprising of Equity and Debt Inflation: Along with the growth of GDP, if inflation also increases, then the real rate of

growth would be very little. The demand in the consumer product industry is

significantly affected. If there is a mid level of inflation, it is good to the stock market

but high rate of inflation is harmful to the stock market.

Interest rates: The interest rate affects the cost of financing to the firms. A decrease in

interest rate implies lower cost of finance for firms and more profitability. More money

is available at a lower interest rate for the brokers who are doing business with

borrowed money. Availability of cheap fund, encourages speculation and rise in price of

shares.

Budget: The budget draft provides an elaborate account of the government revenues

and expenditures. A deficit budget may lead to high rate of inflation and adversely

affect the cost of production. Surplus budget may result in deflation. Hence, balanced

budget is highly favorable to the stock market.

The tax structure: Concessions and incentives given to a certain industry encourages

investment in that particular industry. Tax relief’s given to savings encourage savings.

The type of tax exemption has an impact on the profitability of the industries.

The Balance of payment: The balance of payment is the record of a country’s money

receipts from and payments abroad. The difference between receipts and payments may

be surplus or deficit. BOP is the measure of the strength of rupee on external account. If

the deficit increases, the rupee may depreciate against other currencies, thereby,

affecting the cost of imports. The volatility of the foreign exchange rate affects the

investment of the foreign institutional investors in the Indian Stock Market. A favorable

balance of payment renders a positive effect on the stock market.

Infrastructure facilities: Infrastructure facilities are essential for the growth of

industrial and agricultural sector. A wide network of communication system is a must

for the growth of the economy. Regular supply of power without any power cut would

boost the production. Banking and financial sectors should also be sound enough to

provide adequate support to industry and agriculture.

Demographic factors: The demographic data provides details about the population by

age, occupation, literacy and geographic location. This is needed to forecast the demand

for the consumer goods. The population by age indicates the availability of able work

force. Population, by providing labour and demand for products, affects the industry and

stock market.

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Construction of Balanced Portfolio comprising of Equity and Debt

Industry analysis

Industry analysis is a type of business research that focuses on the status of an industry or an

industrial sector (a broad industry classification, like "manufacturing"). A complete industrial

analysis usually includes a review of an industry's recent performance, its current status, and the

outlook for the future. Many analyses include a combination of text and statistical data.

Five Forces Affecting Competitive Strategy

Porter identifies five forces that drive competition within an industry:

The threat of entry by new competitors.

The intensity of rivalry among existing competitors.

Pressure from substitute products.

The bargaining power of buyers.

The bargaining power of suppliers.

Industry Life Cycle Model

This model is a useful tool for analyzing the effects of an industry's evolution on competitive

forces. Using the industry life cycle model, we can identify five industry environments, each

linked to a distinct stage of an industry's evolution:

An embryonic industry environment

A growth industry environment

A shakeout industry environment

A mature industry environment

A declining industry environment

Company Analysis

In the company analysis the investor assimilates the several bit of information related to the

company and evaluates the present and future value of stock. The risk and return associated

with the purchase of the stock is analyzed to take better investment decision.

The present and future are affected by a number of factors. They are:-

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Construction of Balanced Portfolio comprising of Equity and Debt

Factors Share values

The competitive edge of the company:- The competitive edge of the company can be studied

with the help of:-

The market share

The growth of annual sales

The stability of annual sales

The market shares:- The market share of the annual sales helps to determine a company’s

relative competitive position within the industry. If the market share is high the company would

be able to meet the competition successfully.

Growth of sales:- The company would be the leading company, but if the growth of sales is

comparatively lower than another company, it indicates the possibility of the company losing

the leadership. The rapid growth in sales would keep the shareholder in a better position than

one with a stagnant rapid growth.

Stability of sales: - If a firm has stable sales revenue, other things being remaining constant

will have more stable earnings. Wide variation in sales leads to variation incapacity utilization,

financial planning and dividend.

Earnings of the company:- Sales alone do not increase the sales the earnings but the costs and

expenses of the company also influence the earnings of the company. Further, earnings do not

always increase with the increase in sales. The company’s sales might have increased but its per

share may decline due to the rise in costs.

Capital structure: - The equity holders’ return can be increased manifold with the help of

financial leverage, i.e. using debt financing along with equity financing. The effect of financial

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Competitive edge

Earnings

Capital structure

Management

Operating efficiency

Financial performance

Historic price of stock

P/E ratio

Economic condition

Stock market condition

Present price Future price

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Construction of Balanced Portfolio comprising of Equity and Debt leverage is measured by computing leverage ratios. The debt ratio indicates the positions of

long term and short terms debts in the company finance. The debt may be in the form of

debentures and term loans from financial institutions.

Management: - Good and capable management generates profit to the investors. The

management of the firm should efficiently plan, organize, actuate and control the activities of

the company. The basic objective of management is to attain the stated objectives of the

company for the good of the equity share holders, the public and the employers. The good

management depends on the quality of the manager.

The following are special traits of an able manager:-

Ability to get along with people

Leadership

Analytical competence

Industry

Judgment

Ability to get things done

Operating efficiency: - The operating efficiency of a company directly affects the earnings of a

company. An expanding company that maintains high operating efficiency with a low break-

even point earns more than the company with high break-even points. If a firm has stable

operating ratio, the revenue will also be stable. Efficient use of fixed assets with a raw

materials, labour and management would lead to more income from sales. This leads to internal

fund generation for the expansion of the firm. A growing company should have low operating

ratio to meet the growing demand for its product.

Financial analysis:- the best source of financial information about a company is its own

financial statements. This is a primary source of information for evaluating the investments

prospect in the particular company’s stock. Financial statement analysis is the study of a

company’s financial statement from various viewpoints. The statement gives the historical and

current information about the company’s operations. Historical financial statements help to

predict the future. The current information aids to analyse the present status of the company.

The two main statements used in analysis are:-

Balance sheet

Profit and loss account

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Construction of Balanced Portfolio comprising of Equity and Debt Debt valuation techniques and concepts

In their simplest form bonds are pretty straightforward. After all, just about anybody can

comprehend the borrowing and lending of money. However, like many securities, bonds

involve some more complicated underlying concepts as they are traded and analyzed in the

market.

Bond Pricing

It is important for prospective bond buyers to know how to determine the price of a bond

because it will indicate the yield received should the bond be purchased. Bonds can be priced at

a premium, discount, or at par. If the bond’s price is higher than its par value, it would sell at a

premium because its interest rate is higher than current prevailing rates. If the bond’s price is

lower than its par value, the bond would sell at a discount because its interest rate is lower than

current prevailing.

Bondholder's Expected Rate of Return (Yield to Maturity)

The bondholder's expected rate of return is the rate the investor will earn if the bond is held to

maturity, provided, of course, that the company issuing the bond does not default on the

payments.

Computing Yield-to-Maturity on a Bond (YTM)

n

n

rI

r

rCMP

1

11

11

Solving the equation for r gives the YTM.

1) If the investor's required return is greater than the YTM, the investor should not buy the bond

2) If the investor's required return is less than the YTM, the investor should buy the bond

Three Important Relationships

First relationship

A decrease in interest rates (required rates of return) will cause the value of a bond to increase;

an interest rate increase will cause a decrease in value. The change in value caused by changing

interest rates is called interest rate risk.

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Construction of Balanced Portfolio comprising of Equity and Debt Second relationship

1. If the bondholder's required rate of return (current interest rate) equals the coupon interest

rate, the bond will sell at par, or maturity value.

2. If the current interest rate exceeds the bond's coupon rate, the bond will sell below par value

or at a "discount."

3. If the current interest rate is less than the bond's coupon rate, the bond will sell above par

value or at a "premium."

Third relationship

A bondholder owning a long-term bond is exposed to greater interest rate risk than when

owning a short-term bonds.

Relationships on the YTM

Since the bond's coupon rate, kc, is fixed for the life of bond, the following

YTM/bond price relationship is created:

If YTM is > r, the bond sells at Discount.

If YTM is < r, the bond sells at Premium

If YTM is = r, the bond sells at par.

The Term Structure of Interest Rates

The term structure of interest rates, also known as the yield curve, is a very common

bond valuation method. Constructed by graphing the yield to maturities and the

respective maturity dates of benchmark fixed-income securities, the yield curve is a

measure of the market's expectations of future interest rates given the current market

conditions. Treasuries, issued by the central government, are considered risk-free, and

as such, their yields are often used as the benchmarks for fixed-income securities with

the same maturities. The term structure of interest rates is graphed as though each

coupon payment of a non-callable fixed-income security were a zero-coupon bond that

“matures” on the coupon payment date. The exact shape of the curve can be different at

any point in time. So if the normal yield curve changes shape, it tells investors that they

may need to change their outlook on the economy.

Duration

The term “duration,” having a special meaning in the context of bonds, is a measurement of

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Construction of Balanced Portfolio comprising of Equity and Debt how long in years it takes for the price of a bond to be repaid by its internal cash flows. It is an

important measure for investors to consider, as bonds with higher durations are more risky and

have higher price volatility than bonds with lower durations.

Factors affecting Duration

Besides the movement of time and the payment of coupons, there are other factors that affect a

bond's duration: the coupon rate and its yield. Bonds with high coupon rates and in turn high

yields will tend to have lower durations than bonds that pay low coupon rates, or offer a low

yield. This makes empirical sense, since when a bond pays a higher coupon rate, or has a high

yield, the holder of the security receives repayment for the security at a faster rate. The diagram

below summarizes how duration changes with coupon rate and yield.

Types of Duration

There are four main types of duration calculations, each of which differ in the way they account

for factors such as interest rate changes and the bond's embedded options or redemption

features. The four types of durations are Macaulay duration, modified duration, effective

duration, and key-rate duration.

Macaulay Duration

Macaulay duration is calculated by adding the results of multiplying the present value of each

cash flow by the time it is received, and dividing by the total price of the security. The formula

for Macaulay duration is as follows:

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Construction of Balanced Portfolio comprising of Equity and Debt n = number of cash flows

t = time to maturity

C = cash flow

i = required yield

M = maturity (par) value

P = bond price

n

n

rI

r

rCMP

1

11

11

.

So the following is an expanded version of Macaulay duration:

Modified Duration

Modified duration is a modified version of the Macaulay model that accounts for changing

interest rates. Because they affect yield, fluctuating interest rates will affect duration, so this

modified formula shows how much the duration changes for each percentage change in yield.

For bonds without any embedded features, bond price and interest rate move in opposite

directions, so there is an inverse relationship between modified duration and an approximate

one-percentage change in yield. Because the modified duration formula shows how a bond's

duration changes in relation to interest rate movements, the formula is appropriate for investors

wishing to measure the volatility of a particular bond. Modified duration is calculated as the

following:

.

Total Return Index

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Construction of Balanced Portfolio comprising of Equity and Debt Nifty is a price index and hence reflects the returns one would earn if investment is made in the index

portfolio. However, a price index does not consider the returns arising from dividend receipts. Only

capital gains arising due to price movements of constituent stocks are indicated in a price index.

Therefore, to get a true picture of returns, the dividends received from the constituent stocks also need to

be factored in the index values. Such an index, which includes the dividends received, is called the Total

Returns Index.

Total Returns Index reflects the returns on the index arising from (a) constituent stock price movements

and (b) dividend receipts from constituent index stocks.

Methodology for Total Returns Index (TR) is as follows:

The following information is a prerequisite for calculation of TR Index:

1. Price Index close

2. Price Index returns

3. Dividend payouts in Rupees

4. Index Base capitalisation on ex-dividend date

Dividend payouts as they occur are indexed on ex-date.

Indexed dividends are then reinvested in the index to give TR Index.

Total Return Index = [Prev. TR Index + (Prev. TR Index * Index returns)] +

[Indexed dividends + (Indexed dividends * Index returns)]

The base for both the Price index close and TR index close will be the same.

An investor in index stocks should benchmark his investments against the Total Returns index

instead of the price index to determine the actual returns vis-à-vis the index.

Operational Definitions

Bond: A debt instrument sold by a company or government to raise money. One who buys a

bond is a creditor of the company, but not an owner, as a stockholder would be.

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Construction of Balanced Portfolio comprising of Equity and Debt

Par: The value of a bond assigned by the issuer; also called face value.

Original issue discount: A bond with an offering price that is below par value.

Coupon: A bond's interest rate.

Premium: The amount by which a security sells above its par value.

Maturity: The length of time before the principal amount of a bond is due to the bondholders.

It is the time until a bond may be surrendered to its issuer, called as term-to-maturity.

Maturity date: The date on which a bond is to be redeemed and its principal and interest

returned to the owner.

Callability: The feature of some bonds whereby the issuer can redeem it before it matures.

Issuers often call their bonds when interest rates are falling and they want to replace high-

yielding bonds with lower-yielding bonds. Call provisions must be made clear before a bond is

sold. A bond with this feature is a callable bond.

Debenture: A bond backed by the issuer's general credit and ability to repay and not by an

asset or collateral.

Investment-grade: A classification of the ability of a bond issuer to repay a bond.

Discount bond: A bond that sells at a discounted value of its face value. If a bond has a Rs

1000 par value but sells for Rs 900, it is "sold at a discount" of Rs100. Adverse market

conditions and reductions in interest rates can convince sellers to discount the bonds they sell.

Premium bond: A bond selling for more than its stated value. If a bond is Rs1000 par but sells

for Rs1100, it is "sold at a premium" of Rs100. Market conditions and increases in interest rates

can convince sellers to raise the prices of the bonds they sell.

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Construction of Balanced Portfolio comprising of Equity and Debt Yield: The rate of return on an investment, described as a percentage of the amount of the

investment. For example, a bond purchased for Rs1,000 with a 7% yield would pay out 7% of

Rs1,000, or Rs70.

Yield to maturity: The fully compounded annual rate of return paid out over a bond's life,

from purchase date to maturity, including appreciation/depreciation and earnings. It is the most

comprehensive measure of yield.

Accrued interest: The interest that has been accumulating on a bond since the last time interest

was paid on it.

Current yield: The expected rate of return calculated by dividing the most recent annualized

distribution by the selling price. For example, a Rs.2,000 par bond that pays Rs140 but is

bought for Rs1600 has a current yield of 8 3/4 percent. The formula for deriving current yield is

annual income divided by current price.

Coupon rate: The interest as a percent of par paid by a bond. It is called a coupon rate because

historically bonds included attached coupons that were clipped and surrendered for cash.

Today, most bonds come without the attached coupons.

Duration: The change in value of a bond (expressed in years) caused by a change in the

prevailing interest rates.

Floating-interest rate: A variable interest rate, one that changes periodically.

Floating-interest bond. A bond with an interest rate that changes each quarter to reflect

economic conditions.

Fixed-interest bond. A bond with an interest rate that stays the same over its life span is

corporate bond. A bond issued by a corporation and backed by the company's credit and/or its

assets.

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Construction of Balanced Portfolio comprising of Equity and Debt Mortgage bond. A secured corporate bond that is backed by real estate. Because mortgage

bond collateral provides a clear claim on a company's assets, these bonds are considered secure

and high-grade.

Junk bond. Refers to the quality of bond that is a speculative, high yielding, and issued by a

company that typically finances its growth and operations with debt. Ratings companies usually

assign low grades to these bonds.

Revenue bond. A bond sold by a municipality to finance projects such as bridges, hospitals,

power plants and other local services. Also called limited obligation bonds, revenue bonds are

secured by the revenue generated by those projects.

Government bond. A bond sold by the. Government. Government bonds are rated the highest

of all bonds. They are used to finance federal projects.

Treasury bond (T-bond). A bond issued by the Treasury to meet the government's financial

needs. Treasury bonds are considered the safest bonds and are very popular with investors.

They have maturities lasting from ten to thirty years.

Treasury note (T-note). An intermediate-term federal government debt, similar to a T-bond

but maturing in one to ten years.

Zero-coupon bond. A bond sold at discount and paying no interest, but instead paying the

holder the face value at maturity. A zero-coupon bond stated at 1000 but sold for 600 would

yield the holder a total of 1000 at maturity. The extra 400 the investor makes would be treated

as interest.

Fundamental Analysis: A method of evaluating a stock by attempting to measure its intrinsic

value. Fundamental analysts study everything from the overall economy and industry

conditions, to the financial condition and management of companies.

Intrinsic value: the economic value of a company or its common stock based on internally-

generated cash returns. Intrinsic value can be thought of as the discounted stream of net cash

flows attributable to an investment asset.

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Construction of Balanced Portfolio comprising of Equity and Debt Terminal value: Terminal value refers to the value of the firm (or equity) at the end of the high

growth period. Terminal Value in year n= Cash Flow in year n+1/(r - g) .This approach requires

the assumption that growth is constant forever, and that the cost of capital will not change over

time.

Total Return Index: An index that calculates the performance of a group of stocks assuming

that all dividends and distributions are reinvested. This method is usually considered a more

accurate measure of actual performance than if dividends and distributions were ignored.

Beta: Statistically, beta is the measure of systematic risk in the CAPM and is the ratio of two co

variances: the individual security divided by a proxy for the market as a whole or the so-called

market portfolio. The beta factor is the expected change in the security's rate of return divided

by the accompanying change in the rate of return to the market portfolio.

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Construction of Balanced Portfolio comprising of Equity and Debt

DESIGN OF THE STUDY

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Construction of Balanced Portfolio comprising of Equity and Debt

Title :

“Construction of Balanced Portfolio comprising of Equity and Debt”

Statement of Problem:

To test the significance of excess return to beta and find out whether one can construct a

portfolio whose beta is equal to market beta (beta =1), with returns greater than market returns.

Objectives of the research:

To analyze the performance of the shares of co’s in the steel and cement sector in

Indian stock market in light of the growth in infrastructure in India.

To study the factors influencing the share price of the company.

To analyze the companies based on Fundamental Analysis and TRI model

To construct a Portfolio (Balanced Fund) of Equities and Debt. The construction

would be based on Fundamental Analysis Model.

Research Methodology

Type of research

The study is a descriptive research, describing the construction of portfolios.

Tools for data collection:

The study involves collection of data from secondary sources and collected from internet,

magazines, news paper, and research reports.

Sampling:

Type of sampling: Non-probabilistic judgment sampling.

Sample size: Four stocks from the steel sector and six stocks from the cement sector; 10

company’s Corporate debt; ten Government securities; and 364 day-T-bills

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Construction of Balanced Portfolio comprising of Equity and Debt Plan Of Analysis

After collecting financial data related to the entities, i.e. the sample selected from the selected

sectors, the various valuation ratios and other financial calculations which will help in the

company valuation will be calculated. A portfolio will be constructed on the basis of

fundamental analysis and on the basis of risk-return analysis with different combinations of

debt and equity to maximize the returns and minimize the risk (beta).

