fundamental and technical analysis of automobile companies stocks

A REPORT ON ANALYSIS OF INDIAN AUTOMOBILE INDUSTRY This report is submitted as partial fulfillment of the requirement of PGDM programme of ITM Business School, Siruseri, Chennai.

By S. RAMPRASAD

Institute for Technology and Management Business School Siruseri, Chennai July 2010

Certificate by SIP Organization

(In SIP Company Letter head)

To whomsoever it May concern This is to certify that ___________________ was with us from _____________ to ______________ as intern. He was maintaining 100% attendance and he has no dues. The report submitted by the candidate is of his original work.

Place: Date:

_______________________ Signature of Company Guide

ACKNOWLEDGMENTS I would like to express my gratitude to Dr. G.K.Sharma, Director, Institute for Technology and Management Business School, Chennai for allowing me to do my Summer Internship Project. I am especially thankful to Mr. Bharat Munoth, Managing Director, Munoth Financial Services Ltd., Chennai. I am highly indebted to Mr. Dipesh Shah, Chief Executive and company project guide, who has provided me with the necessary information and also for the support extended out to me in the completion of this report and his valuable suggestion and comments on bringing out this report in the best way possible. I also thank Prof. Ravimohan, Institute for Technology and Management Business School, Chennai who has supported me with his valuable insights into the completion of the project. I am grateful to all faculty members of Institute for Technology and Management Business School, Chennai and who have helped me in the successful completion of this project.

SYNOPSIS

The automobile industry, one of the core sectors, has undergone metamorphosis with the advent of new business and manufacturing practices in the light of liberalization and globalization. The sector seems to be optimistic of posting strong sales in the couple of years in the view of a reasonable surge in demand. The Indian automobile market is gearing towards international standards to meet the needs of the global automobile giants and become a global hub. So investment in the stocks of the automobile industry is one of the attractive options. Investing in shares of a company is highly rewarding at the same time it is highly risky. Moreover the Indian Stock market is highly volatile with large volumes being traded. Analysis of stocks is highly helpful to reduce the risks and to make good money. This project is aimed at analyzing the Indian automobile industry in the view of its feasibility as an investment option. A detailed analysis of the Indian automobile industry is covered in respect of past growth and performance. The fundamental analysis is done which analyzes the economy in the broader sense and the industry is analyzed using Industry Life Cycle, Porter’s Five Forces Model and SWOT Analysis. Three companies namely Mahindra & Mahindra, Tata Motors and Ashok Leyland are chosen and their financial and non-financial information are analyzed. The technical analysis is also done for the stocks using some technical indicators. Based on the analysis done the intrinsic value of the shares of the companies were found out and their future price directions were determined. Based on the analysis the future price directions are determined and recommendations are given to make the project more meaningful.

CHAPTERISATION

This project is divided into 14 Chapters. 1.

Introduction to the project: This chapter gives a description about the project. It covers the objectives, scope, limitations, methodology used and the sample design.

2.

Introduction to Munoth Financial Services Limited: This chapter gives a brief overview about the SIP Organization.

3.

Introduction to Indian Automobile Industry: This chapter gives a bird’s eye view on the Indian Automobile Industry.

4.

Introduction to Fundamental Analysis: This chapter discusses about the Fundamental Analysis and the various concepts of it in detail.

5.

Introduction to Technical Analysis: This chapter discusses about the concept of Technical Analysis in detail.

6.

Indian Economic Analysis: This chapter analyses in the overall Indian economy in a broader sense.

7.

Indian Automobile Industry Analysis: This chapter gives details about the Indian Automobile Industry and the industry is analyzed using tools like SWOT, Porter’s Five Forces Model, etc.

8.

Analysis of Mahindra & Mahindra Limited: The fundamental and technical analysis of Mahindra & Mahindra Ltd., is done in this chapter.

9.

Analysis of Tata Motors Limited: The fundamental and technical analysis of Tata Motors Ltd., is done in this chapter.

10. Analysis

of Ashok Leyland Limited: The fundamental and technical analysis of Ashok

Leyland Limited is done in this chapter 11. Findings:

This chapter gives the information on the findings of the analysis made in the

preceding chapters. 12. Conclusions: The

conclusions are drawn based on the findings of the analysis

13. Recommendations:

Based on the findings and conclusions recommendations are given in this

chapter 14. References:

collected.

This chapter lists the sources from which the information for the project is

TABLE OF CONTENTS Sl. No. Particulars

1.

2.

3.

4.

5.

Pg. No.

Cover & Title Page

i

Certificate from SIP Company

ii

Acknowledgements

iii

Synopsis

iv

Chapterisation

v

List of Figures

vi

List of Tables

vii

Introduction to the Project

1

1.1.Overview

1

1.2.Objectives, Scope and Limitations

1

1.3.Methodology, Data Sources and Samples

2

An Introduction to Munoth Financial Services Limited

3

2.1. The Company

3

2.2. Vision, Values and Objectives

3

2.3. Services

4

2.4. Clients

4

Introduction to Indian Automobile Industry

5

Introduction to Fundamental Analysis

6

4.1. Economic Analysis

8

4.2. Industry Analysis

10

4.3. Company Analysis

11

Introduction to Technical Analysis

17

5.1. Price Charts

17

5.2. Volume

19

5.3. Trends

20

5.4. Support & Resistance Levels

21

5.5. Technical Indicators

22

6.

Indian Economic Analysis

28

Indian Automobile Industry Analysis

30

7.1. Segmentation of the Industry

30

7.2. Key Players in the Industry

31

7.3. Contribution to the GDP

31

7.4. Automobile Exports

32

7.5. The Future of the Industry

32

7.6. Industry Life Cycle

33

7.7. Porter’s Five Force Analysis

33

7.8. SWOT Analysis

34

Analysis of Mahindra & Mahindra Limited

36

8.1. Analysis of Non-Financial Information

36

8.2. Analysis of Financial Information

39

8.3. Analysis of Key Ratios

42

8.4. Analysis of Technical Indicators

46

Analysis of Tata Motors Limited

51

9.1. Analysis of Non-Financial Information

51

9.2. Analysis of Financial Information

54

9.3. Analysis of Key Ratios

57

9.4. Analysis of Technical Indicators

61

Analysis of Ashok Leyland Limited

66

10.1. Analysis of Non-Financial Information

66

10.2. Analysis of Financial Information

69

10.3. Analysis of Key Ratios

72

10.4. Analysis of Technical Indicators

76

11.