Limitations of the Study

The study was confined only to the selected sectors.

The study was more confined with secondary data.

The study assumes no changes in the tax rates in the country.

As the scope is defined by the researcher, it restricts the number of variables which

influence the industry.

Sales growth were assumed on the basis of change in sales of yr 2007 and 2006

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Construction of Balanced Portfolio comprising of Equity and Debt

EIC ANALYSIS

ECONOMY ANALYSIS

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Construction of Balanced Portfolio comprising of Equity and Debt Economic growth includes a raft of supply side policies that have helped to increase

competitiveness and productivity. For example financial markets have become more

deregulated, allowing more flexible loans. These have helped to increase investment which has

led to increased capacity and competitiveness. There has also been increased focus put on

training and education of at least part of the population. Despite the rapid economic growth so

far the Indian economy has managed to maintain relatively stable prices, with inflationary

pressures remaining subdued.

The success of the Indian economy shares several parallels with the Chinese economy. Like

China the Indian economy has a plentiful supply of cheap labour. This has enabled low labour

costs for firms which have made them particularly competitive in labour intensive industries.

This has often been at the expense of Western manufacturing sectors. For example recently

Dyson’s announced it would switch production of vacuum cleaners from the UK to Indian

where labour costs are cheaper.

The Indian economy has also benefited from the process of globalisation and improved

technology. A good example of this is in call centres, which benefit from the low labour costs.

Due to the internet and cheap telephone calls many Western companies have found it profitable

to switch their call centres to places in India where labour costs are significantly lower. India is

at a particular advantage for this growing market because compared to other developing

countries English is spoken to a reasonable standard by a high share of the population. The

Indian economy has also been able to diversify from its primarily agricultural roots. Mumbai

has emerged as one of the leading financial centres in Asia. India is also increasingly benefiting

from foreign investment into a variety of industries.

Strengths of Indian Economy.

After several decades of sluggish growth the Indian economy is now amongst the fastest

growing economy in the world. Economic growth is currently 8-9%, second only to China.

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Construction of Balanced Portfolio comprising of Equity and Debt

Despite several problems facing the Indian economy many economists point to potential

strengths of the Indian economy which could enable it to continue to benefit from high levels of

economic growth in the future.

1. Demographics of India are favourable.

India still has a positive birth rate meaning that the size of the workforce will continue to

grow for the foreseeable future. (unlike India) A rising workforce helps to increase saving

and investment. It also enables increased productivity.

2. There is much scope for increases in efficiency.

The infrastructure of India is so bad in places that even moderate improvements could lead

to significant improvements in the productive capacity of the economy.

3. India is well placed to benefit from globalization and outsourcing.

A legacy of the British Empire is that India has one of the largest English speaking

populations in the world. For labour intensive industries like call centres India is an obvious

target for outsourcing. This is an economic development likely to continue in the future.

4. Positive Growth Forecasts

A recent study from Goldman Sachs, forecast that India could growth at a sustainable rate

of 8% growth until 2020.However it is worth noting that this assumed Indian would make

several supply side policies such as labour market deregulation and improvements in

education and training.

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Construction of Balanced Portfolio comprising of Equity and Debt Problems Facing Indian Economy

1. Inflation.

Fuelled by rising wages, property prices and food prices inflation in India is an increasing

problem. Inflation is currently between 6-7%. A record 98% of Indian firms report operating

close to full capacity .With economic growth of 9.2% per annum inflationary pressures are

likely to increase, especially with supply side constraints such as infrastructure. The wholesale-

price index (WPI), rose to an annualized 6.6% in Janu 2007

2. Poor educational standards.

Although India has benefited from a high % of English speakers. (important for call centre

industry) there is still high levels of illiteracy amongst the population. It is worse in rural areas

and amongst women. Over 50% of Indian women are illiterate

3. Poor Infrastructure.

Many Indians lack basic amenities lack access to running water. Indian public services are

creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before

it reaches the market; this is one example of the supply constraints and inefficiency’s facing the

Indian economy.

4. Balance of Payments deterioration.

Although India has built up large amounts of foreign currency reserves the current account

deficit has deteriorate in recent months. This deterioration is a result of the overheating of the

economy. Aggregate Supply cannot meet Aggregate demand so consumers are sucking in

imports. Excluding workers remittances India’s current account deficit is approaching 5% of

GD

5. High levels of debt.

Buoyed by a property boom the amount of lending in India has grown by 30% in the past year.

However there are concerns about the risk of such loans. If they are dependent on rising

property prices it could be problematic. Furthermore if inflation increases further it may force

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Construction of Balanced Portfolio comprising of Equity and Debt the RBI to increase interest rates. If interest rates rise substantially it will leave those indebted

facing rising interest payments and potentially reducing consumer spending in the future

6. Inequality has risen rather than decreased.

It is hoped that economic growth would help drag the Indian poor above the poverty line.

However so far economic growth has been highly uneven benefiting the skilled and wealthy

disproportionately. Many of India’s rural poor are yet to receive any tangible benefit from the

India’s economic growth. More than 78 million homes do not have electricity. 33%

(268million) of the population live on less than $1 per day. Furthermore with the spread of

television in Indian villages the poor are increasingly aware of the disparity between rich and

poor.

7. Large Budget Deficit.

India has one of the largest budget deficits in the developing world. Excluding subsidies it

amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little

scope for increasing investment in public services like health and education.

8. Rigid labour Laws.

As an example Firms employing more than 100 people cannot fire workers without government

permission. The effect of this is to discourage firms from expanding to over 100 people. It also

discourages foreign investment. Trades Unions have an important political power base and

governments often shy away from tackling potentially politically sensitive labour laws.

CURRENT STATE OF AN INDIAN ECONOMY

The economy of India, when measured in USD exchange-rate terms, is the tenth largest in the

world, with a GDP of US $1.50 trillion (2008). It is the third largest in terms of purchasing

power parity. India is the second fastest growing major economy in the world, with a GDP

growth rate of 9.4% for the fiscal year 2006–2007. However, India's huge population has a per

capita income of $4,542 at PPP and $1,089 in nominal terms (revised 2007 estimate). The

World Bank classifies India as a low-income economy.

Babasabpatilfreepptmba.com25

Construction of Balanced Portfolio comprising of Equity and Debt India's economy is diverse, encompassing agriculture, handicrafts, textile, manufacturing, and a

multitude of services. Although two-thirds of the Indian workforce still earn their livelihood

directly or indirectly through agriculture, services are a growing sector and play an increasingly

important role of India's economy. The advent of the digital age, and the large number of young

and educated populace fluent in English, is gradually transforming India as an important 'back

office' destination for global outsourcing of customer services and technical support. India is a

major exporter of highly-skilled workers in software and financial services, and software

engineering. Other sectors like manufacturing, pharmaceuticals, biotechnology,

nanotechnology, telecommunication, shipbuilding, aviation , tourism and retailing are showing

strong potentials with higher growth rates.

India followed a socialist-inspired approach for most of its independent history, with strict

government control over private sector participation, foreign trade, and foreign direct

investment. However, since the early 1990s, India has gradually opened up its markets through

economic reforms by reducing government controls on foreign trade and investment. The

privatisation of publicly owned industries and the opening up of certain sectors to private and

foreign interests has proceeded slowly amid political debate.

India faces a fast-growing population and the challenge of reducing economic and social

inequality. Poverty remains a serious problem, although it has declined significantly since

independence. Official surveys estimated that in the year 2004-2005, 27% of Indians were poor.

SOME IMPORTANT FACTS ABOUT INDIAN ECONOMY

Public expenditure

India's public expenditure is classified as development expenditure, comprising central plan

expenditure and central assistance and non-development expenditures; these categories can

each be divided into capital expenditure and revenue expenditure. Central plan expenditure is

allocated to development schemes outlined in the plans of the central government and public

sector undertakings; central assistance refers to financial assistance and developmental loans

given for plans of the state governments and union territories. Non-development capital

expenditure comprises capital defense expenditure, loans to public enterprises, states and union

territories and foreign governments, while non-development revenue expenditure comprises

Babasabpatilfreepptmba.com26

Construction of Balanced Portfolio comprising of Equity and Debt revenue defence expenditure, administrative expenditure, subsidies, debt relief to farmers,

postal deficit, pensions, social and economic services (education, health, agriculture, science

and technology), grants to states and union territories and foreign governments.

Headquarters of India's central bank, the Reserve Bank of India, in Mumbai (It's the tall

building in the background. The building in the foreground is the Asiatic Library)

India's non-development revenue expenditure has increased nearly fivefold in 2003–04 since

1990–91 and more than tenfold since 1985–1986. Interest payments are the single largest item

of expenditure and accounted for more than 40% of the total non development expenditure in

the 2003–04 budget. Defence expenditure increased fourfold during the same period and has

been increasing due to growing tensions in the region, the expensive dispute with Pakistan over

Jammu and Kashmir and an effort to modernise the military. Administrative expenses are

compounded by a large salary and pension bill, which rises periodically due to revisions in

wages, dearness allowance etc. subsidies on food, fertilizers, education and petroleum and other

merit and non-merit subsidies account are not only continuously rising, especially because of

rising crude oil and food prices, but are also harder to rein in, because of political compulsions.

Public receipts

India has a three-tier tax structure, wherein the constitution empowers the union government to

levy income tax, tax on capital transactions (wealth tax, inheritance tax), sales tax, service tax,

customs and excise duties and the state governments to levy sales tax on intrastate sale of

goods, tax on entertainment and professions, excise duties on manufacture of alcohol, stamp

duties on transfer of property and collect land revenue (levy on land owned). The local

governments are empowered by the state government to levy property tax, Octroi and charge

users for public utilities like water supply, sewage etc. More than half of the revenues of the

union and state governments come from taxes, of which half come from Indirect taxes. More

than a quarter of the union government's tax revenues is shared with the state governments.

Babasabpatilfreepptmba.com27

Construction of Balanced Portfolio comprising of Equity and Debt The tax reforms, initiated in 1991, have sought to rationalise the tax structure and increase

compliance by taking steps in the following directions:

Reducing the rates of individual and corporate income taxes, excises, customs and making it

more progressive

Reducing exemptions and concessions

Simplification of laws and procedures

Introduction of Permanent account number to track monetary transactions

21 of the 29 states introduced Value added tax (VAT) on April 1, 2005 to replace the

complex and multiple sales tax system.

The non-tax revenues of the central government come from fiscal services, interest receipts,

public sector dividends, etc., while the non-tax revenues of the States are grants from the central

government, interest receipts, dividends and income from general, economic and social

services.

General budget

The Finance minister of India presents the annual union budget in the Parliament on the last

working day of February. The budget has to be passed by the Lok Sabha before it can come into

effect on April 1, the start of India's fiscal year. The Union budget is preceded by an economic

survey which outlines the broad direction of the budget and the economic performance of the

country for the outgoing financial year. This economic survey involves all the various NGOs,

women organizations, business people, old people associations etc.

Labour

The large population puts further pressure on infrastructure and social services. A positive

factor has been the large working-age population, which forms 45.33% of the population and is

expected to increase substantially, because of the decreasing dependency ratio. The national

labour market has been tightly regulated by successive governments ever since the Workmen's

Compensation Act was passed in 1923.

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Construction of Balanced Portfolio comprising of Equity and Debt Natural resources

India's total cultivable area is 1,269,219 km² (56.78% of total land area), which is decreasing

due to constant pressure from an ever growing population and increased urbanisation.

India has a total water surface area of 314,400 km² and receives an average annual rainfall of

1,100 mm. Irrigation accounts for 92% of the water utilisation, and comprised 380 km² in 1974,

and is expected to rise to 1,050 km² by 2025, with the balance accounted for by industrial and

domestic consumers. India's inland water resources comprising rivers, canals, ponds and lakes

and marine resources comprising the east and west coasts of the Indian ocean and other gulfs

and bays provide employment to nearly 6 million people in the fisheries sector. India is the

sixth largest producer of fish in the world and second largest in inland fish production.

India's major mineral resources include Coal (fourth-largest reserves in the world), Iron ore,

Manganese, Mica, Bauxite, Titanium ore, Chromite, Natural gas, Diamonds, Petroleum,

Limestone and Thorium (world's largest along Kerala's shores). India's oil reserves, found in

Bombay High off the coast of Maharashtra, Gujarat, and in eastern Assam meet 25% of the

country's demand.

Rising energy demand concomitant with economic growth has created a perpetual state of

energy crunch in India. India is poor in oil resources and is currently heavily dependent on coal

and foreign oil imports for its energy needs. Though India is rich in Thorium, but not in

Uranium, which it might get access to if a nuclear deal with US comes to fruition. India is rich

in certain energy resources which promise significant future potential - clean / renewable

energy resources like solar, wind, biofuels (jatropha, sugarcane).

Physical infrastructure

Mumbai Airport

Babasabpatilfreepptmba.com29

Construction of Balanced Portfolio comprising of Equity and Debt Development of infrastructure was completely in the hands of the public sector and was

plagued by corruption, bureaucratic inefficiencies, urban-bias and an inability to scale

investment.

Infosys Software Development Center in Pune.

India's low spending on power, construction, transportation, telecommunications and real estate,

at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates.

This had prompted the government to partially open up infrastructure to the private sector

allowing foreign investment which has helped in a sustained growth rate of close to 9% for the

past six quarters. India holds second position in the world in roadways' construction, more than

twice that of China. As of 2005 the electricity production was at 661.6 billion kWh with oil

production standing at 785,000 bbl/day. India's prime import partners are : China 8.7%, US 6%,

Germany 4.6%, Singapore 4.6%, Australia 4% as of 2006 CIA FactBook As of 15 January

2007, there were 2.10 million broadband lines in India. Low tele-density is the major hurdle for

slow pickup in broadband services. Over 76% of the broadband lines were via DSL and the rest

via cable modems.

Financial institutions

Babasabpatilfreepptmba.com30

Construction of Balanced Portfolio comprising of Equity and Debt India has set up Special Economic Zones and software parks that offer tax benefits and better

infrastructure to set up business. Pictured here is the Infosys headquarters in Bangalore, one of

the largest software companies in India.

India inherited several institutions, such as the civil services, Reserve Bank of India, railways,

etc., from its British rulers. Mumbai serves as the nation's commercial capital, with the Reserve

Bank of India (RBI), Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)

located here. The headquarters of many financial institutions are also located in the city.

Cyber Greens Office Complex. Containing offices like ABN Amro, Microsoft.

The RBI, the country's central bank was established on 1 April 1935. It serves as the nation's

monetary authority, regulator and supervisor of the financial system, manager of exchange

control and as an issuer of currency. The RBI is governed by a central board, headed by a

governor who is appointed by the Central government of India.

Cuffe Parade is an important business district in Mumbai, home to the World Trade Center as

well as other important financial institutions

The BSE Sensex or the BSE Sensitive Index is a value-weighted index composed of 30

companies with April 1979 as the base year (100). These companies have the largest and most

actively traded stocks and are representative of various sectors, on the Exchange. They account

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Construction of Balanced Portfolio comprising of Equity and Debt for around one-fifth of the market capitalisation of the BSE. The Sensex is generally regarded

as the most popular and precise barometer of the Indian stock markets. Incorporated in 1992,

the National Stock Exchange is one of the largest and most advanced stock markets in India.

The NSE is the world's third largest stock exchange in terms of transactions. There are a total of

23 stock exchanges in India, but the BSE and NSE comprise 83% of the volumes.The Securities

and Exchange Board of India (SEBI), established in 1992, regulates the stock markets and other

securities markets of the country.

SECTORS

Agriculture

Composition of India's total production (million tonnes) of foodgrains and commercial crops, in

2003–04. India ranks second worldwide in farm output. Agriculture and allied sectors like

forestry, logging and fishing accounted for 18.6% of the GDP in 2005, employed 60% of the

total workforce[4] and despite a steady decline of its share in the GDP, is still the largest

economic sector and plays a significant role in the overall socio-economic development of

India. Yields per unit area of all crops have grown since 1950, due to the special emphasis

placed on agriculture in the five-year plans and steady improvements in irrigation, technology,

application of modern agricultural practices and provision of agricultural credit and subsidies

since Green revolution in India. However, international comparisons reveal that the average

yield in India is generally 30% to 50% of the highest average yield in the world.

The low productivity in India is a result of the following factors:

Illiteracy, general socio-economic backwardness, slow progress in implementing land

reforms and inadequate or inefficient finance and marketing services for farm produce.

The average size of land holdings is very small (less than 20,000 m²) and is subject to

fragmentation, due to land ceiling acts and in some cases, family disputes. Such small

holdings are often over-manned, resulting in disguised unemployment and low productivity

of labour.

Adoption of modern agricultural practices and use of technology is inadequate, hampered

by ignorance of such practices, high costs and impracticality in the case of small land

holdings.

Babasabpatilfreepptmba.com32

Construction of Balanced Portfolio comprising of Equity and Debt Irrigation facilities are inadequate, as revealed by the fact that only 53.6% of the land was

irrigated in 2000–01, which result in farmers still being dependent on rainfall, specifically

the Monsoon season. A good monsoon results in a robust growth for the economy as a

whole, while a poor monsoon leads to a sluggish growth. Farm credit is regulated by

NABARD, which is the statutory apex agent for rural development in the subcontinent.

Industry

India is fourteenth in the world in factory output. They together account for 27.6% of the GDP

and employ 17% of the total workforce.However, about one-third of the industrial labour force

is engaged in simple household manufacturing only.

Economic reforms brought foreign competition, led to privatisation of certain public sector

industries, opened up sectors hitherto reserved for the public sector and led to an expansion in

the production of fast-moving consumer goods.

Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family

firms and required political connections to prosper was faced with foreign competition,

including the threat of cheaper Chinese imports. It has since handled the change by squeezing

costs, revamping management, focusing on designing new products and relying on low labour

costs and technology.

34 Indian companies have been listed in the Forbes Global 2000 ranking for 2008.

Babasabpatilfreepptmba.com33

Construction of Balanced Portfolio comprising of Equity and Debt The 10 leading companies are:

World

Rank  Company   Logo Industry  

Revenue

(billion

$)  

Profits

(billion

$)  

Assets

(billion

$)  

Market

Value

(billion

$)  

193Reliance

Industries

Oil & Gas

Operations26.07 2.79 30.67 89.29

198Oil and Natural

Gas Corporation

Oil & Gas

Operations18.90 4.11 33.79 54.11

219State Bank of

IndiaBanking 15.77 1.47 188.56 33.29

303Indian Oil

Corporation

Oil & Gas

Operations42.68 1.82 25.39 16.36

374ICICI Bank Banking 9.84 0.64 91.07 29.85

411NTPC Utilities 7.84 1.60 20.34 41.57

647Steel Authority

of India LimitedMaterials 7.88 1.45 8.05 26.37

738Tata Steel Materials 5.83 0.97 11.48 14.63

826Bharti AirtelTelecommunications

Services4.26 0.94 6.61 39.16

846Reliance

Communications

Telecommunications

Services3.13 0.65 13.08 29.63

Services

India is fifteenth in services output. It provides employment to 23% of work force, and it is

growing fast, growth rate 7.5% in 1991–2000 up from 4.5% in 1951–80. It has the largest share

in the GDP, accounting for 53.8% in 2005 up from 15% in 1950. Business services

(information technology, information technology enabled services, business process

outsourcing) are among the fastest growing sectors contributing to one third of the total output

of services in 2000. The growth in the IT sector is attributed to increased specialisation,

Babasabpatilfreepptmba.com34

Construction of Balanced Portfolio comprising of Equity and Debt availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking

workers. On the supply side and on the demand side, increased demand from foreign consumers

interested in India's service exports or those looking to outsource their operations. India's IT

industry, despite contributing significantly to its balance of payments, accounted for only about

1% of the total GDP or 1/50th of the total services.

Banking and finance

The Indian money market is classified into: the organised sector (comprising private, public and

foreign owned commercial banks and cooperative banks, together known as scheduled banks);

and the unorganised sector (comprising individual or family owned indigenous bankers or

money lenders and non-banking financial companies (NBFCs)). The unorganised sector and

microcredit are still preferred over traditional banks in rural and sub-urban areas, especially for

non-productive purposes, like ceremonies and short duration loans.

Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980,

and made it mandatory for banks to provide 40% of their net credit to priority sectors like

agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks

fulfill their social and developmental goals. Since then, the number of bank branches has

increased from 10,120 in 1969 to 98,910 in 2003 and the population covered by a branch

decreased from 63,800 to 15,000 during the same period. The total deposits increased 32.6

times between 1971 to 1991 compared to 7 times between 1951 to 1971. Despite an increase of

rural branches, from 1,860 or 22% of the total number of branches in 1969 to 32,270 or 48%,

only 32,270 out of 5 lakh (500,000) villages are covered by a scheduled bank.

Since liberalisation, the government has approved significant banking reforms. While some of

these relate to nationalised banks (like encouraging mergers, reducing government interference

and increasing profitability and competitiveness), other reforms have opened up the banking

and insurance sectors to private and foreign players.

Babasabpatilfreepptmba.com35

Construction of Balanced Portfolio comprising of Equity and Debt Socio-economic characteristics

Poverty

Large numbers of India's people live in abject poverty. Wealth distribution in India is

improving since the liberalization and with the end of the socialist rule termed as the license raj.

While poverty in India has reduced significantly, official figures estimate that 27.5% of Indians

still lived below the national poverty line in 2004-2005. A 2007 report by the state-run National

Commission for Enterprises in the Unorganised Sector (NCEUS) found that 70% of Indians, or

800 million people, lived on less than 20 rupees per day with most working in "informal labour

sector with no job or social security, living in abject poverty."

Since the early 1950s, successive governments have implemented various schemes, under

planning, to alleviate poverty, that have met with partial success. All these programmes have

relied upon the strategies of the Food for work programme and National Rural Employment

Programme of the 1980s, which attempted to use the unemployed to generate productive assets

and build rural infrastructure. In August 2005, the Indian parliament passed the Rural

Employment Guarantee Bill, the largest programme of this type in terms of cost and coverage,

which promises 100 days of minimum wage employment to every rural household in 200 of

India's 600 districts. The question of whether economic reforms have reduced poverty or not

has fuelled debates without generating any clear cut answers and has also put political pressure

on further economic reforms, especially those involving the downsizing of labour and cutting

agricultural subsidies.

Occupations and unemployment

Agricultural and allied sectors accounted for about 57% of the total workforce in 1999–2000,

down from 60% in 1993–94. While agriculture has faced stagnation in growth, services have

seen a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which

are in the public sector. The NSSO survey estimated that in 1999–2000, 106 million, nearly

10% of the population were unemployed and the overall unemployment rate was 7.32%, with

rural areas doing marginally better (7.21%) than urban areas (7.65%).

Unemployment in India is characterised by chronic underemployment or disguised

unemployment. Government schemes that target eradication of both poverty and

unemployment, (Which in recent decades has sent millions of poor and unskilled people into

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Construction of Balanced Portfolio comprising of Equity and Debt urban areas in search of livelihoods.) attempt to solve the problem, by providing financial

assistance for setting up businesses, skill honing, setting up public sector enterprises,

reservations in governments, etc. The decreased role of the public sector after liberalisation has

further underlined the need for focusing on better education and has also put political pressure

on further reforms.

Regional imbalance

One of the critical problems facing India's economy is the sharp and growing regional

variations among India's different states and territories in terms of per capita income, poverty,

availability of infrastructure and socio-economic development.

The five-year plans have attempted to reduce regional disparities by encouraging industrial

development in the interior regions, but industries still tend to concentrate around urban areas

and port cities. After liberalization, the more advanced states are better placed to benefit from

them, with infrastructure like well developed ports, urbanisation and an educated and skilled

workforce which attract manufacturing and service sectors. The union and state governments of

backward regions are trying to reduce the disparities by offering tax holidays, cheap land, etc.,

and focusing more on sectors like tourism, which although being geographically and

historically determined, can become a source of growth and is faster to develop than other

sectors.

External trade and investment

Global trade relations

Until the liberalization of 1991, India was largely and intentionally isolated from the world

markets, to protect its fledging economy and to achieve self-reliance. Foreign trade was subject

to import tariffs, export taxes and quantitative restrictions, while foreign direct investment was

restricted by upper-limit equity participation, restrictions on technology transfer, export

obligations and government approvals; these approvals were needed for nearly 60% of new FDI

in the industrial sector. The restrictions ensured that FDI averaged only around $200M annually

between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid,

commercial borrowing and deposits of non-resident Indians.

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Construction of Balanced Portfolio comprising of Equity and Debt

Indian exports in 2006

India's exports were stagnant for the first 15 years after independence, due to the predominance

of tea, jute and cotton manufactures, demand for which was generally inelastic. Imports in the

same period consisted predominantly of machinery, equipment and raw materials, due to

nascent industrialisation. Since liberalisation, the value of India's international trade has become

more broad-based and has risen to Rs. 63,080,109 crores in 2003–04 from Rs.1,250 crores in

1950–51. India's major trading partners are China, the US, the UAE, the UK, Japan and the EU.

The exports during April 2007 were $12.31 billion up by 16% and import were $17.68 billion

with an increase of 18.06% over the previous year.

India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947

and its successor, the World Trade Organization. While participating actively in its general

council meetings, India has been crucial in voicing the concerns of the developing world. For

instance, India has continued its opposition to the inclusion of such matters as labour and

environment issues and other non-tariff barriers into the WTO policies.

Balance of payments

Since independence, India's balance of payments on its current account has been negative.

Since liberalisation in the 1990s (precipitated by a balance of payment crisis), India's exports

have been consistently rising, covering 80.3% of its imports in 2002–03, up from 66.2% in

Babasabpatilfreepptmba.com

Share of top five investing countries in FDI inflows. (2000–2007)[79]

Rank CountryInflows

(Million USD)Inflows (%)

1  Mauritius 85,178 44.24%[80]

2  United States 18,040 9.37%

3  United Kingdom 15,363 7.98%

4  Netherlands 11,177 5.81%

5  Singapore 9,742 5.06%

38

Construction of Balanced Portfolio comprising of Equity and Debt 1990–91. Although India is still a net importer, since 1996–97, its overall balance of payments

(i.e., including the capital account balance), has been positive, largely on account of increased

foreign direct investment and deposits from non-resident Indians; until this time, the overall

balance was only occasionally positive on account of external assistance and commercial

borrowings. As a result, India's foreign currency reserves stood at $285 billion in 2008, which

could be used in infrastructural development of the country if used effectively.

India is a net importer: Per the CIA factbook in 2007, imports were $224bn and exports

$140bn.

India's reliance on external assistance and commercial borrowings has decreased since 1991–

92, and since 2002–03, it has gradually been repaying these debts. Declining interest rates and

reduced borrowings decreased India's debt service ratio to 4.5% in 2007. In India, External

Commercial Borrowings (ECBs) are being permitted by the Government for providing an

additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates

these borrowings (ECBs) through ECB policy guidelines.

Foreign direct investment in India

As the third-largest economy in the world in PPP terms, India is a preferred destination for

foreign direct investments (FDI); India has strengths in information technology and other

significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery.

India has always held promise for global investors, but its rigid FDI policies were a significant

hindrance in this regard. However, as a result of a series of ambitious and positive economic

Babasabpatilfreepptmba.com39

Construction of Balanced Portfolio comprising of Equity and Debt reforms aimed at deregulating the economy and stimulating foreign investment, India has

positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India

has a large pool of skilled managerial and technical expertise. The size of the middle-class

population at 300 million exceeds the population of both the US and the EU, and represents a

powerful consumer market.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.

Industrial policy reforms have substantially reduced industrial licensing requirements, removed

restrictions on expansion and facilitated easy access to foreign technology and foreign direct

investment FDI. The upward moving growth curve of the real-estate sector owes some credit to

a booming economy and liberalized FDI regime. In March 2005, the government amended the

rules to allow 100 per cent FDI in the construction business. This automatic route has been

permitted in townships, housing, built-up infrastructure and construction development projects

including housing, commercial premises, hotels, resorts, hospitals, educational institutions,

recreational facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors.

Restrictions will be relaxed in sectors as diverse as civil aviation, construction development,

industrial parks, petroleum and natural gas, commodity exchanges, credit-information services

and mining. But this still leaves an unfinished agenda of permitting greater foreign investment

in politically sensitive areas such as insurance and retailing.

FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March),

according to the government's Secretariat for Industrial Assistance. This was more than double

the total of US$7.8bn in the previous fiscal year. Between April and September 2007, FDI

inflows were US$8.2bn.

INDUSTRY ANALYSIS

Indian Money Market

Whenever a bear market comes along, investors realize that the stock market is a risky place for

their savings, a fact we tend to forget while enjoying the returns of a bull market! This,

unfortunately, is part of the risk/return tradeoff. That is, to get higher returns, you have to take

on a higher level of risk. But for many investors, a volatile market is too much to stomach - an

alternative is the money market. The money market is better known as a place for large

Babasabpatilfreepptmba.com40

Construction of Balanced Portfolio comprising of Equity and Debt institutions and government to manage their short-term cash needs. However, individual

investors have access to the market through a variety of different securities.

The money market is a subsection of the fixed income market. Many people think of the term

"fixed income" as synonymous with bonds, but technically, a bond is just one type of fixed

income security. The difference between the money market and the bond market is that the

money market specializes in very short term debt securities (debt that matures in less than one

year). Money market investments are also called cash investments because of their short

maturities. Money market securities are essentially bonds issued by governments, financial

institutions, and large corporations. These instruments are very liquid, and considered very safe.

Because they are so conservative, money market securities offer a lower return than most other

securities. One of the main differences between the money market and the stock market is that

most money market securities trade in very high denominations and so individual investors

have limited access to them. Also, the money market is a dealer market, which means that firms

buy and sell securities in their own accounts, at their own risk. Compare this to the stock market

where brokers usually act as agents, making money on commissions, while investors takes the

risk of holding the stock. One other characteristic of a dealer market is there is no central

trading floor or exchange. Deals are transacted over the phone or through electronic systems .

The easiest way for us to gain access to the money market is with a money market

mutual funds, or sometimes a money market bank account. Although, some money market

instruments like treasury bills may be purchased directly or through other large financial

institutions with direct access to these markets. There are several different instruments in the

money market, offering different returns and different risks. Let's take a look at the major ones.

Treasury Bills

Treasury Bills (T-bills) are the most marketable money market security. Their popularity is

mainly due to their simplicity. T-bills are basically a way for the government uses to raise

money from the public. T-bills are short-term securities that mature in one year or less from

their issue date. T-bills are issued with 3 month, 6 month, and 1 year maturities.

Certificate of Deposit (CD)

A certificate of deposit (CD) is a time deposit with a bank. Time deposits may not be

withdrawn on demand like a check account. CDs are generally issued by commercial banks but

they can be bought through brokerages. They bear a specific maturity date (from 3 months to 5

years), a specified interest rate, and can be issued in any denomination, very similar to bonds.

Babasabpatilfreepptmba.com41

Construction of Balanced Portfolio comprising of Equity and Debt Commercial Paper

For many corporations, borrowing short-term money from banks is often a labored and

annoying task. Their desire to avoid banks as much as possible has led to the Commercial paper

is an unsecured, short-term loan issued by a corporation, typically for financing accounts

receivable and inventories.

Debentures

These are the normal types of bonds. It is unsecured debt, backed only by the name and

goodwill of the corporation. In the event of the liquidation of the corporation, holders of

debentures are repaid before stockholders, but after holders of mortgage bonds.

Babasabpatilfreepptmba.com42

Construction of Balanced Portfolio comprising of Equity and Debt INDIAN CEMENT INDUSTRY

Background

The Indian cement industry (120 million tons per annum) is the fourth largest in he world after

China, Japan and USA. However, per capita consumption in the country is only around 80-90

kg compared to the world average of approximately 250 kg.

Historically, the Indian cement sector has been highly fragmented comprising 54 players that

operate 124 plants. The majority of the plants are small-sized and well spread through out the

country. The cement industry is cyclical and capital intensive. A new plant typically has a

gestation period of 3-4 years.

Overview of The Indian cement industry

The Indian cement industry with a total capacity of 144 m tonnes (including mini plants) in

FY07, has surpassed developed nations like USA and Japan and has emerged as the second

largest market after China. Although consolidation has taken place in the Indian cement industry

with the top six players controlling almost 60% of the capacity, the remaining 40% of the

capacity remains pretty fragmented with around 40 players in the fray.

Despite the fact that Indian cement industry has clocked a production of more than 100 m

tonnes for the second year in succession, the per capita consumption of 110 kgs

compares poorly with the world average of 260 kgs. This, more than anything underlines

the tremendous scope for growth in the Indian cement industry in the long term.

Cement, being a bulk commodity, is a freight intensive industry and transporting cement

over long distances can prove to be uneconomical. This has resulted in cement being

largely a regional play with the industry divided into five main regions viz. north, south,

west, east and the central region. While the southern region is excess is capacity owing to

the availability of limestone, the western and northern region are the most lucrative

markets. Therefore, players like Grasim, L&T and Gujarat Ambuja enjoy high price

realisations compared to the all India average.

Although the government has reduced the import duty on cement, imports do not pose a

threat since prices of cement in India are lower than those prevailing in the international

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Construction of Balanced Portfolio comprising of Equity and Debt markets. Moreover, the storage facilities on the Indian ports are inadequate for large-

scale imports.

  Key points about the cement industry

Supply : There is an oversupply situation in the industry due to capacity additions by

the major players in the industry. The situation is likely to improve, as there is no major

Greenfield expansion in sight.

Demand : Housing sector acts as the principal growth driver for cement. However, in

recent times, industrial and infrastructure sector have also emerged as demand drivers

for cement.

Barriers to entry: High capital costs and long gestation periods. Access to limestone

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

entry barrier.

Bargaining power of suppliers:Licensing of coal and limestone reserves, supply of

power from the state grid and availability of railways for transport are all controlled by a

single entity, which is the government.

Bargaining power of customers: Cement is a commodity business and sales volumes

mostly depend upon the distribution reach of the company. However, things are

changing and few brands such as Gujarat Ambuja and L&T have started commanding a

premium on account of better quality perception.

Competition:Due to large number of players in the industry and very little brand

differentiation to speak of, the competition is intense with players resorting to frequent

price cuts in order to gain market share.Key Stages In Cement Production Cement

production is one of the world’s most energy intensive industries. Key production stages

can be summarized as: 1.Raw materialsThese are generally combinations of limestone,

shells or chalk, and shale, clay, sand or iron ore, usually mined from a quarry close to

the plant where they undergo reduction using primary and secondary crushers. When the

reduced materials reach the cement plant they are proportioned to create a cement of

specific chemical composition. Much work is being done on the use of alternative raw

materials – often the by-products of other industrial processes. These can minimize the

effects of quarrying, reduce the impact of the cement plant on the local environment and

enable the cement industry to become a major player in materials recycling. There are

two basic methods used in Portland cement production – wet and dry. In the dry process

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Construction of Balanced Portfolio comprising of Equity and Debt dry materials are proportioned, ground to a powder, blended and fed into the kiln dry.

The wet process involves adding water to the proportioned raw materials and

completing the grinding and blending operations in slurry form.2. Pre-heaterTo

conserve energy, most modern cement plants pre-heat raw materials before they enter

the kiln, using the hot exhaust gases from the kiln itself.

3. KilnThe mixture of raw materials is fed into the upper end of a rotating, cylindrical

kiln, which achieves temperatures in excess of 1000°C. It passes through at a rate

controlled by the slope and rotational speed of the kiln. Chemical reaction inside the

kiln leads to the fusion of the raw materials to produce clinker. Traditionally kiln fuels

have been powdered coal or natural gas, but increasingly alternative fuels are being

used. These include materials such as scrap tyres, processed sewage sludge and

packaging waste. 4. Cooling/finish grindingClinker is discharged from the lower end

of the kiln and transferred to various types of coolers. Total productionThe cement

industry comprises of 125 large cement plants with an installed capacity of 148.28

million tonnes and more than 300 mini cement plants with an estimated capacity of

11.10 million tonnes per annum. The Cement Corporation of India, which is a Central

Public Sector Undertaking, has 10 units. There are 10 large cement plants owned by

various State Governments. The total installed capacity in the country as a whole is

159.38 million tonnes. Actual cement production in 2006-07 was 116.35 million tonnes

as against a production of 106.90 million tonnes in 2004-05, registering a growth rate of

8.84%. Major players in cement production are Ambuja cement, Aditya Cement, J K

Cement and L & T cement.

Apart from meeting the entire domestic demand, the industry is also exporting

cement and clinker. The export of cement during 2004-05 and 2006-07 was 5.14 million

tonnes and 6.92 million tonnes respectively. Export during April-May, 2007 was 1.35

million tonnes. Major exporters were Gujarat Ambuja Cements Ltd. and L&T Ltd.