Findings

81

12.

Conclusions

85

13.

Recommendations

86

14.

References

87

7.

7.

8.

9.

10.

List of Figures Sl. No.

Figure Title

Pg. No.

1

India GDP Growth Rate

28

2

Industry Segmentation

30

3

Automobile Exports

32

4

M&M Shareholding Pattern

36

5

Debt-Equity Ratio of Mahindra & Mahindra

42

6

Return on Equity Ratio of Mahindra & Mahindra

43

7

Price Earnings Ratio of Mahindra & Mahindra

43

8

Dividend Per Share of Mahindra & Mahindra

44

9

Dividend Payout Ratio of Mahindra & Mahindra

44

10

Dividend Yield Ratio of Mahindra & Mahindra

45

11

Book Value Per Share of Mahindra & Mahindra

45

12

EMA of Mahindra & Mahindra

46

13

RSI of Mahindra & Mahindra

48

14

ROC of Mahindra & Mahindra

49

15

MACD of Mahindra & Mahindra

50

16

Tata Motors Shareholding Pattern

51

17

Debt-Equity Ratio of Tata Motors

57

18

Return on Equity Ratio of Tata Motors

58

19

Price Earnings Ratio of Tata Motors

58

20

Dividend Per Share of Tata Motors

59

21

Dividend Payout Ratio of Tata Motors

59

22

Dividend Yield Ratio of Tata Motors

60

23

Book Value Per Share of Tata Motors

60

24

EMA of Tata Motors

61

25

RSI of Tata Motors

63

26

ROC of Tata Motors

64

27

MACD of Tata Motors

65

28

Ashok Leyland Shareholding Pattern

66

29

Debt Equity Ratio of Ashok Leyland

72

30

Return on Equity of Ashok Leyland

73

31

Price Earnings Ratio of Ashok Leyland

73

32

Dividend Per Share of Ashok Leyland

74

33

Dividend Payout Ratio of Ashok Leyland

74

34

Dividend Yield Ratio of Ashok Leyland

75

35

Book Value Per Share of Ashok Leyland

75

36

EMA of Ashok Leyland

76

37

RSI of Ashok Leyland

78

38

ROC of Ashok Leyland

79

39

MACD of Ashok Leyland

80

40

EPS and Net Profit Margin of Mahindra & Mahindra

81

41

EPS and Net Profit Margin of Tata Motors

82

42

EPS and Net Profit Margin of Ashok Leyland

83

List of Tables Sl. No.

Table Title

Pg. No.

1

Balance Sheet of Mahindra & Mahindra

39

2

Profit & Loss Account of Mahindra & Mahindra

40

3

Cash Flow Statement of Mahindra & Mahindra

41

4

Key Ratios of Mahindra & Mahindra

42

5

Balance Sheet of Tata Motors

54

6

Profit & Loss Account of Tata Motors

55

7

Cash Flow Statement of Tata Motors

56

8

Key Ratios of Tata Motors

57

9

Balance Sheet of Ashok Leyland

69

10

Profit & Loss Account of Ashok Leyland

70

11

Cash Flow Statement of Ashok Leyland

71

12

Key Ratios of Ashok Leyland

72

1. Introduction to the Project 1.1.

Overview: The automobile industry is one of the core industries in India and is optimistic of posting

good sales in the coming years. So, the investment in shares and securities of automobile companies seems to be profitable. Investing is one of the most crucial decisions that every earning individual has to make at one point of the time or the other. One of alluring options available is the investment in the shares and securities of companies. The investment in share market is highly rewarding but highly risky. The concept of analysis comes into picture when decision has to be made on choosing a particular company’s shares for investment. Analysis includes fundamental and technical analysis. A proper analysis helps in reducing the risks on investment in the share markets less risky and highly rewarding. This project is aimed at finding the analyzing the securities of select companies in the automobile industries and to assist investment decisions. 1.2.Objectives, Scope and Limitations: Objectives: Primary Objectives: ➢ To analyze the Indian Automobile Industry ➢ To analyze the performance of select companies in automobile industry (fundamental &

technical) ➢ The research report can be used by the organization to assist the investors in making investment decisions. Secondary Objectives: In order to accomplish the primary objectives the following secondary objectives are to be accomplished: ➢ To understand fundamental and technical analysis.

Scope: The project covers the following: ➢ Introduction to the Indian Automobile Industry ➢ Introduction to fundamental and technical analysis ➢ Fundamental analysis of the companies including the analysis of automobile industry ➢ Technical analysis of the stocks of selected companies ➢ Findings, Conclusions and Recommendations. Limitations: ➢ The analysis is fully based on secondary data and hence the accuracy of data is a major

concern. ➢ Only three companies are selected for analysis because of time constraints. ➢ Since the annual reports for 2009-10 are not available for the selected companies

fundamental analysis is done using the data available till 2009. ➢ Analysis helps the investor in making investment decisions but not every investment is entirely dependent on the analysis alone. ➢ Some important concepts would have been left uncovered in the project due to lack of data availability and the project has to be completed in a short span of time. 1.1.Methodology, Data Sources and Samples: ➢

Type of Study: The project will be exploratory in the initial stage and the knowledge thus gained will be used for further descriptive research.

➢

Data: The project is done using secondary data.

➢

Sample Size: 3 automobile companies listed in the National Stock Exchange.

➢

Sampling Design: The companies for the project shall be selected using Convenience Random Sampling.

2. An Introduction to Munoth Financial Services Limited

2.1.