The Planning Commission for the formulation of X Five Year Plan constituted a

'Working Group on Cement Industry' for the development of cement industry. The

Working Group has identified following thrust areas for improving demand for cement;

Further push to housing development programmes;

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Construction of Balanced Portfolio comprising of Equity and Debt i. Promotion of concrete Highways and roads; and

ii. Use of ready-mix concrete in large infrastructure projects.

Further, in order to improve global competitiveness of the Indian Cement Industry, the

Department of Industrial Policy & Promotion commissioned a study on the global

competitiveness of the Indian Industry through an organization of international repute, viz.

KPMG Consultancy Pvt. Ltd. The report submitted by the organization has made several

recommendations for making the Indian Cement Industry more competitive in the international

market. The recommendations are under consideration.

Cement industry has been decontrolled from price and distribution on 1st March 1989 and de-

licensed on 25th July 1991. However, the performance of the industry and prices of cement are

monitored regularly. Being a key infrastructure industry, the constraints faced by the industry

are reviewed in the Infrastructure Coordination Committee meetings held in the Cabinet

Secretariat under the Chairmanship of Secretary (Coordination). The Committee on

Infrastructure also reviews its performance.

Technological change

Continuous technological upgrading and assimilation of latest technology has been going on in

the cement industry. Presently 93 per cent of the total capacity in the industry is based on

modern and environment-friendly dry process technology and only 7 per cent of the capacity is

based on old wet and semi-dry process technology. There is tremendous scope for waste heat

recovery in cement plants and thereby reduction in emission level. One project for co-

generation of power utilizing waste heat in an Indian cement plant is being implemented with

Japanese assistance under Green Aid Plan. The induction of advanced technology has helped

the industry immensely to conserve energy and fuel and to save materials substantially. India is

also producing different varieties of cement like Ordinary Portland Cement (OPC), Portland

Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement,

Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement etc.

Production of these varieties of cement conform to the BIS Specifications. Also, some cement

plants have set up dedicated jetties for promoting bulk transportation and export.

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Construction of Balanced Portfolio comprising of Equity and Debt Future Prospects about the Cement industry

The industry is likely to maintain its growth momentum and continue growing at around 8% in

the medium to long term. Government initiatives in the infrastructure sector (such as the

commencement of second phase of NHDP, rural roads, 10,000 kms of additional highways as

announced in Finance Budget) and the housing sector are likely to be the main drivers of

growth for the industry.

The acquisition of L&T's cement division by Grasim has changed the landscape of the

entire cement industry and in one fell swoop has catapulted Grasim to the leadership

position. This is a healthy sign for the industry, as this would result in consolidation and

would give significant pricing power to the bigger players. With consolidation taking

place at the lower end also, the unviable units will be forced to shut down thus

benefiting the long-term interests of the industry.

With no major capacity expansion in the pipeline, the demand supply level is expected

to achieve parity on a macro level by FY08 and this will help in the improvement of

prices. However, since the level of demand supply mismatch is higher in the southern

region, it will take longer to achieve demand supply parity. We expect cement price to

increase by around 6% in FY08 owing to fundamental reasons.

The industry worked at estimated 84% capacity in FY08 and given the current growth

rates and also assuming no major capacity expansion in the near future, the capacity

utilisation is likely to go up significantly in the future. This will help in improving the

margins of all the major players and will lead to higher profitability.

Despite these positives, the possibility of interest rates heading north and the consequent impact

on housing demand remains to be seen. While infrastructure spending was a boon, there was a

strong cushion from the steady growth of the construction sector. If this support wanes, it could

take even longer for demand-supply balance to reach parity. Also, the hike in prices of coal and

petroleum products could impact cement companies margins (account for around 40% of sales).

Though the pricing cushion exists, the margin rise will be mitigated to this extent.

INDIAN STEEL INDUSTRY

INTRODUCTION

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Construction of Balanced Portfolio comprising of Equity and Debt Steel is a basic industrial metal because of its high specific strength and relatively low cost per

unit. India is one of the major producers of steel in the world (10th largest) while Steel Authority

of India (a PSU) is the 11th largest steel making company in the world. The per capita

consumption of steel in India is 20 kgs compared to 20 kgs in Africa, 340 kgs in Europe, 420

kgs in North America and 635 kgs in Japan.

India has rich deposits of iron ore, ferrous ores, manganese ore, and chromate ore. India exports

iron ores to various countries. The major steel products are flat products such as HR-coils, CR-

coils, Galvanised coils/sheets and Long products and steel alloys. The long products find use in

the construction business. HR coils form the raw material for the CR industry. They are used

for LPG cylinders, tubes, pipes, drums, automobile components, boilers, etc. CR coil, which is

a thin sheet, forms the raw material for the galvanised sheets/coils. Alloy steel is high value

added steel for specific application.

The Indian steel industry is plagued by over-capacity, high capital cost, inefficiency and labour

problems. After liberalisation, heavy investments were made in the steel sector. The steel

market was expected to do well. But the fall of Russia, the Asian crisis, and overcapacity world

wide, led to a supply glut resulting in a fall in steel prices. Many developed countries started

protecting the domestic companies by imposing heavy duties on the imported steel products.

The Indian steel industry is showing some signs of revival. The steel consumption in India grew

at a good 11% in the first half of the current financial year while finished steel production was

up by 13%. The Indian industry is currently concentrating on the domestic market. Most of the

companies have recorded an increase in the sales in the first quarter of this year. The export

market is currently very dull. The prices of the HR coils and CR coils have dropped drastically.

The government had introduced floor prices to protect the Indian industry.

INDUSTRY STRUCTURE

The steel industry worldwide produces over 750 mn tonnes of crude steel each year. The largest

steel-producing countries are China, Japan and the United States. The integrated steel plants

(ISPs) - Steel Authority of India (SAIL), Tata Steel (TISCO) and Rashtriya Ispat Nigam

(RINL) dominate the Indian steel market. The major ISPs in India are SAIL, TISCO and RINL.

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Construction of Balanced Portfolio comprising of Equity and Debt They account for almost 75% of the steel production. SAIL is the 11 th largest producer of steel

in the world while TISCO ranks 59th. TISCO is also one of the lowest cost producer of steel in

the world.

Steel plants can be classified into integrated steel plant (ISP), mini steel plants (MSP) and re-

rolling plants. There are nine integrated steel plants operating in India. There are more than

2,500 MSPs spread across the country. The re-rolling plants process the semi-finished and

intermediate products into finished products. With the liberalization of the steel sector new

private companies have started using of state of the art technology like COREX and CONARC

for production of liquid steel and value added steel respectively. Mini steel producers in India

employ either Electric Arc Furnace [EAF] or Induction Furnace [IF] for steel production.

The steel industry with an estimated turnover of Rs 75,819 crores in the year-end March 2004

comprises of two distinct producer groups.

Major producers: Also known as Integrated Steel Producers (ISPs), this group includes large

steel producers with high levels of backward integration. Steel Authority of India Limited

(SAIL), Tata Steel, Rashtriya Ispat Nigam Limited (RINL), Jindal Vijayanagar Steel Limited

(JVSL), Essar Steel and Ispat Industries form this group. SAIL, TISCO and RINL produce steel

using the blast furnace/basic oxygen furnace (BF/BOF) route that uses iron ore, coal/coke as the

basic input mix for producing finished steel.

Other major producers such as Essar Steel, Ispat Industries and JVSL use routes other than

BF/BOF for producing steel. . While Essar Steel and Ispat Industries employ Electric Arc

Furnace (EAF) route that uses sponge iron, melting scrap or a mix of both as input, JVSL uses

COREX, a revolutionary technology for making steel using basically iron-ore and coal.

Other producers: This group consists of smaller stand-alone steel plants that include producers

and processors of steel.

Processors/Rerollers: Units producing small quantities of steel (flat/long products) from

materials procured from the market or through their own backward integration system

- Stand alone units making pig iron and sponge iron.

- Small producers using scrap-sponge iron-pig iron combination produce steel ingots (for

long products) using Electric Arc Furnace (EAF) or Induction Arc Furnace (IAF) route

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Construction of Balanced Portfolio comprising of Equity and Debt The Major producers are strategic in nature and account for most of the mild steel production

in the country. The group produces most of the flat steel products in the country including Hot

Rolled, Cold Rolled and Galvanized steel. The majors also produce a small proportion of Long

products and other special steel being produced in the country. While the Other producers

account for a majority of long products being produced in the country and some of the value

added flat steel products like cold rolled steel and galvanized steel.

Types of products

Iron ore – National Mineral Development Corporation (NMDC), Kudremukh Iron Ore Co

(KIOCL) and Sesa Goa (Sesa) are the major merchant producers of iron ore. SAIL and Tata

Steel have their captive iron ore mines.

Pig Iron – KIOCL, Sesa Goa and Usha Ispat. Apart from them there are many mini blast

furnace (MBF) pig iron producers and even integrated steel plants like SAIL and RINL

produce a significant amount of pig iron.

Sponge Iron – Essar Steel, Ispat Industries, Vikram Ispat (a division of Grasim) are the

major producers of gas based sponge iron.

Flat steel products - SAIL, Tata Steel, Essar Steel, Ispat Industries and Jindal Vijaynagar

(JVSL) are the major producers of hot rolled coils (HRC). SAIL, Tata Steel, Ispat

Industries, Jindal group of companies, Uttam Steel and Bhushan Steel are the big producers

of cold rolled coils/ sheets (CRC) and galvanized sheets (GP/ GC).

Long products – RINL, SAIL and Tata Steel are the major producers of long products like

rods, pipes, bars, wires etc.

Alloy Steel products - Mukand, Mahindra Ugine (Musco) and Kalyani Carpenter are some

of the largest producers of alloy steel in the country, which is primarily used, in automotive

and engineering applications.

PROCESS OF PRODUCTION

Basic Oxygen Furnace and Electric Arc Furnace: Players in the steel industry can be

classified either as integrated steel plants (ISPs) or secondary producers / mini-steel mills,

based on their process of manufacture. The ISPs use the blast furnace (BF) to reduce iron

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Construction of Balanced Portfolio comprising of Equity and Debt ore to form hot metal, which is then converted into steel in a basic oxygen furnace (BOF).

The basic open hearth (BOH) was in use before the advent of the BOF and has gradually

been phased out because of its inefficiency with respect to furnace productivity, energy and

refractory consumption. The BOF process is not very power intensive as the entire power

requirement is met through generation within the process itself. The secondary producers,

unlike the ISPs, melt the steel scrap / pellets using electricity in the power intensive electric

arc furnaces (EAFs) / induction furnaces (IFs).

Rolling Mills

The re-rollers vary in size, product mix and technology. Most of these mills are equipped

with re-heating furnaces to roll long products, hoops and strips from billets / ingots or from

re-rollable scrap. ISPs and some large plants using the EAF route have set up captive rolling

mills, after the restrictions on setting up downstream production facilities were removed.

With expectations of a shift in demand tow ards high value-added products, larger players

like TISCO, SAIL and Essar are expected to benefit more than the stand-alone rolling mills

because of their cost advantage.

Raw Materials

Important raw materials required by the iron and steel industry include iron ore, sponge iron,

ferro alloys, coal, refractories, manganese ore and chromite ore.

Iron ore - India has an estimated 10,052 mn tonne of recoverable reserves of heamatite and

3,408 mn tonne of magnetite. Bihar and Orissa are the largest heamatite ore-bearing zones in

the country with reserves consisting of mainly medium grade & low-grade iron ore. Madhya

Pradesh has the largest quantity of high grade ore reserves (iron content is more than 65 %) in

the country while Karnataka has the highest reserves of magnetite.

Sponge Iron - Sponge iron is a reduced form of iron ore, having iron content of 85-92%.

Sponge iron is made by mixing iron ore and coal to make it easy for feeding into furnaces for

making steel. It is a substitute for steel melting scrap used for steel making through EAF and

BOF processes. It can be used in induction as well as arc furnaces for better results. India is the

second largest producer of sponge iron.

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Construction of Balanced Portfolio comprising of Equity and Debt Ferro Alloys - They are added to liquid steel to achieve a specified chemical composition and

provide properties needed to make particular products. They are in fact used in all steels e.g.,

plain carbon, stainless, alloy, electrical, etc. Ferroalloys are prepared from charges of the

nonferrous metal ore, iron or iron ore, coke or coal, and flux by treatment at high temperature in

submerged-arc electric furnaces. The bulk ferro alloys are ferro manganese, ferro chromium

and ferro silicon which is mainly produced in India. Production of noble ferro alloys such as

ferro molybdenum, ferro titanium and ferro vanadium is negligible.

Manganese and Chromite ores-The main manganese reserves found in India are of the blast

furnace grade while only 12% (approximately) are of the ferro-manganese grade. Orissa (33%),

Madhya Pradesh (21%), Maharashtra (21%) and Karnataka (18%) are the major producers of

the ore. Orissa is the prime chromite ore producing state accounting for almost 99% of the total

production of 86 mn tonnes in FY99. There are export restrictions on both manganese and

chromite ores.

GOVERNMENT REGULATIONS

Government’s attitude towards this industry in the form of imposing customs and excise duty

does play an important role in increasing/decreasing the competition in terms of price. The

customs duty for most of the products in this sector is reduced to 5%. For instance, The customs

duty on primary steel and ferroalloys stainless steel has been reduced from 7.5% to 5 % in FY

2007 to 5% as on 2007-08 budget. Similarly there was a periodic reduction in duties of nickel,

coaking coal (with ash content less than 12 percent) is fully exempted now. The periodic

decrease in this duty has reduced the landed cost. In the recent budget Excise duty is increased

from 12% to 16%. The customs duty on coaking coal is fully exempted. The budget impact is

neutral to the industry. The hike in excise duty will be passed on to the customers and is already

reflected in the recent hike of steel prices.

Demand Drivers and Profitability

The demand driver for Steel Industry is intrinsically related to the overall development of the

economy. This overall development is basically led by industries like infrastructure,

constructions, automobiles, power, consumer durables etc. Growth in these sectors will lead to

high demand in Steel. The driver for domestic Steel Industry, apart from domestic sales, is

exports. For the past few years’ exports have driven the overall growth of the industry.

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Construction of Balanced Portfolio comprising of Equity and Debt MAJOR PLAYERS

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a

fully integrated iron and steel maker, producing both basic and special steels for domestic

construction, engineering, power, railway, automotive and defence industries and for sale in

export markets. The Government of India owns about 86% of SAIL's equity and retains voting

control of the Company. However, SAIL, by virtue of its "Navratna" status, enjoys significant

operational and financial autonomy.

Others major steel producers are

Tisco ( Tata Iron and Steel Corporation ltd)

Essar Steel

Jindal Vijaynagar Steels Ltd

Jindal Strips Ltd

JISCO

Saw Pipes

Uttam Steels Ltd

Ispat Industries Ltd

Mukand Ltd

Mahindra Ugine Steel Company Ltd

Tata SSL Ltd

Usha Ispat Ltd

Kalyani Steel Ltd

Electro Steel Castings Ltd

Sesa Goa Ltd

NMDC

Lloyds SteeI Industries Ltd

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Construction of Balanced Portfolio comprising of Equity and Debt STEPS TAKEN TO BOOST STEEL INDUSTRY

Budget 2008-09

1. Customs duty on steel scrap and aluminum scrap has been cut to 0% versus 5%

2. Export duty on chrome ore from the current INR 2,000 per tonne to INR 3,000 per/ton

What the budget does

- Steel melting scrap will be exempt from customs duty.

- Aluminium metal scrap to be exempt from customs duty.

- Export duty rate on chromium ores and concentrates has been increased.

Impact on sector

Reduction in customs duty on scrap will help steel manufacturers that use the electric arc

furnace route for steel manufacturing lower their costs. On the other hand, it will be a negative

for manufacturers that use the blast furnace route. If auto manufacturers pass on the reduced

excise benefits in the form of lower prices, it will help spur demand for automobiles, which in

turn will drive steel demand.

While reduction in customs duty on aluminium metal scrap is positive for certain secondary

aluminium manufacturers, it is negative for ingot manufacturers like Nalco and Hindalco.

Increased investments in T&D will help boost demand for aluminium as the electrical sector is

the major consumer of aluminium in the country.

Impact on companies

Reduction in excise duties on automobiles will help companies (such as Tata Steel) that supply

steel to auto makers. Players that supply steel to the power equipment companies like SAIL and

JSW Steel will benefit from increased investments in the power sector.

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Construction of Balanced Portfolio comprising of Equity and Debt

Nalco and Hindalco will be positively impacted due to greater demand from sectors like auto

and power.

Customs duty exemption on aluminium metal scrap is likely to make its cost more competitive

vis-à-vis the ingots being manufactured by Nalco and Hindalco.

KEY POINTS

Supply With trade barriers having been lowered over the years, imports play

an important role in the domestic markets.

Demand The demand is derived from sectors that include infrastructure,

consumer durables and automobiles.

Barriers to entry High capital costs, technology.

Bargaining power of

suppliers

The government's move on railway freight costs and grid power costs

would determine the final price of the metal.

Bargaining power of

customers

High, presence of a large number of suppliers and access to global

markets.

Competition High, presence of a large number of players in the unorganized

sector.

PROSPECTS

After an impressive 7% growth in global steel production and a 7.3% rise in steel

consumption in 2007, this trend is likely to continue well into 2008 with global

production and consumption both estimated to increase by about 6%. This would take

the total world steel consumption to over 900 MTPA from the current 860 MTPA.

While the current world steel capacity is in the vicinity of about a 1,050 MTPA, the year

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Construction of Balanced Portfolio comprising of Equity and Debt 2008 is likely to witness the global steel production crossing the 1-bn ton mark for the

first time

However, the concern here is the new steel capacities cropping up across the globe,

which may increase the pressure on steel prices going forward. Further, the biggest

disruption in the growth pattern could be higher than expected slowdown in Chinese

steel consumption, which could make available a good amount of excess steel for world

consumption.

The steel sector continues to face threat from cheap imports. With the customs duties on

various steel imports already having been reduced in the region of 15%-20%, import

pressures could consequently lead to pressure on margins of the domestic companies

Steel companies are however, expected to continue to perform well in FY08 largely due

to the continuation in infrastructure spending (including housing). Auto sector has also

been showing strong growth, which could help in driving demand for value added steel

products like CR (cold roll) steel. Exports remain a lucrative avenue for domestic steel.

The Steel Industry looks strong with good potential exports and backing higher domestic

demand from various user industries. This is backed by the robust economic growth in India.