The Company: Established in the year 1990 as a widely held public company, The Munoth Financial

Services Limited (MFSL) is the one on its growth pace among its peers. With a networth of above Rs.10Cr the equity shares of the company are listed on the Bombay Stock Exchange (BSE) & the Madras Stock Exchange (MSE). With excellent infrastructure and a good research team the company has its operations at Chennai and Bangaluru. The company provides diverse financial services to Institutional, Corporate, Resident Indians and Non Resident Indian (NRI) customers. The company is also planning to start online trading services soon.

2.2.

Vision, Values and Objectives:

Vision: To provide all the capital market services under one roof to institutional, corporate and retail clients with prudence and integrity.

Values: The Munoth Group is driven by the ethics and philosophies of their ancestors and values that are built over the past 100 years.

Objectives: ➢ To provide all capital market services under one roof ➢ To plan and execute financial schemes with an accent on long term growth and steady returns ➢ To seamlessly work for the benefits of the customers ➢ To provide effective and efficient service to their customers

2.1.

Services:

Corporate Stock Brokers: MFSL is a corporate stock broker with National Stock Exchange (NSE) and member of Madras Stock Exchange and Over The Counter Exchange of India (OTCEI). It executes business in both cash segment and F&O Segment. Mutual Funds Marketing: MFSL markets Mutual Funds for major companies like Reliance Mutual Funds, Sundaram BNP Paribas Mutual, LIC Mutual Fund, SBI Mutual Fund, etc. IPO Offering: The Primary Markets Division of the company markets all the IPOs. Merchant Banking: MFSL is a Category I Merchant Banker offering services in areas of issue management, Mergers & Acquisition, investment banking, advisory, re-structuring, ESOPS, etc. Portfolio Management Services: The Company provides portfolio management services to resident and non-resident Indians. It offers both discretionary and non-discretionary services. Depository Participants: MFSL is a Depository Participant with National Securities Depository Limited (NSDL). It offers Services to resident Indian, non-resident Indians and Corporates.

2.2.

Clients: MFSL offers services to Institutional, Corporate, High Networth Individuals, Non

resident Indians and Resident Indian Customers. Its institutional clients in the cash segment of stock broking include banks like Canara Bank, Indian Bank, Indian Overseas Bank, General Insurance Corporation of India, United India Insurance Company Limited, etc. The Company has been associated with over hundred initial public offerings, has managed rights issue, open offer and ESOPs. The company has recently underwritten the issues of Madras fertilizers Limited and has handled ESOP shares for Orchid Chemicals and Pharmaceuticals Limited.

3.INTRODUCTION TO INDIAN AUTOMOBILE INDUSTRY The auto industry is the greatest engine of economic growth in the world. The global auto industry is a key sector of the economy for every major country in the world. The industry continues to grow, registering a 30 percent increase over the past decade. In 2009, more than 60 million motor vehicles, including cars and commercial vehicles were produced worldwide equivalent to a global turnover of around €2 trillion. The automobile industry is one of the fastest growing industries in India. The Indian automobile industry is the seventh largest in the world with an annual production of over 2.6 million units in 2009. Withstanding a growth rate of 18% per annum and an annual production of more than 2 million units, it may not be an exaggeration to say that this industry in the coming years will soon touch a figure of 10 million units per year. In 2009, India emerged as Asia's fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. By 2050, the country is expected to top the world in car volumes with approximately 611 million vehicles on the nation's roads.

Indian automobile industry at global level: •

India ranks 2nd in the global two-wheeler market.

•

India is the second largest tractor manufacturer in the world.

•

India is the fifth largest commercial vehicle manufacturer in the world.

•

India ranks 5th pertaining to the number of bus and truck sold in the world.

The Indian Automobile industry is floated with both domestic and international players and is highly competitive. One company is present in more than one segment of the industry. Contributing a major share to the GDP, employing more people the industry also supports many other industries. More about the industry is explored into and is analyzed in the Analysis Chapter under Industry Analysis.

2.INTRODUCTION TO FUNDAMENTAL ANALYSIS An investor can make more money if his investment decisions are based on actual movement of share price measured both in money and percentage terms. It is also very important to predict the future movements and also the true value of the securities. Equity analysis is used in order to find the true value of the securities and also to know where the prices are moving. It covers many aspects including the calculating various financial ratios and charts to extremely sophisticated indicators.

Equity Analysis is broadly divided into fundamental and technical analysis. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. The following are the major differences between fundamental and technical analysis: ➢ Fundamental analysis focuses on what is ought to happen while technical analysis focuses on what has already happened. ➢ Fundamental analysis analyses the economic indicators and financial statements while technical analysis makes use of the historic market data ➢ Fundamental Analysis advocates that every security has an intrinsic value which is not reflected by the market price while technical analysis advocates that market price accounts for everything. ➢ Fundamental Analysis uses tools like ratio analysis other valuation methods to find the intrinsic value while Technical Analysis primarily depends on charts and technical indicators.

Fundamental Analysis Fundamental analysis is the study of a company’s financial strength, based on historical data; sector and industry position; management; dividend history; capitalization; and potential for future growth. It is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices. The analysis attempts to find the intrinsic value of a security that helps investors to make decisions. The fundamental information that is analyzed can include a company's financial reports, and non-financial information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy-wide changes, changes in government policies etc. The various steps involved in the fundamental analysis are: 1.

Macroeconomic analysis, which involves considering the overall health of the economy and its future.

2.

Industry analysis, which involves the analysis of the industry in which the company is operating.

3.

Situational analysis of the company, studying their business model, management, products and services, its current position, its future, etc.

4.

Financial analysis of the company, which involves analyzing the financial statements like balance sheets, income statements, cash flows and ratios.

5.

Valuation, which attempts to find the intrinsic value of the securities of the company.

The approach to fundamental analysis is often referred to as E-I-C Approach. The E-I-C denotes the three parts of the fundamental analysis. The three distinctive parts of fundamental analysis are: 1. Economic Analysis 2. Industry Analysis and 3. Company Analysis

2.1.

ECONOMIC ANALYSIS: Economic analysis is the analysis of forces operating the overall economy a country. It is a process whereby strengths and weaknesses of an economy are analyzed and is important in order to understand exact condition of an economy. The various factors considered are: The Economic Cycle Countries go through the business or economic cycle and the stage of the cycle at which a country is in has a direct impact both on industry and individual companies. It affects investment decisions, employment, demand and the profitability of companies. It is very important to determine the stage of the cycle into which the economy is passing through. The four stages of economic cycle are depression, recovery, boom and recession.

BOOM DEPRESSION RECESSION RECOVERY DISINVEST INVEST

Investors should attempt to determine the stage of the economic cycle the country is in. They should invest at the end of a depression when the economy begins to recover, and at the end of a recession. Investors should disinvest either just before or during the boom, or at the worst, just after the boom. Investment and disinvestments made at these times will earn the investor the greatest benefits.

The Political Equation A stable political environment is necessary for steady, balanced growth. If a country is ruled by a stable government which takes decisions for the long-term development of the country, industry and companies will prosper. Foreign Exchange Reserves A country needs foreign exchange reserves to meet its commitments, pay for its imports and service foreign debts. If the reserves are not managed properly it may pose foreign exchange risks. Foreign Debt and the Balance of Trade Foreign debt, especially if it is very large, can be a tremendous burden on an economy. India pays around $ 5 billion a year in principal repayments and interest payments. Inflation Inflation has an enormous effect in the economy. Within the country it erodes purchasing power. As a consequence, demand falls. If the rate of inflation in the country from which a company imports is high then the cost of production in that country will automatically go up. Interest Rates

A low interest rate stimulates investment and industry. Conversely, high interest rates result in higher cost of production and lower consumption. Taxation The level of taxation in a country has a direct effect on the economy. If tax rates are low, people have more disposable income. Government Policy Government policy has a direct impact on the economy. A government that is perceived to be pro-industry will attract investment.

2.2.

INDUSTRY ANALYSIS: The importance of industry analysis is now dawning on the Indian investor as never

before. It is very important to analyze the health of an industry because no company is operating in isolation. Analysis of an industry can be performed using the tools like: Industry Life Cycle The first step in industry is to determine the cycle it is in, or the stage of maturity of the industry. All industries evolve through the following stages: 1. Introduction 2. Growth 3. Maturity 4. Decline

Porter’s Five Forces Model There are competitive forces and it is these competitive forces that determine the extent of the inflow of funds, the return on investment and the ability of companies to sustain these returns. Porter has identified five competitive forces that shape every industry and every market. The five forces identified by Porter are:

1. Threat of new entrants 2. Threat fo substitutes 3. Baggaining power of the customers 4. Bargaining power of the suppliers 5. Rivalry among competitors

SWOT Analysis SWOT analysis of an industry gives an investor the overall picture about the industry. A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. 2.1.

COMPANY ANALYSIS: Company analysis is the final stage of fundamental analysis. The economy analysis provides the investor a broad outline of the prospects of growth in the economy. The industry analysis helps the investor to select the industry in which investment would be rewarding. Now he has to decide in which company he has to invest. Company analysis provides the answer to this question. In company analysis the investor tries to predict the future earnings of the company because there is strong evidence that the earnings have a strong effect on the share prices. The level, trend and safety of earnings of a company, however depend upon a number of factors concerning the operations of the company. The different issues regarding a company that should be examined are: ➢ The Management ➢ The Company ➢ The Annual Report ➢ Ratios ➢ Cash flow

The Management:

Management is the most important factor that should be first looked into in a company. The performance of a company is primarily dependant on the effectiveness of the management. Investors must check on the integrity of the managers, proven competence, rating among its peers, its performance at the time of adversity, its depth of knowledge, innovation and professionalism. The Company: It is most important to understand the company because ultimately the profitability depends on the business it is into. Many factors are considered here including the products and services, its competitors, competitive advantage, market position, policies, etc. The Annual Report: The annual report is the primary and most important source of information on a company. By law, this is prepared every year and distributed to the shareholders. It contains very important information relating to the performance of a company over a period of time. The Annual Report is broken down into the following specific parts: A) The Director's Report, B) The Auditor's Report, C) The Financial Statements, and D) The Schedules and Notes to the Accounts. A. The Director’s Report The Director’s Report is a report submitted by the directors of a company to its shareholders, advising them of the performance of the company under their stewardship. A Director’s Report is valuable and it gives information relating to the workings of a company, the problems it faces, the direction it intends taking, and its future prospects. B. The Auditor's Report The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors. Auditors are required to report whether the financial statements presented do, in fact, present a true and fair view of

the state of the company. The auditors are their representatives and that they are required by law to point out if the financial statements are not true and fair. They are also required to report any change, such as a change in accounting principles or the non provision of charges that result in an increase or decrease in profits. C. Financial Statements The published financial statements of a company in an Annual Report consist of its Balance Sheet as at the end of the accounting period detailing the financing condition of the company at that date, and the Profit and Loss Account or Income Statement summarizing the activities of the company for the accounting period.

Balance Sheet The Balance Sheet details the financial position of a company on a particular date; of the company's assets (that which the company owns), and liabilities (that which the company owes), grouped logically under specific heads. It must however, be noted that the Balance Sheet details the financial position on a particular day.

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

D. The Schedule and Notes to the Accounts: Schedules and notes to the accounts are found after the financial statements in the annual report. The schedules detail pertinent information about the items of the balance sheet and profit and loss account. The notes are even more important as they give very important information such as the accounting policies that the company has followed; the contingent liabilities of the companies, etc. It is imperative that the schedules and notes to the accounts be read for a clearer understanding of the company’s financial condition.