Companies are expanding their capacities visualizing the extent of demand they may have to

meet locally and globally in the years to come. Indian companies are also working to ensure that

the basic raw materials are available adequately.

Companies with lower financial risk; higher operational efficiency and high utilization and cost

reduction will perform better than the others. Though fundamentally things look good, the price

of steel is expected to increase. With the supply constraints in raw materials expected to further

increase, reduction in the rate of increase in prices of steel and other value added products,

companies have to improve their productivity and become global in terms of their capacity,

productivity and have brand strategies for various value added products to reduce the cyclical

nature of this business.

Companies, which have high vertical integration, high operating efficiency, low financial

leverage, thrust on value added products with brand will have lesser negative impact on

their performance considering the cyclical nature of this industry.

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Construction of Balanced Portfolio comprising of Equity and Debt

STEEL SECTOR FINANCIALS

31/03/2005 31/03/2006 31/03/2007

  12 12 12

SALES Rs m 235,527 296,152 369,811

SALES GROWTH % - 25.7 24.9

GROSS PROFIT MARGIN % 6.3 15.2 23.6

PAT Rs m -9,958 7,206 43,571

PAT GROWTH % - -175.6 378.5

WORKING CAPITAL TO

SALES% 7.0 3.7 -1.3

ROCE % 4.9 12.3 27.4

RONW % -19.8 13.6 46.8

DEBT TO EQUITY RATIO x 3.1 2.6 1.1

MKT CAP Rs m 21,020 28,165 83,015

MKT CAP / SALES x 0.4 0.4 1.1

ENTERPRISE VALUE Rs m 235,661 253,113 518,551

P/E RATIO X -6.3 11.7 5.7

PRICE/BOOK VALUE RATIO x 1.3 1.6 2.7

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Construction of Balanced Portfolio comprising of Equity and Debt

COMPANY ANALYSIS

ACC CEMENTS LTD

ACC Limited is India’s foremost manufacturer of cement and ready mix concrete with a

countrywide network of factories and marketing offices.Established in 1936, ACC has been a

pioneer and trend-setter in cement and concrete technology. ACC’s brand name is synonymous

with cement and enjoys a high level of equity in the Indian market. It is the only cement

company that figures in the list of Consumer SuperBrands of India. Among the first companies

in India to include commitment to environment protection as a corporate objective, ACC has

won several prizes and accolades for environment friendly measures taken at its plants and

mines. The company has also been felicitated for its acts of good corporate citizenship.

PEFORMANCE EVALUATION

Company strengthened several organizational processes across a wide range of functions with a

view to enhance its business capabilities. Production and sale of cement touched an all-time

high of 19.92 million tonnes and 19.97 million tonnes respectively during the year 2007,

growth of 6.4% and 6.1% respectively as compared to the corresponding previous year

Profit after Tax for the year ended December 31, 2007 for the group was Rs 1427 crore against

Rs 1240 crore in the corresponding previous year.Total group income for the year 2007 at Rs

7189 crore, up 20% over the corresponding previous year

Cement grinding capacities were enhanced at Tikaria, Kymore, Wadi and Sindri

Project for setting up of a new 7000 TPD clinker line at Chanda along with 25 MW additional

captive power plant was approved by the Board

Cement Business

2007 2006 Change %

Production-Million tonnes 19.92 18.73 6.4%

Sales volume-Million tonnes* 19.97 18.83 6.1%

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Construction of Balanced Portfolio comprising of Equity and Debt Sales value - Rs crore ** 6639.93 5503.76 20.6%

EBITDA - 31% 32%

Operational Performance 2007 2006

Capacity utilization - % 91 95 Blended cement - % 90 87 Fuel consumption (Kcal/Kg of

clinker) 752 736 Power consumption (Process) Kwh/T 89 88 Man hours per tonne of cement

1.14 1.36

Production and sales of RMX stood at 1.11 million cubic meters and 1.23 million cubic metres

which was higher by 4.7% and 9.8% respectively as compared to the previous year. Sales value

stood at Rs 367.02 crore which is 22.4% higher than that in the previous year. Profitability of

RMX operations was adversely affected due to higher cost of input mix and higher overhead

costs.

Ready Mixed Concrete business holds huge potential and is poised for significant growth in

coming years. In view of this, your Company sees this business as a key channel for delivery of

cement to customers of tomorrow.

Expansion Projects

Company continued to pursue the policy of strengthening its presence in its strategic markets by

judicious brownfield expansion of its existing cement plants.

The project for expansion of Bargarh Work's capacity to 2.14 million tonnes per annum

together with 30 MW captive power plant is underway and scheduled to be completed by early

2009.

The implementation of the projects for augmenting grinding capacity at Madukkarai by 0.22

million tonnes per annum and New Wadi by 0.60 million tonnes per annum are also expected to

materialize this year.

During the year, work was commenced on the expansion of New Wadi Plant in Karnataka

which together with two grinding plants will augment our cement capacity in the state of

Karnataka by 3 million tonnes per annum. These projects will go on stream in middle of 2009.

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Construction of Balanced Portfolio comprising of Equity and Debt ACQUISITIONS / DIVESTMENTS

With the view to further improve its market share and presence in Orissa market, company

acquired 14.3% equity stake in Shiva Cement Limited (SCL), Rourkela. SCL has an integrated

cement plant with a clinker capacity of 350 tonnes per day and cement grinding capacity of

100,000 tonnes per annum. Company has entered into a marketing agreement through which

the entire production of SCL is marketed by ACC.

In order to augment limestone reserves of Lakheri Works, company has acquired 100% of the

equity stake of Lucky Minmat Private Limited for Rs 35 crore. Company holds lime stone

mines in the Sikar District of Rajasthan.

The Company divested its entire stake in its engineering subsidiary ACC Nihon Castings Ltd.

during the year under review. Company also divested its entire equity stake in Almatis ACC

Limited to the Almatis group during the year.

FINANCIAL ANALYSIS

ACC CEMENTS          

    2007 2006 2005 2004 2003

1 NPM Ratio 20.44 21.16 9.59 5.93 3.52

2 ROE/RONW Ratio 29.16 33.64 21.58 11.61 4.48

3 EPS 76.67 65.78 21.19 11.3 6.08

4 FATO Ratio 1.74 1.65 1.35 1.32 1.17

5 Inventory Turnover Ratio 2.99 2.83 3.16 3.17 3.1

6 Interest Cover Ratio 28.21 23.43 7.44 4.7 2.86

7 GPM Ratio 23.72 24.73 12.23 7.87 6.05

8 Debt/Equity Ratio 0.07 0.24 0.88 0.98 1.3

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Construction of Balanced Portfolio comprising of Equity and Debt

Leverage Ratios :

Debt-Equity- We can see that Acc cements has been consistently reducing the portion of debt

from year on year which tells that, company is focused on the protection of its creditors.

Interest Coverage – As we can see that, firm’s interest coverage capacity has gone up tells that

the firm can easily meet its current burden even if PBIT suffer a considerable decline.

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has been quite consistant

over the years although It had declined little in year 2006 and 2007. This shows that company

has been quite efficient in converting its inventory into sales quite efficiently.

FATO – As we can see, the portion of fixed assets have almost remained unchanged, we can

tell that the firm ahs been using assets quite conservatively but they have been in line with the

firms requirements.

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Construction of Balanced Portfolio comprising of Equity and Debt Profitability Ratios :

NPM – From the trend, we can see that portion of net profit has been increasing quite

consistently over year by year. It shows that company has been performing quite efficiently and

earnings have been distributed to shareholders very well.

GPM – From the table we can see that company has been very efficient in using its production

capacity. Its portion of gross profit has been increasing considerable over the years, which is

also good sign for the company in the future.

ROE – From the table, we can see that over the years, company’s return on equity have been

increasing quite consistantly, which shows that profits have been made by firm consistently on

the equity funds invested.

EPS – From the table, we can see that, eps portion of the company has been increasing over the

year from 2003 till date. I tells that, on very share held by share holders, they have been able to

earn efficient earnings.

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Construction of Balanced Portfolio comprising of Equity and Debt INDIA CEMENTS LTD

The India Cements Ltd was established in 1946 and the first plant was setup at Sankarnagar in

Tamilnadu in 1949 . Since then it has grown in stature to seven plants spread over Tamilnadu

and Andhra Pradesh . The capacities as on March 2002 have increased multifold to 9 million

tons per annum.

Company Highlights

The Company is the largest producer of cement in South India.

The Company's plants are well spread with three in Tamilnadu and four in Andhra

Pradesh which cater to all major markets in South India and Maharashtra.

The Company is the market leader with a market share of 28% in the South. It aims to

achieve a 35% market share in the near future. The Company has access to huge

limestone resources and plans to expand capacity by de-bottlenecking and optimisation

of existing plants as well as by acquisitions.

The Company has a strong distribution network with over 10,000 stockists of whom

25% are dedicated.

The Company has well established brands- Sankar Super Power, Coromandel Super

Power and Raasi Super Power.

Regional offices in all southern states and Maharasthra offices/representative in every

district.

PEFORMANCE EVALUATION

CURRENT PERFORMANCE

The country witnessed further growth in demand during April and May 2007 with the domestic

consumption going up by 10% over and above the double digit growth registered in the

previous year. South was even better with a growth of 12.4% in the first two months of this

year.

The clinker production of company during the first quarter was at 17.33 lakh tonnes (15.01 lakh

tonnes), the cement production at 22.90 lakh tonnes (19.04 lakh tonnes) and cement sales at

23.06 lakh tonnes (18.52 lakh tonnes). As earlier mentioned, the previous period figures are not

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Construction of Balanced Portfolio comprising of Equity and Debt strictly comparable as Visaka Cement Industry Ltd was merged with company with effect from

1s July 2006. Company has achieved a gross turnover of Rs.841 Crores (Rs.567 Crores) and a

net profit before tax of Rs.215 Crores (unaudited) (Rs.113 Crores). With the continued

buoyancy in demand and further improvement in prices, the year 2007-08 could be a record

year for company in terms of volume and profitability.

EXPANSION/MODERNISATION

As earlier mentioned, the Company has taken up various projects on hand for

upgradation/expansion of its cement capacity and also to optimise energy consumption levels.

The conversion of Sankaridurg Plant from wet process to dry process is expected to be

completed during the II quarter of this financial year and the expansion of capacity at

Vishnupuram through upgrading Kiln I is expected to be completed by the IV quarter of current

year. The Company has also taken up replicating the production capacity at Malkapur Plant

through one more line of a capacity of 1.2 million tonnes which is expected to be commissioned

during the III quarter of FY 09. The company is also setting up grinding plants at Chennai

(Tamil Nadu) and at Parli (Maharashtra), each with a capacity of 1 million tonnes. Work is

apace on both these projects which are expected to be completed over next 9/12 months. All

these capital expenditure proposals will be funded out of the proceeds of Foreign Currency

Convertible Bonds (FCCB) and internal generation. Your Company is also actively pursuing its

proposals for setting up a cement plant in Himachal Pradesh and also on the look out for

establishing capacities in Rajasthan and Madhya Pradesh.

CORPORATE DEBT RESTRUCTURING

As reported in the last year, the company has been in negotiations with all the remaining

lenders for revision in the terms of assistance/for settlement. Presently, the company is left with

only few lenders with whom settlement is to be reached. During the current year the company is

likely to approach the lenders for exiting from the CDR arrangement.

The company has prematurely repaid all the debts arranged by the foreign investor, which was

availed by the company during the year 2005 for refinancing part of the restructured debt.

FINANCIAL ANALYSIS

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Construction of Balanced Portfolio comprising of Equity and Debt

INDIA

CEMENTS

2007 2006 2005 2004 2003

1 NPM Ratio 21.2 2.92 0.39 -9.39 -22.52

2 ROE/RONW Ratio 34.91 4.37 -19.97 -34.17 -51.28

3 EPS 21.73 2.38 0.32 -6.87 -13.84

4 FATO Ratio 1.05 1.23 0.9 0.75 0.63

5

Inventory Turnover

Ratio 1.3 0.97 0.75 0.67 0.56

6 Interest Cover Ratio 5 1.84 1.16 0.76 0.17

7 GPM Ratio 28.49 12.18 5.46 3.75 -4.87

8 Debt/Equity Ratio 1.48 1.8 5.95 5.88 4.58

Leverage Ratios :

Debt-Equity- We can see that India cements has reduced the portion of the debt in yr 2006-07

drastically compared to year 200-2005 which tells that company is focused on the protection of

its creditors.

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Construction of Balanced Portfolio comprising of Equity and Debt Interest Coverage – As we can see at the starting years, company was not doing well to meet

its current obligations from the year 2003-2005. But in the year 2007, firm’s interest coverage

portion has gone up realy well. So the firm is in better position to cover its obligations in future

as well.

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has been quite low over the

years. This shows that company has been little inefficient in converting its inventory into sales

quite effectively. Company needs to convert its inventory into sales quickly in the coming

years.

FATO – As we can see, the portion of fixed assets have almost remained unchanged, we can

tell that the firm ahs been using assets quite conservatively but they have been in line with the

firms requirements.

Profitability Ratios :

NPM – From the trend, we can see in year 2003-2005, company has not done well in terms

profits as there has been loss. From the year 2006-07, portion of net profit has been increasing

quite nicely. It shows that company has been performing quite efficiently in last 2 year and

earnings have been distributed to shareholders very well in future as well..

GPM – Except in the year 2003, we can see that company has been very efficient in using its

production capacity. Its portion of gross profit has been increasing considerable over the years,

which is also good sign for the company in the future.

ROE – From the table, we can see that in period of 2003-05, company has not performed well,

but company’s return on equity in yr 2006-07 have gone up , which shows that profits have

been made and distributed by firm and it needs to that consistently well in coming years.

EPS – From the table, we can see that, EPS was not quite well in yr 2003-05. But the year

2007, company has done quite well to earn earning per share. Company is expected to do well

in the future as well.

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Construction of Balanced Portfolio comprising of Equity and Debt ULTRATECH CEMENT LTD

UltraTech Cement Limited, a Grasim subsidiary has an annual capacity of 17 million tonnes. It

manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and

Portland Pozzolana Cement.

UltraTech has five integrated plants, five grinding units and three terminals — two in India and

one in Sri Lanka. These include an integrated plant and two grinding units of the erstwhile

Narmada Cement Company Limited, a subsidiary, which has been amalgamated with the

company in May 2006.

UltraTech is the country's largest exporter of cement clinker. The company exports over 2.5

million tonnes per annum, which is about 30 per cent of the country's total exports. The export

markets span countries around the Indian Ocean, Africa, Europe and the Middle East.

The cement division of L&T was demerged in 2004 after Grasim made the 30 per cent open

offer for equity shares, gaining control over the new company, christened UltraTech. Besides

the long term strategic value in the wake of rising demand for cement, with the growth of

housing and infrastructure sectors in the country, the acquisition brings significant synergy

gains to the parent company.

Ready Mix Concrete is likely to see substantial growth in the coming years. Recognising the

opportunities that this business will offer, UltraTech has commenced setting up of Ready Mix

Concrete plants at various places in the country.

UltraTech's subsidiaries are: Dakshin Cements Limited and UltraTech Ceylinco (Private)

Limited

PEFORMANCE EVALUATION

The year under review witnessed improved performance, driven by higher market realisation,

enhanced capacity utilisation and greater volumes.

Average realisation improved by 29% from Rs.2,122 per MT in FY06 to Rs.2,735 per MT in

FY07. Cement production was 14.64 MMT as compared to 13.33 MMT in the previous year.

Effective capacity utilisation (cement produced + clinker sold) was 101% compared to 89 %

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Construction of Balanced Portfolio comprising of Equity and Debt during the previous year. Aggregate sales volume at 17.67 MMT (15.55 MMT) was higher by

13.63%. Domestic sales volume which constituted around 80 % of the aggregate sales volume

rose from 12.97 MMT in FY06 to 14.21 MMT in FY07, while aggregate exports grew from

2.58 MMT in FY06 to 3.46 MMT in FY07.

CAPITAL EXPENDITURE

The Company is setting up captive power plants at its Units in Andhra Pradesh, Chattisgarh and

Gujarat. The power plant in Andhra Pradesh will be commissioned in the last quarter of FY08

and the one in Chattisgarh in the first quarter of FY09. The power plant in Gujarat will be

commissioned in a phased manner, commencing from the last quarter of FY08 and ending in

the second quarter of FY09. These power plants will meet around 80% of company's power

requirement. It will also reduce company's dependence on the State Grid, supply power at

economical rates, thereby reducing the cost of power.

The capacity at company's Unit in Andhra Pradesh is being augmented by 4 mtpa together with

a grinding Unit in Karnataka. Expected to be commissioned in March, 2008, this will help

company cater to the growing demand in the markets of South India.

FINANCIAL ANALYSIS

2007 2006 2005 2004 2003

NPM Ratio 15.75 6.91 0.1 1.69 0

ROE/RONW Ratio 44.13 20.79 7.45 1.18 0

EPS 62.84 18.47 0.22 3.12 0

FATO Ratio 1.53 1.23 1.03 0.82 0

Inventory Turnover

Ratio 5.05 4.22 3.15 3.04 0

Interest Cover Ratio 15.99 6.03 3.07 2.71 0

GPM Ratio 24.39 10.47 5.57 6.36 0

Debt/Equity Ratio 0.89 1.4 1.44 1.45 0

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Construction of Balanced Portfolio comprising of Equity and Debt

Leverage Ratios :

Debt-Equity- We can see that company has been consistently reducing the portion of debt from

year on year which tells that, company is focused on the protection of its creditors.

Interest Coverage – As we can see that, firm’s interest coverage capacity has gone quite well

in year 2007, which tells that the firm can easily meet its current burden I future even if PBIT

suffer a considerable decline. In previous years, coverage was quite low.

Turnover Ratios :

ITO – As we can see, the firms inventory portion has been increasing over the years. This

shows that company has been quite efficient in converting its inventory into sales very

efficiently and momentum will be sustained in coming years as well.

FATO – As we can see, the portion of fixed assets have almost remained unchanged, we can

tell that the firm has been using assets quite conservatively but they have been in line with the

firms requirements. In the future, company will have increase its fixed assets portion to gain

more profits.

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Construction of Balanced Portfolio comprising of Equity and Debt Profitability Ratios :

NPM – From the trend, we can see that portion of net profit has been increased in last 3 years.

It shows that company has been performing quite efficiently in last 3 year and earnings have

been distributed to shareholders very well.