Cash Flows: A statement of sources and uses begins with the profit for the year to which are added the increases in liability accounts (sources) and from which are reduced the increases in asset accounts (uses). The net result shows whether there has been an excess or deficit of funds and how this was financed. Investors must examine a company's cash flow as it reveals exactly where the money came from how it was utilized. Investors must be concerned if a company is financing either its inventories or paying dividends from borrowings without real growth as that shows deterioration. Ratios: A ratio is an arithmetical expression of relationship between two variables of the financial statements. It helps in easy comparison. The comparison may be intra firm or inter firm. A glance at the ratios of the company gives the complete information about the company to an investor. There are many ratios one can calculate and no single ratio can tell the complete story. Ratios are generally classified as: (A)

Liquidity Ratios: Liquidity ratios are the ratios which are used to measure the short term liquidity position of a firm. Some of the commonly used liquidity ratios are Current Ratio, Acid Test Ratio, Absolute Liquidity Ratio, etc.

(B) Solvency Ratios: These are the ratios that are used to measure the long term solvency position of a firm. These ratios are generally looked into by creditors of the companies. The common solvency ratios are Debt Equity Ratio, Proprietory Ratio, Interest Coverage Ratio, Fixed Charge Coverage Ratio, etc. (C) Profitability Ratios: The profitability ratios measure the overall profitability of a firm. Some of the common profitability ratios are Gross Profit Ratio, Net Profit Ratio, Operating Profit Ratio, Return on Equity, Return on Assets, Return on Investments, Return on Capital Employed, etc.

(D) Activity Based Ratios: Activity Ratios measures the efficiency of a firm. These ratios are also called as performance ratios. Some of the commonly used ratios are Inventory Turnover ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratio, etc. (E) Market Based Ratios: These ratios are usually calculated using the values in the financial statements and the market value of the share. Some of the commonly used ratios are: Price Earnings Ratio, Dividend Yield Ratio, Market Price to Book value Ratio, etc. Some important ratios that are considered in this project are: ➢

Net Profit Margin:- The Net Profit Margin measures the relationship between Net Profits and Sales of a firm. This ratio is indicative of management’s ability to operate the business successfully and expresses the cost effectiveness of the organization. Net Profit Margin=Earnings After Interest and TaxNet Salesx 100

A high net profit margin would ensure adequate return to the owners as well as enable the firm to withstand adverse economic conditions like falling demand, rising costs, etc. while a low net profit margin has the opposite implications. ➢

Debt-Equity Ratio:- This ratio is used to find out the long term solvency position of the firm. Debt Equity Ratio=Long Term DebtsEquity Funds

This ratio serves of primary use to the creditors of the company. This ratio is also used by the investors to know their claim in the company. ➢

Return on Equity:- This ratio expresses the profitability of a firm in relation to the equity shareholders’ funds. Return on Equity=Net Profit after taxes-Preference DividendNetworthx 100

This is the single most important ratio to judge whether the firm has earned satisfactory return to the equity shareholders or not.

➢

Earnings Per Share (EPS):- This ratio measures the profit available to the equity shareholders on a per share basis, that is the amount they can get on every share held. It is the most widely used ratio by investors.

Earnings Per Share=Net Profit available to equity share holdersTotal No.of Shares outstanding

This ratio only shows the profits earned per share but the same amount is not received by the shareholders. ➢

Price Earnings (P/E) Ratio:- The P/E Ratio reflects the price currently paid by the investor for each rupee of the reported EPS. Price Earnings Ratio=Market Price per shareEarnings Per Sahre

It measures the investor’s confidence in the firm’s future. The higher the ratio, the larger is the investor’s confidence in the firm’s future. ➢

Dividend Per Share (DPS):- This ratio shows the profits that are paid to equity shareholders on a per share basis

Dividend Per Share=Dividend Paid to Equity shareholdersNo.of Equity Shares Outstanding

The DPS is a better indicator than EPS as the former shows exactly what amount is received by the shareholders. ➢

Dividend Payout Ratio:- This ratio measures the relationship between the earnings belonging to the equity shareholders and the dividends paid to them. Dividend Payout Ratio=Dividend Paid to Equity ShareholdersProfits belonging to Equity Shareholdersx 100

If the Dividend Payout Ratio is subtracted from 100 it shows the Earnings Retention Ratio, which shows the profits retained in the business. ➢

Dividend Yield Ratio:- This ratio reflects the price paid by the investor for each rupee of the dividend paid.

Dividend Yield Ratio=Dividend Per ShareMarket price per sharex 100

This ratio is very significant from the point of view of those investors who are interested in dividend income.

➢

Book Value Per Share:- Book value per share represents the claim of the shareholders on a per share basis. This ratio is sometimes used as a benchmark for comparison with the Market price per share. Book Value Per Share=Net WorthNo.of Equity Shares Outstanding

5. INTRODUCTION TO TECHNICAL ANALYSIS Technical analysis is a security analysis technique that claims the ability to forecast the future direction of prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysis mainly seeks to predict the short term price travels. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. The basic assumptions of technical analysis are: ➢

The market discounts everything: technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. This only leaves the analysis of price movement for a particular stock in the market.

➢

Price moves in trends: In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

➢

History tends repeats itself: Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends.

5.1. Price Charts A chart is simply a graphical representation of a series of prices over a set time frame. Technical analysis uses various kinds of charts to show the movement of prices over a period of time. The charts that are most commonly used for technical analysis are:

➢

Line Charts

➢

Bar Charts and

➢ Candlestick Charts Line Chart:

Line Chart is the most common and simple charts as it considers only the closing prices of the stocks and ignores other values such as open, close, etc. The line chart is drawn by connecting the closing prices of a stock over a period of time. The above figure shows the line chart for the Reliance Industries Limited for 3 months period (April to June 2010) Bar Chart:

The chart is made up of a series of vertical lines and two small horizontal lines, one to the left and another to the right. The vertical line represents the high and low for the trading

period, along with the small horizontal line on the left to show the open price and another on the right side to show the closing price. The above figure shows the bar chart for Reliance Industries Limited for 3 months period (April- June 2010). Candlestick Chart:

Similar to a bar chart the candlestick chart also shows all the information like high, low, open and close prices of the stock the only difference being the way it is visually constructed. Usually traders feel that candlestick charts are easy to read because it clearly shows the relationship between the opening and closing prices of a security. If the closing price is more than the opening price the candle is shaded white. Conversely the candle is shaded black if the closing price is less than the opening price. The above figure shows the Candlestick price chart of Reliance Industries Limited for a period of 3 months (April- June 2010) and also the patterns of candle sticks.

1.2.

Volume:

Volume refers to the number of shares or contracts that are traded over a given period of time. Usually a price chart is presented along with the volume which is represented by volume bars. The higher the volume, the more active the security is. Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively higher volume is seen as stronger and more relevant move than a similar move with weak volume.

1.3.

Trends:

Trend refers to the direction in which a security or the market is moving. In technical analysis, it is the movement of the highs and lows that constitutes a trend. Trends are generally classified into: ➢

Uptrend:

A trend is considered to be uptrend if each successive high and low is more than the high and low of the previous day. This is also called as bullish trend. In other words in an uptrend the prices makes a series of higher highs and higher lows.

➢ Downtrend:

A trend is said to be downward if each successive high and low is lesser than that of the previous day. Downward trend is also called as Bearish Trend. In other words in a downtrend prices makes a series of lower highs and lower lows. ➢

Sideways/ Horizontal Trend: A trend is considered to be sideways if there is small changes in the highs and lows

.

To clearly show a trend a line is drawn in the price chart. This line is called as a trendline. An upward trendline is drawn at the lows of an uptrend. A downward trendline is drawn at the highs of a downtrend. 1.2.

Support and Resistance Levels:

Support: Support refers to the price level beyond which the prices will not fall. It is the level at which buyers take control over the markets and prevents the price from falling further. In the above figure we can see that the support level is established at Rs.30.30 Resistance: Resistance refers to the price level beyond which the prices will not go up. It is the levels at which the sellers will take control over the market and prevents the price from rising further. In the above figure we can see that the resistance is established at Rs.31.90. Role Reversal:

Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. In the above figure we can see that the Support at Rs.51 has become the resistance level on a later stage.

1.3.

Technical indicators:

Technical indicators are mathematical formulas that, when applied to security prices, clearly flash either buy or sell signals. Price data includes any combination of the open, high, low or close over a period of time and most of the indicators use only the closing prices. For analysis purposes, technical indicators are usually shown in a graphical form above or below a security's price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison. A technical indicator offers a different perspective from which to analyze the price action. Some, such as moving averages, are derived from simple formulas and are relatively easy to understand while some such as MACD uses complex formulas and are difficult to understand. Technical indicators offer many uses such as: ➢ To confirm the trends ➢ To generate Buy/Sell Signals ➢ To predict the direction of future prices. The technical indicators can be broadly classified into leading indicators and lagging indicators. The leading indicators are those indicators which are designed to lead price movements. The most common leading indicators are RSI and ROC. Lagging indicators are those indicators which follow price action and are commonly referred to as trend following indicators. Some of the most common lagging indicators are Moving Averages and MACD. Some of the most common technical indicators that are used in this project are: 1. Moving Averages

2. Moving Average Convergence Divergence (MACD) 3. Relative Strength Index (RSI) 4. Rate of Change (ROC)

1. Moving Averages: The moving averages are the most common and widely used technical indicators because of their simplicity. Moving averages are formed by calculating the average price of a security over a period of time. Moving averages smooth the price data to form a trend following indicator. They do not predict price direction, but rather define the current direction with a lag. Moving averages form the building blocks for many other technical indicators including MACD. The most popular moving averages are: i.

Simple Moving Average (SMA)

ii.

Exponential Moving Average (EMA)

Simple Moving Average (SMA): A simple moving average is formed by computing the average price of a security over a specific number of periods. Most moving averages are based on the closing prices. A 5-day simple moving average is the five day sum of closing prices divided by five. As its name implies, a moving average is an average that moves. Old data is dropped as new data comes available. This causes the average to move along the time scale.

Exponential moving Average (EMA): Exponential Moving Average is the moving average that is formed by applying weight to the recent price changes. This reduces the time lag. This makes the EMA to respond faster to the price changes than SMA. There are three steps to calculating an exponential moving average. First, calculate the simple moving average. An EMA has to start somewhere so a simple moving average is used as the previous period's EMA in the first calculation. Second, calculate the weighting multiplier. Third, calculate the exponential moving average. The formula for calculating EMA is

In the above diagram the SMA (15) and EMA (15) are plotted where we can see that the EMA responds faster to recent price changes than SMA. The length of the moving average depends on the analytical objectives. Short moving averages (5-20 periods) are best suited for short-term trends and trading. Chartists interested in medium-term trends would opt for 20-60 period moving averages. Long-term investors will prefer moving averages with 100 or more periods. Uses of Moving Averages: The direction of the moving average conveys important information about prices. A rising moving average shows that prices are generally increasing. A falling moving average indicates that prices, on average, are falling. A rising long-term moving average reflects a long-term uptrend. A falling long-term moving average reflects a long-term downtrend. Two moving averages can be used together to generate crossover signals. A bullish crossover occurs when the shorter moving average crosses above the longer moving average. This is also known as a golden cross. A bearish crossover occurs when the shorter moving average crosses below the longer moving average. This is known as a dead cross.

Moving averages can also act as support in an uptrend and resistance in a downtrend. A short-term uptrend might find support near the 20-day simple moving average. A long-term uptrend might find support near the 200-day simple moving average.

2. Moving Average Convergence and Divergence (MACD): Developed by Gerald Appel in the late seventies, Moving Average ConvergenceDivergence (MACD) is one of the simplest and most effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. MACD fluctuates above and below the zero line (the centerline) as the moving averages converge, cross and diverge. Standard

MACD

is

the

12-day

Exponential Moving Average (EMA) less the 26-day EMA. A 9-day EMA of MACD is plotted alongside to act as a signal line to identify turns in the indicator. The MACDHistogram represents the difference between MACD and its 9-day EMA, the signal line.