GPM – From the table we can see that company has been very efficient in using its production

capacity. Its portion of gross profit has been increasing considerable over the years, which is

also good sign for the company in the future.

ROE – From the table, we can see that over the years, company’s return on equity have been

increasing quite consistantly, which shows that profits have been made by firm consistently on

the equity funds invested.

EPS – From the table, we can see that EPS has gone up quite well fro yr 2005-07. It tells that,

on very share held by share holders, they have been able to earn more profits.

MANGALAM CEMENTS LTD.

Mangalam Cement Limited was promoted in the year 1978 by the famed House of Shri

B.K.Birla, the most eminent and illustrious industrialist of the country. It is a professionally

managed and well established cement manufacturing company enjoying the confidence of

consumers because of its superior quality product and excellent customer service.

The company has recently commissioned its state-of-the-art new cement plant with German

technology for producing 7 lakh tonnes per annum at its existing site at Morak, Distt. Kota in

Rajasthan under the name of Neer Shree Cement.

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Construction of Balanced Portfolio comprising of Equity and Debt FINANCIAL ANALYSIS

MANGALAM CEMENTS

2007 2006 2005 2004 2003

1 NPM Ratio 20.9 15.97 5.49 5.59 -26.45

2 ROE/RONW Ratio 33.7 63.8 37.48 131.75 0

3 EPS 17.01 24.44 5.94 8.4 -30.31

4 FATO Ratio 1.21 3.49 2.83 2.38 1.66

5 Inventory Turnover Ratio 2.01 4.61 5.06 6.27 4.4

6 Interest Cover Ratio 10.76 12.37 3.42 3.04 -0.09

7 GPM Ratio 27.02 21.29 7.57 9.51 -8.35

8 Debt/Equity Ratio 0.48 0.33 2.53 10.27 0

Leverage Ratios :

Debt-Equity- In the 1st 3 yrs, company doesn’t have good track record of debt. But, we can see

that company has been consistently reducing the portion of debt in coming years which tells

that, company is focused on the protection of its creditors.

Interest Coverage – As we can see that, firm’s interest coverage capacity has gone quite well

in year 2006-07, which tells that the firm can easily meet its current burden I future even if

PBIT suffer a considerable decline. In previous years, coverage was quite low. It tells that firm

is in position to pay of its interest part quite well.

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Construction of Balanced Portfolio comprising of Equity and Debt

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has been decreasing over the

years. This shows that company has been quite inefficient in converting its inventory into sales

very effectively. Company should concentrate on pushing the sales more often.

FATO – As we can see, the portion of fixed assets have decrraesed with marginal improvement

in year 2006 only. Company has been using fixed assets quite conservatively. In the future,

company will have to increase its fixed assets portion to gain more profits.

Profitability Ratios :

NPM – Except in yr 2003, we can see that portion of net profit has been increased in

subsequent years. It shows that company has been performing quite efficiently in last 3 years

and earnings have been distributed to shareholders very well.

GPM – From the table we can see that company has been very efficient in using its production

capacity. Its portion of gross profit has been increasing considerable over the years, which is

also good sign for the company in the future.

ROE – From the table, we can see that over the years, company’s return on equity have been

increasing quite consistently, which shows that profits have been made by firm consistently on

the equity funds invested. I had given huge return in year 2004.

EPS – From the table, we can see that EPS has gone up quite well from yr 2005-07. It tells that,

on very share held by share holders, they have been able to earn more profits. Earnings to the

share holders have increased quite well in the last 2 years which tells that company has been

performing well.

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Construction of Balanced Portfolio comprising of Equity and Debt PRISM CEMENTS LTD

Prism Cement Limited is an ISO 9001:2000 certified company promoted by the Rajan Raheja

Group. It operates one of the largest single kiln cement plants in the country at Satna, Madhya

Pradesh. Equipped with state-of-the-art machinery and technical support from F.L Smidth & Co

A.S Denmark, the world leaders in cement technology, Prism Cement has successfully created a

niche for itself in the Indian cement industry.

PEFORMANCE EVALUATION

During the year, the Company produced 21.69 lakh tonnes of clinker and 22.39 lakh tonnes of

cement.During the year ended June 30, 2007, as against 22.02 lakh tonnes of clinker and 21.60

lakh tonnes of cement produced during the year ended June 30, 2006. The growth in demand

for cement combined with efforts to maximize realizations has enabled the Company to earn a

profit after tax of Rs. 192.77 crores as against Rs. 62.08 crores in the previous year. This is

inspite of the uptrend in prices of inputs such as coal and freight and taxes. The Board of

Directors has recommended a maiden dividend of 10 % per share. The dividend is tax free in

the hands of the shareholders. While the demand for cement has shown a good growth, the

Company was successful in strategizing its market operations which substantially enhanced the

brand equity of “PRISM CHAMPION”. The Company increased its share of PPC production

from 72 % during the year 2005-06 to 87 % during the year under review.

Prudent finance management over the years has enabled the Company to repay its entire debt

and wipe off its losses during the year under review. The Company invested surplus funds in

liquid mutual fund schemes. The total amount of investments as at June 30, 2007 was Rs.

141.87 crores. The Company’s products are well recognized in the markets of interest to be

among the best in terms of quality and standards. They enjoy a cost advantage given the

proximity to the markets. The costs of production are also kept under constant checks and

controls. The Company believes that it is well placed to take advantage of the opportunities that

the markets offer.

The progress made in the year 2006-07 has set the Company on a course to enhance growth in

subsequent years. With the Government’s thrust on infrastructure and housing continuing its

momentum, the demand for cement will be sustained in the current year. With this perspective,

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Construction of Balanced Portfolio comprising of Equity and Debt the Company has embarked upon augmenting its capacity through a brownfield expansion of 2

million tonnes of clinker at Satna, Madhya Pradesh and thereafter setting up a Greenfield

project of 2 to 3 million tonnes of clinker at Kurnool, Andhra Pradesh. It is expected that after

these expansions, the total cement capacity of the Company would increase to around 10

million tonnes by

2011-2012.

FINANCIAL ANALYSIS

Prism

2007 2006 2005 2004 2003

1 NPM Ratio 25.02 10.83 5.84 -1.54 -9.58

3 ROE/RONW Ratio 46.66 25.98 11.53 -3.66 -20.9

4 EPS 6.46 2.08 0.86 -0.19 -1.05

5 FATO Ratio 2.12 1.61 1.16 0.98 0.78

6

Inventory Turnover

Ratio 5.27 2.69 2.05 1.85 1.57

7 Interest Cover Ratio 50.5 6.01 3.28 1.98 0.93

8 GPM Ratio 39.02 21.16 16.1 12.93 6.7

9 Debt/Equity Ratio 0 0.42 1.22 1.73 1.87

Leverage Ratios :

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Construction of Balanced Portfolio comprising of Equity and Debt Debt-Equity- In the 1st 4 yrs, company has sufficient portion amount of debt financing. But in

the year company has become totally debt free, which puts further pressure on its equity share

holders and firm cannot take advantage of leveraged position.

Interest Coverage – As we can see that, firm’s interest coverage capacity has gone up really

well in year 2007, which supports zero debt for firm in yr 2007. In previous years, coverage

was quite low. It tells that firm is in position to pay of its interest part quite well if it takes any

debt in the future.

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has been increasing over the

years. This shows that company has been quite efficient in converting its inventory into sales

very effectively. Consistancy for the company will be key for the future growth.

FATO – As we can see, the portion of fixed assets have been quite low along all the years.

Company has been using fixed assets quite conservatively. In the future, company will have to

increase its fixed assets portion to gain more profits.

Profitability Ratios :

NPM – Except in yr 2003-04, we can see that portion of net profit has been increased in

subsequent years. It shows that company has been performing quite efficiently in last 3 years

and earnings have been distributed to shareholders very well.

GPM – Companies, GPM has increased quite well in the last 3 years.From the table we can see

that company has been very efficient in using its production capacity. Its portion of gross profit

has been increasing considerable over the years, which is also good sign for the company in the

future.

ROE – From the table, we can see that over the years, company’s return on equity have been

increasing quite consistently in last 3 years, which shows that profits have been made by firm

consistently on the equity funds invested.

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Construction of Balanced Portfolio comprising of Equity and Debt

EPS – From the table, we can see that EPS has gone up quite well in yr 2007. It tells that, on

very share held by share holders, they have been able to earn more profits in future. Company

has not given much returns to the share holders in the last 4 years which calls for the

improvement in the sales.

DALMIA CEMENTS

Founded in 1935 by Jaidayal Dalmia; the cement division was established in 1939 and enjoys a

heritage of 70 years of expertise and experience. The company is headquartered in New Delhi

with cement, sugar, travel agency, magnesite, refractory and electronic operations spread across

the country.

 

PEFORMANCE EVALUATION

Dalmia Cements has leveraged additional capacities and generated greater efficiencies to

produce excellent results. Company’s additional 2 million MT capacity at Dalmiapuram fully

came on stream in the first quarter of 2006-07. The 27 MW thermal power plant that was

commissioned in 2005-06 provided assured, cost effective electric supply. There were further

improvements in manufacturing efficiencies. New capacity ramp up encountered a few

challenges in the first half of the year but the plant stabilised well in the second half. Our last

quarter capacity utilisation was close to 95%. These factors led to a 74 per cent volume growth

of your Company’s cement sales from 1.58 million MT in 2005-06 to 2.71 million MT in 2006-

07.

Operational performance

The Company’s cement operations, located in Dalmiapuram, Tamil Nadu, saw a significant

ramp-up during 2006-07. The Company completed execution of its 2 million MT’s per annum

brownfield expansion. Its brands such as Dalmia Superoof and Vajram continue to remain the

preferred brands in the market and command premium over other brands. The Company also

has a significant presence in select niche segments—including high-value special cement for

construction of oil wells, railway sleepers and air strips. It is a market leader in the manufacture

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Construction of Balanced Portfolio comprising of Equity and Debt of cement for construction of walls of on-shore and off-shore oil wells. In fact, oil well cement

manufactured by Dalmia Cement was the first in India to receive the prestigious American

Petroleum Institute (API) certification. Dalmia Cement also continues to maintain its leadership

position in the manufacture of high grade cement for railway sleepers. Introduced in India by

the Company, this cement is widely used to replace wooden railway sleepers for high speed

trains, and is supplied to all major railway sleeper manufacturers in India. The Company

continued to work ceaselessly to improve efficiency and manage costs. Dalmia Cement is one

of India’s most efficient companies in cement manufacturing. Not only did the Company

continue to hold to that standard, but also worked to create new efficiency benchmarks.

FINANCIAL ANALYSIS

DALMIA CEMENTS

2007 2006 2005 2004 2003

1 NPM Ratio 22.77 14.43 6.63 6.67 4.98

2 ROE/RONW Ratio 14.81 7.78 11.14 4.21 2.93

3 EPS 53.58 22.18 40.34 33.16 26

4 FATO Ratio 0.78 0.82 0.86 1.41 1.44

5 Inventory Turnover Ratio 1.45 1.25 1.23 1.35 1.71

6 Interest Cover Ratio 5.12 4.35 3.43 2.34 2.18

7 GPM Ratio 20.34 10.39 9.48 9.1 7.54

8 Debt/Equity Ratio 1.5 2 1.88 1.14 1.21

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Construction of Balanced Portfolio comprising of Equity and Debt Leverage Ratios :

Debt-Equity- company has been keeping the debt-equity portion quite well in the last 5 years

except in the year 2006 where is touched its peak. So it tells that company has been using

sufficient amount of debt to take advantage of low interest payment

Interest Coverage – As we can see that, firm’s interest coverage capacity has gone up really

well in last 5 years, which supports debt paying capacity for firm all through the years. It tells

that firm is performing quite well to cover its obligations.

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has been quite low over the

years. This shows that company has been quite inefficient in converting its inventory into sales

very effectively. Company will have to increase its sales converting capacity.

FATO – As we can see, the portion of fixed assets have been quite low along all the years.

Company has been using fixed assets quite conservatively. In the future, company will have to

increase its fixed assets portion to gain more profits.

Profitability Ratios :

NPM – We can see that portion of net profit has been increasing in over the years. It shows that

company has been performing quite very efficiently in all the 5 years and earnings have been

distributed to shareholders very well.

GPM – Companies, GPM has increased quite well in the last 3 years. From the table we can see

that company has been very efficient in using its production capacity. Its portion of gross profit

has been increasing considerable over the years, which is also good sign for the company in the

future.

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Construction of Balanced Portfolio comprising of Equity and Debt ROE – From the table, we can see that over the years, company’s return on equity have been

increasing quite consistently in last 3 years with fluctuations in between , which shows that

profits have been made by firm efficiently on the equity funds invested.

EPS – From the table, we can see that EPS has gone up quite well in from year to year. It tells

that, on very share held by share holders. Company is in very good position to give out more

dividends and returns to its share holders.

LLOYDS STEEL INDUSTRIES LTD

The USD 850 Million LLOYDS has expanded and diversified into core business areas,

ensuring synergy amongst its business ventures spreading over 4 plants, at 3 pivotal locations in

India. The focus in manufacturing is, Steel & related products, including upstream (Coal

Based DRI) & Downstream (like Pipes, Tubes, Engineering Products) LLOYDS

plants/divisions are equipped with the state of art technology, equipments and excellent

infrastructure like water, power, rail link, and townships. LLOYDS Dedication towards

Customer Service has ensured the group Consolidation in the worst times & Growth in the

Booming Business Cycles.

PEFORMANCE EVALUATION

The Steel demand has grown steadily during last three years which resulted in elevating the

Indias rank among the top steel producers of the world from 9* position in 2004 to 7" position

in the year under review. In tendem the price of Flat Steel with an exception of previous year

has also shown a upswing trend. However, the cost of raw materials particularly zinc prices

which has shown a jump of over 100% and energy during the year under review has kept

margins under constant pressure. The Company achieved a Turnover of Rs.1932.05 crores as

against Rs. 1586.48 crores in the previous year, showing a remarkable increase of 21.78%

The Company incurred a Loss, before exceptional items, of Rs. 67.78 crores during the year as

compared with previous year loss of Rs. 121.88 crores after providing depreciation of

Rs.112.51 crores (Previous year Rs. 109.07 crores).

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Construction of Balanced Portfolio comprising of Equity and Debt DEBT RESTRUCTURING

On the restructuring/settlement of debts with the Financial Institutions and Banks, the

Restructuring proposals are under various stages of discussion with the lenders. In accordance

with the restructured terms, the Company has paid off Rs. 70.45 crores during the year towards

past Debt liabilities.

During the year, company has issued Redeemable Preference Shares at par of Rs. 1.29 Crores

against part conversion of its debt to IDBI as per the approval of Members at the last Annual

General Meeting. These Preference Shares will be redeemed with a premium of 11.5%

commencing from Financial year 2016.

Sales

Steel Products Sales during the year under review has seen an improvement of 23% over the

previous year and has reached a figure of Rs.1870.64 crores as against the previous year figure

of Rs. 1526.50 crores. The exports of steel has shown a quantum jump and has almost doubled.

The Export during the year was at Rs.276.19 Crores as against Rs. 127.28 crores recorded

during the previous year.

Engineering Products

The Engineering Products, during the year under review has recorded sales at Rs. 61.41 crores

as compared to the previous year of Rs. 127.87 crores. The Company during the year has

successfully executed jobs for reputed public and private sector companies. The setting up of

Pelletization Plant at Orissa for a client is almost in the completion stages. The Company

continue to support in supply of spares and services to Navy, Coast Guard, Mumbai Port Trust,

GRSE and major Oil and Gas sector companies.

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Construction of Balanced Portfolio comprising of Equity and Debt

FINANCIAL ANALYSIS

LLYODS STEEL

2007 2006 2005 2004 2003

1 NPM Ratio -3.83 -4.48 8.7 -0.13 -39.25

2 ROE/RONW Ratio 0 0 0 0 0

3 EPS -3.55 -3.29 6.35 -0.05 -12.18

4 FATO Ratio 1.52 1.14 1.1 0.57 0.4

5 Inventory Turnover Ratio 2.8 3.08 3.19 1.44 1.09

6 Interest Cover Ratio 2.08 0.74 7.54 1.88 0

7 GPM Ratio -3.44 -6.31 5.5 -10.59 -19.29

8 Debt/Equity Ratio 0 0 0 0 0

Leverage Ratios :

Debt-Equity- Company doesn’t have any debt portion all over the 5 years. Company has to put

sum amount debt to take advantage of leveraged position in the future.

Interest Coverage – As we can see that, firm’s interest coverage capacity has been quite low

all over the years. In previous years, coverage was quite low. It tells that firm is in position to

pay of its interest part quite well if it takes any debt in the future.

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Construction of Balanced Portfolio comprising of Equity and Debt

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has been decreasing over the

last 3 years. This shows that company has been quite inefficient in converting its inventory into

sales very effectively. Consistancy for the company will be the key for future growth.

FATO – As we can see, the portion of fixed assets have been quite low along all the years.

Company has been using fixed assets quite conservatively. In the future, company will have to

increase its fixed assets portion to gain more profits and for further investment avenues.

Profitability Ratios :

NPM – Except in yr 2005, we can see that portion of net profit has been decreased in

subsequent years. It shows that company has not been performing quite efficiently in last 3

years and earnings have not been distributed to shareholders.

GPM – Except in the year 2005, company had margin has been in negative which tells that cost

of production has been running quite high for the company. Firm will have to increase its

production efficiency so that operating expenses can be covered efficiently.

ROE – From the table, we can see that over the years, company’s return on equity has been nil

supporting the fact that company is not earning well all over the year as its been into loss.

Company has to get sum amount debt financing to improve the returns to equity share holders

in the future.

EPS – Except in the year 2005, company has failed to get any earnings on the shares supporting

the nil return on equity situation. So the company will have to make use of debt and equity in

the future really well to get good returns on equity.

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Construction of Balanced Portfolio comprising of Equity and Debt JSW STEELS LTD

JSW Steel Ltd is today a fully integrated steel plant having units across Karnataka and

Maharashtra producing from pellets to colour coated steel .