Positive and Negative MACD: Positive MACD indicates that the 12-day EMA is above the 26-day EMA i.e. when the MACD Histogram is positive. This means upside momentum is increasing. On the other hand, Negative MACD indicates that the 12-day EMA is below the 26-day EMA i.e. when the MACD Histogram is negative. This means downside momentum is increasing.

MACD Signals: MACD generates two kinds of signals. They are: Signal line crossovers: A bullish crossover occurs when MACD turns up and crosses above the signal line. A bearish crossover occurs when MACD turns down and crosses below the signal line. Centerline Crossovers: A bullish centerline crossover occurs when MACD moves above the zero line to turn positive. At this time a BUY signal is generated. A bearish centerline crossover occurs when MACD moves below the zero line to turn negative. At this time a SELL signal is generated.

3. Relative Strength Index (RSI): J. Welles Wilder developed the Relative Strength Index (RSI) and introduced it in the June 1978 article for Commodities magazine. RSI is an extremely popular momentum indicator. RSI is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. The most popular is the 14 days RSI where the RSI is calculated based on 14 days values. Traditionally the stock is considered to be overbought when RSI is above 70 and oversold when RSI is below 30. Signals can also be generated by looking for divergences and centerline crossovers. Calculation: The very first calculations for average gain and average loss are simple 14 period averages. •

First Average Gain = Total of Gains during the past 14 periods / 14.

•

First Average Loss = Total of Losses during the past 14 periods / 14

The second, and subsequent, calculations are based on the prior averages and the current gain loss: •

Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.

•

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

RSI Signals: ➢ The stock is considered to be overbought if RSI goes above 70. Since the stock is overvalued, it is the right time to sell the stock and make profits ➢ Conversely, a stock is considered to be oversold if RSI falls below 30. Since the stock is undervalued, it is the right time to buy the stock. ➢ A RSI reading above 50 is bullish as the average gains are more than the average losses. On the other hand a reading below 50 is considered to be bearish. ➢ A bearish divergence occurs when stock makes a higher high and the RSI makes a lower high ➢

A bullish divergence occurs when stocks makes a lower low while RSI makes a higher low.

4. Rate of Change: The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure momentum oscillator that measures the percent change in price from one period to the next. The value of ROC oscillates around a central zero-point level. To calculate ROC a set period is used to compare with today’s price. The most popular periods used are 10, 12 and 25 days.

The figure above shows the prices and Rate of Change for a period of 7 months. Calculation: ROC = [(Close - Close n periods ago) / (Close n periods ago)] * 100 Where n=10, 12 or 25 days. ROC Indicators: ➢

ROC indicator which is at a high peak and starting to move down is an indication of a sell signal, whereas an ROC at a low peak, but staring to move upward, is a buy signal.

➢

A movement toward the zero line indicates that the existing trend is losing momentum.

➢ ROC moving from above zero to below zero level is an indication of sell while ROC moving from below zero to above zero level is an indication of buy.

1.

Indian Economic Analysis

The Indian economy is one of the largest economies in the world. Presently India stands in the 13th position in the world in terms of Gross Domestic Product (GDP). According to the estimates of the World Bank the India GDP is worth 1217 billion USD or 1.96% of the world GDP. According to a report published by domestic broking major Edelweiss Captal in March 2010, India's GDP is set to quadruple over the next ten years and the country is likely to be a US$ 4 trillion economy by 2020. India will overtake China to become the world's fastest growing economy by 2018. (Figure 1)

In the Figure 1 we can see that India’s Gross Domestic Product (GDP) expanded 7.90% over the last 4 quarters. Its diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. The economy has posted an average growth rate of more than 7% in the decade since 1997. The Indian economy faced significant slowdown in growth momentum in 2008-09, driven by a severe downturn in the global economy. The key shock to India’s growth has come from external sources, largely by way of lower exports and a marked reduction in inflow of foreign capital. The industrial sector has been the largest casualty of the marked slowdown in both investment and imports, slowing from a growth rate of 8.5% in the year ended March 31, 2008 to around 6% in the year ended March 31, 2009. Even during the

economic slowdown some of the sectors including the automobile industry have recorded a positive growth while many nations had experienced a negative growth rate. For example, According to data released by Society of Indian Automobile Manufacturers, the cumulative production data for April 2009-February 2010 shows production growth of 24.34 per cent over same period last year. Passenger vehicles production crossed 2 million and two wheelers production touched almost 9.5 million. With the help of strong financial policies and balanced stimulus packages the economy could recover from the global slowdown in a faster pace when compared with many developed nations which is a sign of political stability in the country. This made India as one of the promising nations in the world for FDIs and FIIs. Foreign institutional investors (FIIs) were net investors of US$ 4.54 billion in equity and US$ 4.71 billion in debt instruments during January- March 2010, according to the data released by Securities and Exchange Board of India. India received FDI worth US$ 20.92 billion during April-December 2009, taking the cumulative amount of FDI inflows from August 1991 to December 2009 to US$ 127.46 billion. As on March 26, 2010, India's foreign exchange reserves totaled US$ 277.04 billion, an increase of US$ 24.71 billion over the same period last year according to RBI. Of the more than 200 companies from over 50 countries that form part of the World Economic Forum's Global Growth Companies (GGC) Community, India today has the second largest representation, with a total of 18 GGCs with a strong representation from almost every sector. According to data from RBI, loan disbursement by scheduled commercial banks, including regional rural banks, recorded 16.04 per cent growth at the end of March 12, 2010, on a year-on-year basis which is above RBI prediction of 16%. The recovery of the Indian economy, as was broadly expected, worked well for the advance tax figures. The all India direct tax collection between April and December 2009, which includes corporate and personal taxes, increased 8.1 per cent to US$ 48.39 billion, according to figures that are currently with the income-tax (I-T) department. Exports from India were worth US$ 16.09 billion in February 2010, 34.8 per cent higher than the level in February 2009, according to the Ministry of Commerce and Industry. India's

imports during February 2010 were valued at US$ 25.05 billion representing a growth of 66.4 per cent over February 2009. 2.