JSW's history can be traced back to 1982, when the Jindal Group acquired Piramal Steel Ltd

which operated a mini steel mill at Tarapur in Maharashtra. The Jindals, who had wide

experience in the steel industry, renamed it as Jindal Iron and Steel Co Ltd (JISCO) now known

as JSW Steel Limited (Downstream)

PERFRMANCE EVALUATION

Operational Performance

The Company has successfully commissioned 1.3 MTPA crude steel capacity expansion,

modernization of Hot Strip Mill increasing the capacity from 2 to 2.5 MTPA, expanding the

capacity of pellet plant from 4.2 MTPA to 5 MTPA during the financial year under review

which contributed to achieve a Crude Steel production of 2.652 million tonnes showing a

growth of 18%. The cost reduction initiatives namely increasing the proportion of captive coke

and power, Coal Dust Injection (CDI) in the Blast Furnace, use of Sinter fines in Corex acted as

a mitigant against raising input costs. Higher volumes, improved realisations and cost savings

initiatives pushed the EBIDTA margin to 34%. The Company posted a net profit of Rs.1,292

crores on net sales of Rs.8594.44 crores for the year. The long term debt gearing has come

down to 0.75 from 0.96 in the previous year due to repayment of loans aggregating to Rs.1018

crores during the year.

They are at the verge of completing the 1.3 mtpa expansion project in the next couple of

months, the capacity expansion to 7mtpa is under-way and planned to be completed by March,

2009.Meticulous planning is being done to accomplish the vision of making company a 10

mtpa by 2010 at Vijayanagar. Company has also signed a Memorandum of Understanding with

the State Government of Jharkhand for setting up a 10 mtpa integrated steel plant (subject to

availability of inputs, land etc.) JSW Steel is therefore poised to be one of the dominant players

in the Indian steel industry with bright prospects.

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Construction of Balanced Portfolio comprising of Equity and Debt FINANCIAL ANALYSIS

JSW STEELS

2007 2006 2005 2004 2003

1 NPM Ratio 14.98 14.14 13 16.05 -4.41

2 ROE/RONW Ratio 23.1 10.88 32.25 12.68 42.93

3 EPS 77.09 53.28 65.27 4.09 -0.85

4 FATO Ratio 0.84 0.73 1.04 0.63 0.44

5 Inventory Turnover Ratio 3.46 2.22 3.52 2.53 2.13

6 Interest Cover Ratio 6.99 4.68 4.93 2.57 1.26

7 GPM Ratio 24.56 18.96 32.6 15.53 5.17

8 Debt/Equity Ratio 0.84 1.07 1.43 4.15 8.59

Leverage Ratios :

Debt-Equity- We can see that company has been consistently reducing the portion of debt from

year on year which tells that, company is focused on the protection of its creditors. Debt equity

portion been quite consistant over the years.

Interest Coverage – As we can see that, firm’s interest coverage capacity has gone up tells that

the firm can easily meet its current burden even if PBIT suffer a considerable decline. Firm has

been efficient in increasing its debt paying capacity.

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Construction of Balanced Portfolio comprising of Equity and Debt

Turnover Ratios :

Inventory T O Ratio – As we can see, the firm’s inventory portion has been quite consistent

over the years. This shows that company has been quite efficient in converting its inventory into

sales quite efficiently. Company will have to further improve its turnover as its puts more

investments in to the production.

FATO – As we can see, the portion of fixed assets have almost remained unchanged and quite

low all over the years. We can tell that the firm has been using assets quite conservatively but

they have been in line with the firm’s requirements.

Profitability Ratios :

NPM – From the trend, we can see that portion of net profit has remained quite stable over year

by year except in the 2003. It shows that company has been performing quite efficiently and

earnings have been distributed to shareholders very well.

GPM – From the table we can see that company has been very efficient in using its production

capacity. Its portion of gross profit has been increasing considerable over the years, which is

also good sign for the company in the future.

ROE – From the table, we can see that over the years, company’s return on equity have been

increasing quite consistently except in the year 2006 and 2004, which shows that profits have

been made by firm on the equity funds invested. Company will have to be more consistant in

the future.

EPS – From the table, we can see that, eps portion of the company has been increasing over the

year from 2003 till date. It tells that, on very share held by share holders, they have been able to

earn efficient earnings. Company has been giving very good returns on amount invested to its

share holders

STEEL AUTHORITY OF INDIA LTD (SAIL)

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Construction of Balanced Portfolio comprising of Equity and Debt Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a

fully integrated iron and steel maker, producing both basic and special steels for domestic

construction, engineering, power, railway, automotive and defence industries and for sale in

export markets.

SAIL manufactures and sells a broad range of steel products, including hot and cold rolled

sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates, bars

and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated

plants and three special steel plants, located principally in the eastern and central regions of

India and situated close to domestic sources of raw materials, including the Company's iron ore,

limestone and dolomite mines. The company has the distinction of being India’s largest

producer of iron ore and of having the country’s second largest mines network. This gives SAIL

a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which

are inputs for steel making.

PERFRMANCE EVALUATION

PRODUCTION REVIEW

Company achieved a new record in production of saleable steel at 12.6 million tonnes with

capacity utilization touching a new high of 114%, through improvements in operational

efficiencies. The finished steel component in total saleable steel was also highest ever at 10.3

million tonnes, a growth of 5% over previous year. Special thrust was given to orient the

companys product mix for more value added products and increasing share of special steels.

The production of value added items touched 3 million tonnes for the first time and recorded a

growth of 17% during the year over previous year. Substantial growth was achieved in

production of pipes (38%), TMT bars (12%) and CRNO steel (10%).

The company introduced several new products in the domestic market during the year. HCR-

EQR TMT for earthquake resistant construction, rock bolt TMT for tunnel construction, EN

series HR coils for LPG cylinders, MC 12 HR coils for chains etc.. In addition, Bhilai Steel

Plant developed high strength vanadium rails, Durgapur Steel Plant produced S-profile loco

wheels for high speed locos and Rourkela Steel Plant rolled special plates which were used in

the indigenously built rocket PSLV C-7. Company takes pride in supplying steel for critical

usage in projects of national importance, such as those used in highest railway bridge in the

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Construction of Balanced Portfolio comprising of Equity and Debt world built over river Chenab, new generation loco wheels, naval aircraft carrier and materials

for several products of defence usage.

The company continued to take measures for further improving techno-economic parameters,

achieving a record continuous cast production of 8.3 million tonnes (up by 5%), lowest ever

coke rate of 541 kg/thm, best ever blastfurnace productivity at 1.50t/ m3/day (up by 3%) and

lowest ever energy consumption at 7.16 Gcal/tonne (1% improvement). Bhilai Steel Plant

achieved the highest campaign life of 6252 heats in converter which is the best in country for

any top blown converter. Specific power consumption reduced by 4% as compared to previous

year to lowest ever level of 460 kwh/T of saleable steel.

Sales and Marketing Review

During the financial year 2006-07, company achieved highest ever sales of 11.9 million tonnes,

a growth of 5% over the corresponding period last year.

There was significant growth in sales of value added products during the year,viz. Pipes - 50%,

TMT bars - 25%, Medium Structurals - 16%, Plates over 20 mm -21%and HRCoils-12%.

Record supply of Rails, Wheel and Axles, Sheets, Plates and Structurals were made to the

Indian Railways. The supply of long rails from newly constructed rail mill at Bhilai, was

increased to 65,000 tonnes, higher by 36% over previous year.

The company has maintained its presence in neighbouring and traditional markets and exported

about 5 lakh tonnes of steel during the year. The products exported were primarily Billets, Wire

Rods, Plates, HR Coils and CRNO Coils. Exports were made to new markets namely Portugal,

Sudan, UAE, Bahrain, Oman, Argentina and Brazil. MG Diesel Loco Wheels from Durgapur

Steel Plant were supplied for the first time to Malaysia. High Tensile and Ship Building Plates

from Bhilai Steel Plant were exported to the European Union and Singapore.

Special thrust was given by the company to expand its distribution network to make its branded

products available across the country. SAIL appointed additional 453 dealers in 430 districts

during the year. Today, company has unique presence in as many as 597 districts in the country

with over 1000 dealers. In addition, 12 Customer Contact Offices and 16 additional

Warehouses were added during the year. For the first time e-booking and supply at door- step

facility was introduced for small consumers of TMT Bars in NCR Delhi and Kolkata. Towards

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Construction of Balanced Portfolio comprising of Equity and Debt increasing customer satisfaction and greater logistics support, door delivery to customers was

stepped up.

FINANCIAL ANALYSIS

SAIL

2007 2006 2005 2004 2003

1 NPM Ratio 17.38 13.79 23.19 11.39 -1.73

2 ROE/RONW Ratio 35.34 31.45 66.48 50.58 -23.61

3 EPS 15.02 9.72 16.5 6.08 -0.73

4 FATO Ratio 2.67 2.18 2.23 1.6 1.19

5

Inventory Turnover

Ratio 1.58 1.5 1.85 2.64 2.34

6 Interest Cover Ratio 33.12 15.92 18.45 5.1 1.73

7 GPM Ratio 4.28 8.12 12.36 -29.63 18.98

8 Debt/Equity Ratio 0.24 0.34 0.55 1.72 5.14

Leverage Ratios :

Debt-Equity- Except in the year 2003 and 2004, we can see that company has been

consistently reducing the portion of debt from year on year which tells that, company is focused

on the protection of its creditors and company is using the amount of debt financing very

efficiently.

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Construction of Balanced Portfolio comprising of Equity and Debt Interest Coverage – As we can see that, firm’s interest coverage capacity has gone up really

well in last 3 years except 2003-04. It tells that the firm can easily meet its current burden even

if PBIT suffer a considerable decline in the future looking at the increase.

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has not been quite

consistant. It has declined gradually in the last 3 years. This shows that company has not been

quite efficient in converting its inventory into sales quite efficiently in last 3 years.

FATO – As we can see, the portion of fixed assets have almost remained unchanged and quite

well. We can tell that the firm ahs been using assets quite conservatively but they have been in

line with the firms requirements.

Profitability Ratios :

NPM – From the trend, we can see that portion of net profit has been quite consistent in last 3

years. It shows that company has been performing quite efficiently in last 3 years and earnings

have been distributed to shareholders very well.

GPM – From the table we can see that company has been very inefficient in using its

production capacity. Its portion of gross profit has been increasing and decreased in between

very often, which is also not a good sign for the company in the future.

ROE – From the table, we can see that over the years, company’s return on equity has

decreased in the last 2 years. It has given very good returns in the year 2004 and 2005 It shows

that profits have been made by firm have been quite consistant on the equity funds invested.

EPS – From the table, we can see that, eps portion of the company has been increasing over the

year from 2004till date. It tells that, on very share held by share holders, they have been able to

earn efficient earnings. So its been very good returns for the share holders for the every one

share held by them.

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Construction of Balanced Portfolio comprising of Equity and Debt TATA METALIKS LTD.

Tata Metaliks Limited was incorporated in 1990 under the Companies' Act, 1956 and began its

commercial production in 1994. TML is a public limited company. It was promoted by Tata

Steel Limited (formerly, The Tata Iron and Steel Company Limited) and assisted by The West

Bengal Industrial Development Corporation. The promoter company, Tata Steel, and resident

individuals each hold 47% of the shares, the balance being held by West Bengal Industrial

Development Corporation, corporate bodies and financial institutions (including Foreign

Institutional Investors). It was set up together with Tata Korf Engineering Services as the

technology consultant and KTS, Brazil as the technology supplier.

Tata Metaliks is engaged in the business of manufacturing and selling pig iron. Its plants,

located at Kharagpur (West Bengal) and Redi (Maharashtra), consists of five Mini Blast

Furnaces and related facilities including Captive Power Plants.

PEFORMANCE EVALUATION

PLANT OPERATIONS

During the year ended 31st March, 2006, the Kharagpur plant produced 314,141 tonnes of hot

metal as against the production capacity of 3,25,000 tonnes hence, taking the blast furnace

productivity for the year to 2.27 tonnes/m3/day. This increase in production was due to the

higher production capacity created by the newly installed second mini blast furnace (MBF) at

the Kharagpur plant. The oxygen enrichment plant, commissioned in the Kharagpur premises

during 2005-06 also contributed to increase productivity and yield of the furnace.

The entire power requirement of the plant was fulfilled by its two captive power plants having a

capacity of 2.76 MW and 4 MW, respectively.

In the current financial year, the Company initiated the practice of importing coal and getting it

converted into coke at the domestic cokeries to save the expense of imported LAM Coal. This

converted coke is blended with indigenous coke, a practice that enables the Company to

maintain its competitiveness in the cost of coke and also allows enough flexibility to directly

source coke as and when required.

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Construction of Balanced Portfolio comprising of Equity and Debt MARKETING PERFORMANCE

During the year under review, the Company sold 304,560 tonnes of pig iron compared to

1,63,483 tonnes in 2004-05. Although the net realization per tonne of pig iron wa slow, the

Company was able to improve upon its total revenue figures due to increased sales volumes in

2005-06. The low net realization, was caused by overall depression in the pig iron market.

However, exports almost doubled to 36217 M.T in 2005-06 compared to 18,455 M.T in 2004-

05. The Company now has footprints in 16 countries including Japan, the south-east Asian

countries like Bangladesh, Thailand, Malaysia, Indonesia, among others, and the European

country of Spain.

As in the previous years, the Company appointed IMRB, an independent agency to conduct a

customer perception survey (CSS) to assess customer's perception about products and services

offered by TATA Metaliks Limited. The Customer Satisfaction Survey has yet again rated the

Company as an INDUSTRY LEADER in most of the attributes.

FINANCIAL ANALYSIS

TATA METALIKS

2007 2006 2005 2004 2003

1 NPM Ratio 4.23 10.29 22.37 17.17 12.44

2 ROE/RONW Ratio 21.65 35.22 64.88 47 37.7

3 EPS 11.67 18.16 25.31 9.81 5.78

4 FATO Ratio 2.59 1.95 2.66 2.74 3.13

5 Inventory Turnover Ratio 3.68 2.73 3.03 2.75 2.35

6 Interest Cover Ratio 3.68 2.73 3.03 2.75 2.35

7 GPM Ratio 6.24 15.63 35.97 25.7 17.41

8 Debt/Equity Ratio 0.8 0.72 0.19 0 0.03

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Construction of Balanced Portfolio comprising of Equity and Debt

Leverage Ratios :

Debt-Equity- We can see that company has been consistently reducing the portion of debt from

year on year which tells that, company is focused on the protection of its creditors. It is using its

debt proportion to very good extent.

Interest Coverage – As we can see that, firm’s interest coverage capacity has been quite

consistency and showing the signs of increase in the last 2 years, tells that the firm can easily

meet its current burden even if PBIT suffer a considerable decline.

Turnover Ratios :

Inventory T O Ratio – As we can see, the firms inventory portion has been quite consistant

over the years. This shows that company has been quite efficient in converting its inventory into

sales quite efficiently and quickly.

FATO – As we can see, the portion of fixed assets have almost remained consistant over all

the years, we can tell that the firm has been using assets quite conservatively but they have been

in line with the firms requirements.

Profitability Ratios :

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Construction of Balanced Portfolio comprising of Equity and Debt NPM – From the trend, we can see that portion of net profit has decreased in the year 2007 and

2006. Earnings have been decreased in year 2006 and 2007 and less shares have been

distributed to shareholders.

GPM – From the table we can see that company has been very inefficient in using its

production capacity. Its portion of gross profit has decreased in the subsequent years, which

calls for the increase in its efficiency in the future.

ROE – From the table, we can see that over the years, company’s return on equity have been

decreasing over the years, which shows that profits have been decreasing on the equity funds

invested.

EPS – From the table, we can see that, EPS portion of the company has been decreased over

the years supporting the fact low ROE.I tells that, on very share held by share holders, they

have been able to earn profits but in declining mode.

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Construction of Balanced Portfolio comprising of Equity and Debt

PORTFOLIO ANALYSIS

AND CONSTRUCTION

Calculation of Total Return on Index (TRI)

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Construction of Balanced Portfolio comprising of Equity and Debt

Total Return Index = ( Pre TR Index + Prev. TR Index

* Index Returns) + (Indexed Dvds + (Indexed Dvds *

index Returns) yrs

Returns

2003 16.18

2004 20.85

2005 29.59

2006 42.69

2007 59.38

Average Annualized returns 33.74 %

Annualized Market Returns (CAGR) 31.14 %

ACC CEMENTS

Capital Expenditure of 10 companies (in crores)

CAPEX = (increase in fixed assets) + (increase in Capital WIP) – (increase in investments)

– (increase in depcn)

Particulars 2006 2007 Increase

CAP WIP 558.42 649.19 90.77

Fixed assets 4,816.25 5,464.07 647.82

Investment 543.09 844.81 301.72

Depcn 1,893.76 2,149.35 255.59

Capex 2937.57 3119.1 181.28

We find fixed assets turnover ratio for previous years

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Construction of Balanced Portfolio comprising of Equity and Debt We find weighted average of FATR

FATR

Year 2007 2006 2005 2004 2003

FATR 1.74 1.65 1.35 1.32 1.17

Weights 5 4 3 2 1

8.7 6.6 4.05 2.64 1.17

Avg FATR 4.63

2007 2006 2005 2004 2003

SALES 7,848.32 6,453.07 5,222.57 3,699.89 4,539.35

Sales

Growth

Assumed to be 17.68 % year on year ( i.e. average % sales change from

2003-07)

2007 2008 2009 2010 2011 2012

7,848.32 9235.9 10868.8 12790.4 15051.74 17712.88

In a similar way of methodology used for ACC cements, all the companies CAPEX and

expected sales have been calculated.

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Construction of Balanced Portfolio comprising of Equity and Debt

PRESENT CAPEX

Companies

CAPEX

(crores)

1 PRISM -135.37

2

DALMIA

CEMENTS 351.76

3 INDIA CEMENTS 803.08

4

ULTRATECH

EMENTS 224.97

5 ACC CEMENTS 181.28

6

MANGALAM

CEMENTS

748.59

7 LLYODS STEEL -84.66

8 JSW STEELS 1704.29

9 SAIL -308.12

10 TATA METALIKS 35.76

AVERAGE FATR

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Construction of Balanced Portfolio comprising of Equity and Debt Companies Avg FATR (%)

1 PRISM 4.65

2 DALMIA CEMENTS 2.8

3 INDIA CEMENTS 3

4 ULTRATECH EMENTS 7.65

5 ACC CEMENTS 4.63

6 MANGALAM CEMENTS 6.98

7 LLYODS STEEL 3.34

8 JSW STEELS 4.2

9 SAIL 6.63

10 TATA METALIKS 7.46

Expected Future Sales (in crores)

  Companies 2007 2008 2009 2010 2011 2012

1 PRISM883.48 1081.29 1323.39 1619.69 1982.34 2426.18

2 DALMIA CEMENTS1,117.5

9 1438 1850.27 2380.74 3063.29 3941.53

3 INDIA CEMENTS2,610.7

5 3310.43 4197.62 5322.58 6749.03 8557.77

4

ULTRATECH

EMENTS5,509.2

2 6930.59 8718.68 10968.113797.8

617357.3

1

5 ACC CEMENTS7,848.3

2 9235.9 10868.8 12790.415051.7

417712.8

8

6

MANGALAM

CEMENTS548.24 697.03 886.2 1126.71 1432.5 1821.48

7 LLYODS STEEL1,932.0

5 2588.93 3469.16 4648.67 6229.21 8347.14

8 JSW STEELS9,337.3

413,072.2

718301.1

825621.6

535870.0

550218.0

7

9 SAIL40,291.

7548382.1

958097.3

369763.2

7 83771.6100592.

9310 TATA METALIKS

681.15 1076.21 1700.41 2686.84 4245.09 6707.24Portfolio Construction Based on Fundamental Analysis

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Construction of Balanced Portfolio comprising of Equity and Debt On the basis of Excess returns to beta, the proportion of each stock to be included is determined

by assigning the weights to the expected future growth rates (sales growth) of companies.

Weights are used to calculate portfolio and Beta.

Sr. No Company Expec. growth rate

Weights Prop Returns

( exp GR *W)

1 PRISM 22.39% 7.44% 1.67%2 LLYODS

STEEL33.96% 11.29% 3.83%

3 DALMIA CEMENTS 28.67%

9.53% 2.73%

4 INDIA CEMENTS 26.80%

8.91% 2.39%

5 ULTRATECH EMENTS 25.80%

8.58% 2.21%

6 ACC CEMENTS 17.68%

5.22% 0.92%

7 JSW STEELS 39.67% 13.19% 5.23%8 MANGALAM

CEMENTS 27.14%

9.02% 2.45%

9 SAIL 20.08% 6.68% 1.34%10 TATA

METALIKS58.55% 19.47% 11.40%

300 % 100.00% 34.18%

BETA OF THE PORTFOLIO

Company Weights Beta

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Construction of Balanced Portfolio comprising of Equity and Debt

PRISM 7.44% 1.02

LLYODS STEEL 11.29% 0.91

DALMIA CEMENTS 9.53% 1.25

INDIA CEMENTS 8.91% 1.36

ULTRATECH EMENTS 8.58% 0.92

ACC CEMENTS 5.22% 0.97

JSW STEELS 13.19% 1.14

MANGALAM CEMENTS 9.02% 1.06

SAIL 6.68% 1.48

TATA METALIKS 19.47% 0.81

Avg. Beta

of portfolio

1.1

DEBT PORTFOLIO

Step 1 : 10 top corporate debts were taken on random basis from the market

Step 2 : All the 10 debts are being given weights according to ratings given by the agencies

on basis of below mentioned scale

Debt Valuation

Includes research of different kinds of fixed income securities, like corporate debt, government

securities and treasury Bills.

Corporate Debt :

Step 1: The sample of 10 corporate debts is taken from the market on random basis

Step 2: All the securities are given weights according to ratings given by the agencies on the

basis of below mentioned scale.

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Construction of Balanced Portfolio comprising of Equity and Debt RATING Weight

AAA 5

AA+ 4

AA 3

AA- 2

Step 3: All the 10 (debt) securities’ YTM’s, Durations, and Modified Durations are taken from

market and assigned weights for YTM, assuming higher the YTM higher the returns.

YTM YTM Weight

12.42 3.42 1

3.42 5.67 2

5.67 7.92 3

7.92 10.17 4

10.17 12.42 5

Step 4: As the modified duration tells the sensitivity of the bond (Beta of the bonds ) to the

changes in the interest rates. We can say that, higher the modified duration higher the risk. On

this basis modified duration, is taken as percentage and reduced in the sum of all the weights.

(Rating + YTM – (% MOD DUR))

Step 5: Proportion to be invested is calculated by keeping the returns as the base. And expected

returns are then calculated by multiplying the proportions with the returns.

Table 11: Corporate Debt Portfolio

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Construction of Balanced Portfolio comprising of Equity and Debt

ISIN Number Issue Description AYTM

Mod

Duration Weights

Exp

Returns

% % %

INE043D08862

IDFC 9.10% 2018(S-

PP342008O-II) 9.6492 6.31 9.4 0.59314

INE652A09054

STATE BANK OF

PATIALA 9.3 % LOA

20DC22 FVRS10LAC 9.5949 7.58 11.66 0.883828

INE020B07DE1

RECL 9.07% 2018

(SERIES-83) 9.53 5.79 8.9 0.51531

INE043D08813

IDFC LTD 8.88 LOA

07JN11 FVRS10LAC 9.6267 5.93 9.12 0.540816

INE001A07CW7

HDFC 8.5 NCD 15OT08

FVRS10LAC 9.1845 6.46 9.93 0.641478

INE514E08423

EXIM BANK 9.1 BD

18SP10 FVRS10LAC 9.08 6.39 9.78 0.624942

INE008A08PR2

IDBI LTD OMNI-1 6.75

BD 18AG08 FV RS 1

LAC 9.5356 6.67 10.26 0.684342

INE752E07AB5

PGC 7.39% 2016 (S-

XVIISTP-H) 8.7508 7.11 10.88 0.773568

INE062A09155

STATE BANK OF

INDIA 10.1 BD 12SP22

FVRS10LAC 9.7517 6.67 10.26 0.684342

INE053F09FL9

IRFC 8.69 BD 07JN11

FVRS10LAC LOA

UPTO 01FB08 9.5342 6.38 9.81 0.625878

Total   Approx = 65 100 6.567644

Government Securities:

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Construction of Balanced Portfolio comprising of Equity and Debt Step 1 : The sample of ten government securities are taken from the market on random basis.

Step 2 : The data available was on daily price changes in the market of the underlying security.

Based on the available data from market, we calculate the average returns of the security.

Step 3 : Proportion to be invested in each security is then calculated.

Step 4 : Expected return are calculated

G-Sec portfolio

Symbol

Cpn

rate

Avg

Returns

Proportion

to invest

Exp

Returns

0740E12 7.4 10.32% 23.41% 2.42%

0939G11 9.39 8.72% 19.79% 1.73%

1305D07 13.05 8.55% 19.38% 1.66%

1200E08 12 8.31% 18.85% 1.57%

1210F08 12.1 8.19% 18.57% 1.52%

        8.89%

Construction of portfolio of Debt and Equity

A portfolio that buys a combination of common stock, bonds, and short-term bonds, to provide

both income and capital appreciation while avoiding excessive risk. The purpose of balanced

portfolio (also sometimes called hybrid funds) is to provide investors with a single portfolio

that combines both growth and income objectives, by investing in both stocks (for growth) and

bonds (for income). Such diversified holdings ensure that these portfolios will manage

downturns in the stock market without too much of a loss; the flip side, of course, is that

balanced funds will usually increase less than an all-stock fund during a bull market.

Equity Portfolio:

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Construction of Balanced Portfolio comprising of Equity and Debt

Co Names

Exp

Growth

rate Weights

Prop

returns Port Beta

         

PRISM22.39%

7.44% 1.67% 1.02

LLYODS STEEL 33.96% 11.29% 3.83% 0.91

DALMIA

CEMENTS28.67%

9.53% 2.73%

1.25

INDIA CEMENTS26.80%

8.91% 2.39% 1.36

ULTRATECH

EMENTS25.80%

8.58% 2.21%

0.92

ACC CEMENTS17.68%

5.22% 0.92% 0.97

JSW STEELS 39.67% 13.19% 5.23% 1.14

MANGALAM

CEMENTS27.14%

9.02% 2.45%

1.06

SAIL 20.08% 6.68% 1.34% 1.48

TATA

METALIKS

58.55% 19.47% 11.40%

0.81

       

    Returns 34.18 % 1.1

Debt portfolio:

Composition of Funds

Avg

Returns

Prop

Invested

 Prop Returns

       

Corporate debt 6.56% 50.00% 3.28%

G Sec 8.89% 30.00% 2.67%

364 T-bill and cash 6.50% 20.00% 1.30%

       

Annual Returns   100.00% 7.25%

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Construction of Balanced Portfolio comprising of Equity and Debt Now based on the above tables we construct a balanced portfolio with different combinations of

debt and equity where we try to trace the one combination which gives the optimum returns

with least risk (beta).

Table showing different combinations of debt and equity

Different combinations of Debt and Equity.

Equity Debt

Equity

Returns

Debt

returns Beta Total returns

1 0 34.18 % 0.00 % 1.1 34.18 %

0.9 0.1 30.76 % .72 % 1 31.48 %

0.8 0.2 27.34% 1.45 % 0.88 50.25%

0.7 0.3 23.92% 2.17 % 0.77 44.87%

0.6 0.4 20.50% 2.9 % 0.66 39.5%

0.5 0.5 17.09 % 3.62 % 0.55 34.12%

0.4 0.6 13.67% 4.35 % 0.44 28.75%

0.3 0.7 10.25% 5.07 % 0.33 23.37%

0.2 0.8 6.83% 5.8 % 0.22 18.00%

0.1 0.9 3.41% 6.52 % 0.11 12.62%

0 1 0.00% 7.25 % 0 7.25%

By analyzing the table above, one with basic finance knowledge can easily identify the

optimum combination. The selected portfolio gives the returns of 31.48 % with beta of 1.

The most interesting part here is the beta = 1. As we know that market portfolio Nifty, optimum

portfolio with zero systematic risk has the beta of 1. So we can claim that constructed portfolio

is almost equal to Nifty and moves according to the market.

Portfolio Nifty

Annual Returns 34.18% 31.48 %

Beta 1 1

The objective of any fund manager for any portfolio created by him/her is

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Construction of Balanced Portfolio comprising of Equity and Debt Returns maximization at a fixed level of risk.

Risk minimization at a fixed level of returns.

In this case, researcher has achieved his objective hence forth.

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Construction of Balanced Portfolio comprising of Equity and Debt

FINDINGS

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Construction of Balanced Portfolio comprising of Equity and Debt

Fundamenta l Ana lys i s

STEEL SECTOR

1 India has a per capita consumption of steel of around 30 kgs as against 180 kgs in China and

an average of over 400 kgs in the developed countries. This wide gap in relative steel

consumption indicates that the potential ahead for India to raise its steel consumption is high.

2 Being a core sector, steel industry tracks the overall economic growth in the long-term. Also,

steel demand, being derived from other sectors like automobiles, consumer durables and

infrastructure, its fortune is dependent on the growth of these user industries.

3 The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap

labour. Iron ore is also available in abundant quantities. This provides major cost advantage to

the domestic steel industry, with companies like Tisco being one of the lowest cost producers in

the world.

4 However, Indian steel companies have to bear additional costs pertaining to capital

equipment, power and inefficiencies (low per employee productivity). This has resulted in the

erosion of the edge they would have otherwise enjoyed due to availability of cheap labour and

raw materials.

5 The basic import duty on steel has been consistently brought down. This has made the

industry vulnerable to international competition. On the positive side, domestic prices now

track the global prices more closely.

After many years, the forging industry performed extremely well in 2006-07. During this

period, overall production of the forging industry increased by about 25% to 5,50,000 tonne

(approximately). With the excellent performance of the automotive sector especially the

passenger car segment, the forging segment did exceedingly well both in the domestic market

as well as global market. On the export front the segment made commendable performance by

registering an export growth of almost 30% to Rs 750 crore. Indian forging products catered

mainly to USA, Europe, China etc.

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Construction of Balanced Portfolio comprising of Equity and Debt However, the industry witnessed a steep and frequent increase of prices in major inputs like

steel coupled with acute shortage of the same. Also, the increasing cost of other inputs like

energy/power and fuel has intensified pressures on the player’s margins.

CEMENT SECTOR

1 With increasing demand due to increased infrastructure activities and limited growth in

capacity the demand –supply gap would reduce. In the Apr- June ’08 quarter we expect cement

demand to be robust on account of summer season and prices to remain firm

2 Cut down on coal supplies to cement companies by about 25% would put cost pressure on the

companies. Cement demand would slow down in the late June with the beginning of the

monsoon. With demand expected to grow at the rate of 8% p.a. we expect the capacity

utilization in the coming years to be above 85%. We are positive on the sector in the medium

and long term.

3 India’s per capita consumption is about 90 kg compared to the world average of 250 kg. This

implies great growth potential for the domestic industry. With 60% of the demand coming from

the housing sector, the fortunes of cement industry are closely linked to it

.

4 Greater thrust on continued investments in new infrastructure projects like ports, roads and

highways will power the demand growth for cement for next few years. With nearly Rs.

8,00,000 crore worth of investments likely in electricity generation in the coming decade, the

overall prospects of the growth in demand appears bright

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Construction of Balanced Portfolio comprising of Equity and Debt

PORTFOLIO FINDINGS

1 When the Equity portfolio was constructed using 10 sectors stocks, on the basis of annual

average growth rate 55 %, proportionate returns came about to be 34.18 %. .

2 The debt portfolio formed consisted together of corp. debt, G-Sec and 365 days T-Bills

gave annualized returns of 7.25 %

3 Total Return Index has been calculated which showed the annualized market returns of

31.14 %

4 The Equity portfolio consists of 6 stocks from cement sector and 4 from steel sector.

5 The average FATR of all the 10 equity stocks have been calculated which tells that

Mangalam, Ultratech cements, SAIL and Tata Metaliks have high FATO ratio which tells

that companies have fixed assets which have been used very efficiently. Where as all the

remaining companies have quite an average FATO of ratio, which calls for the better

utilization of fixed assets in the future.

6 When a new portfolio was constructed using different combinations od debt and equity,

combination of 90 % equity and 10 % debt gave annualized return of 31.48 % compared

to the total index returns 31.14 % at same level of Beta (systematic risk) i.e. 1

7 Optimum portfolio, was noticed when the combinations was .9 from equity part and .1

from debt portion with annualized return of 31.48 %

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Construction of Balanced Portfolio comprising of Equity and Debt

RECOMMENDATIONS

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Construction of Balanced Portfolio comprising of Equity and Debt

1 The most basic suggestion is that an investor in order to diversify risk, he must use

fundamental analysis and portfolio valuation.

2 The steel sector portfolio has a very high return and high risk, and this is a very common

situation, as in to “higher the risk, higher will be the return”.

3 It is also suggested that the investor must look into the fundamentals of the company

thoroughly since majority of stock price movements are result of investor’s price perception

and from insider news.

4 The expected return to beta statistical measure can be used for future diversification of the

stocks which have higher expected return to beta.

5 When the investor is an optimist, he will always go for minimum risk level, and according,

which shows the different combination of portfolios, it is clear that, he would opt for the last

combination, i.e., (0, 1) and the other sectors respectively, which has a risk of around less

than .55

6 In the same token, if an investor he is a risk lover, he would definitely select the last

combination i.e., (1 , 0) equity and debt respectively, which fetches him annualized expected

return of 34.18 % or combinations of (.9, .1) which fetches him annualized return of 31.48 %.

Portfolio evaluation

As the objective of project was construction of a portfolio based on fundamental analysis and

include debt to the portfolio so as to reduce the risk and make the portfolio yield regular returns

with stable capital appreciation, we have been successful in that. .

The research also tries to test the significance of excess return to beta, and find weather one can

construct a portfolio which beta is equal to market beta ( beta =1 ) and returns greater then

market returns.

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Simple rules in stock selection for avoiding your risks

To realize your gains in the stock market, your stock selection is going to be the key

step. Diversification, or spreading your eggs in different baskets, is well known. But

which egg should qualify to be placed in your baskets does not get sufficient

attention.

While we are in the stock market to extract a decent return, we must not act like

compulsive gamblers. Even good gamblers have their risk reduction strategies.

Which risks are we most concerned with? The uncertainty of the stock market as a

whole, like the risk of a loss due to a crash following a war or a sudden catastrophe, is

not a concern to us once we have decided to enter the market. Our additional return

from the stock market will flow only because we have decided to pay the price of this

overall uncertainty.

Specifically, we can control the risks inherent in buying a particular stock. For

example, is it a stock with good liquidity? Suppose we wish to invest Rs 25,000 in a

particular stock and the daily transaction volumes are only in the region of a few

lakhs, then the liquidity in the stock is restricted. There are players who bet on stocks

with limited liquidity because it can also move up faster. But this upside has a big

downside, which is you may not be able to get out of the stock when you wish

because there may not be ready buyers to sell to.

Next important aspect is: whether the price at which you are entering a stock is a fair

price? Just because there has been a big increase in its price recently does not make it

fairly or unfairly priced. Players use various ratios, inside information, tips, and

educated guesses to resolve this issue. But if the company is shady, there may be

unseen risks, which you will discover only later. By courting a shady company, you

are unnecessarily meddling with something of suspect quality. It is better to be safe

than sorry. Therefore, it is better to do some homework on this aspect.

In your eagerness to hold on to some thing with a great upside potential, you may

forget to examine why the prevailing price of the stock is so low now or in the recent

past. Researching on this aspect will be very valuable especially if the particular

company's stock price is not in line with others in the same business or industry.

For lay investors, one simple rule to remember would be that high risks would

accompany high returns. In the risk-return scale the various types of company shares

in ascending order would be defensive stocks, established growth stocks, emerging

blue chips (now referred to as mid-caps), re-rating candidates like turnaround

companies, divestment of PSUs or companies benefiting from some expected

fundamental changes in economy, regulations, technology etc.

One more simple and practical way to broadly determine the risk-reward equation

would be a reference to the size of the company by market capitalization. Market

capitalization means the price at which 100% shares of the company can be purchased

at current market prices and would be equivalent to the amount you will obtain by

multiplying the current price by the total number of shares issued by the company.

Viewed by market capitalization, larger companies would have lower risks and return

potential but will involve lower unseen risks. In this way, you are using the judgments

of the entire market to your advantage. Let us consider an example. Infosys has a

large market cap. Polaris Software has a much smaller market cap. Profit potential

and risks will be lower in Infosys compared to Polaris Software. Similarly, for any

industry and also across industries normally.

Many people are unhappy that leading newspapers only carry prices of larger

companies' shares. Actually such smaller lists serve as lists of shares with limited

risks.

CONCLUSION

After analyzing the data in detail, it was found that, majority of the companies have

given good returns historically as well and they will continue to perform well in the

future also. it is a time and good opportunity for the investors to invest in the steel and

cement sector stocks as demand will only increase.

Whenever, an investor wants to construct portfolio, he should go for portfolio

consisting of equity and debt combinations, which will minimize risk and maximize

returns as we have found out from project.

Por t fo l i o cons truc ted has g iven h igher re turns than marke t

r e turns a t same l eve l o f r i sk .