Indian Automobile Industry Analysis

The automobile industry in India is one of the fastest growing industries, growing at a rate of 18% per annum. The industry is the seventh largest in the world by producing around 2.6 million units in the year 2009. This part explains in detail about the Indian Automobile Industry and analyzes the industry. 7.1. Segmentation of the industry: The automobile industry can be broadly segmented into Two Wheelers, Three Wheelers, Passenger Vehicles and Commercial Vehicles. The Commercial Vehicles can be further divided into Heavy Commercial Vehicles (HCVs) and Light Commercial Vehicles (LCVs). The following diagram shows the composition of the major segments of the industry.

The Figure 2 shows that the two wheelers enjoy a major share in the Indian Automobile Industry constituting 76% of the industry. While the passenger vehicles constituting for 16% and Commercial Vehicles and Three wheelers constituting 4% each. This shows that India has a great potential in the passenger vehicles segment which includes cars and vans because increasing standard of living makes people to switch from two wheelers to cars.

2.2.

Key Players in the industry:

The Indian automobile industry is floated with both domestic and international players making it highly competitive. The fact is that almost 8 out of 10 global companies including General Motors, BMW, etc. have their presence in India contributing 25% of the Country’s production. The top 10 companies in the Indian Automobile Industry are: Maruti Suzuki India Ltd., Hyundai Motor India Ltd., Tata Motors, Mahindra & Mahindra Ltd., Hero Honda Motors

Ltd., Bajaj Auto, General Motors Pvt. Ltd., Honda Siel Cars India Ltd., Toyota Kriloskar Motor Pvt. Ltd., and Ashok Leyland respectively. Many companies are present in more than one segment of the industry. For example Tata Motors is present in HCVs, LCVs, MUVs and Passenger Cars.

2.3.

Contribution to the GDP:

The automobile industry has emerged as the key contributor to the growth of the economy. In the last decade their share in the Indian economy is around 5% of GDP. Economic progress is indicated by the amount of goods and services produced which give the impetus for transportation and boost the sale of vehicles. Increase in automobile production has a catalyst effect by indirectly increasing the demand for a number of raw materials like steel, rubber, plastics, glass, paint, electronics and services. An interesting fact is that the industry accounts for 7% of the total steel consumption. Since transportation is the nerve center of every other industry, the well being of the automobile industry is a good indicator of the health of the economy and every piece of infrastructure development in the country stimulates the demand for automobiles. Economic studies have shown that every truck manufactured creates anywhere between eight to twelve jobs and a bus would create around seven, which would include salespeople, drivers, mechanics, cleaners and servicing staff.

2.4.

Automobile Exports:

According to Society of Indian Automobile Manufacturers (SIAM), automobile exports increased by 17.90% from 1.53 million units in 2008-09 to 1.80 million units in 2009-10. At a time when many major global auto markets witnessed declines, the automobile exports from the country registering a robust 33.23 per cent growth in the last fiscal. The exports from various segments of the industry are shown in the Figure 3.

2.5. ➢

The future of the industry:

The Indian economy is on a high growth path on a secured long-term basis and with the consequent increase in disposable incomes of the population at large, the Indian automotive industry is expected to provide significant growth opportunities.

➢

The industry is expected to grow to US$ 40 billion by 2015 from the current level of US$ 7 billion and to contribute 10% of the nation’s GDP.

➢ By 2016 the automobile industry is expected to contribute 35% of the Industry GDP. ➢

The greatest challenge and competition would be from the Chinese automobile industry. The Chinese automobile industry has been able to give stiff competition to India in terms of productivity, cost of manufacturing and technology.

➢

Again the present trend of excess manufacturing capability, reduced margins put additional pressure on the industry.

1.2.

Industrial Life Cycle:

The automobile industry in India is in its growth stage at an accelerating rate of sales and earnings growth. The industry is booming at a growth rate of around 18%. The demand for automobiles in the country is rising continuously. Only one car is available per thousand people in India which shows that the passenger vehicles segment has good prospects of growth.

1.3.

Porter’s Five Forces Analysis:

1. Barrier to Entry: The barriers to enter automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. Although the barriers to new companies are substantial, establishing companies are entering the new markets through strategic partnerships or through buying out or merging with other companies. However, a domestic company, with local knowledge and expertise, has the potential to compete its home market against the global firms who are not well established there. 2. Threat of Substitutes: The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence and value offered by automobiles. The switching cost associated with using a different mode of transportation, may be high in terms of personal time, convenience and utility.

3. Bargaining Power of Suppliers: In the relationship between the industry and its suppliers, the power axis is tipped in industry’s favor. The industry is comprised of powerful buyers who are generally able to dictate their terms to the suppliers. 4. Bargaining Power of Customers: In the relationship between the automotive industry and its ultimate consumers, the power axis is tipped in the consumers’ favor. This is due to the fairly standardized nature and the low switching costs associated with selecting from among competing brands. 5. Rivalry among Competitors: Despite the high concentration ratio seen in the automotive sector, rivalry in the Indian auto sector is intense due to the entry of foreign companies in the market. The industry rivalry is extremely high with any being product being matched in a few months by the competitors. This instinct of the industry is primarily driven by technical capabilities acquired over years of gestation under the technical collaboration with international players.

1.2.

SWOT Analysis:

Strengths: ➢

Large Domestic Market: India has the largest domestic market which is not fully exploited. In specific, the passenger vehicles segment has a bright scope in the coming years.

➢

Cost Advantage: India enjoys lower labor cost of $ 8 per hour of skilled labor while the labor cost of other developed countries is around $ 20 per hour. The cost of creating an automotive design is very economical in India ($60 per hour) when compared to Europe and US (around $800 per hour)

➢

Engineering Skills: India has a strong competitive advantage in design and engineering skills when compared to other low cost economies. India is the ninth country in the world to design a vehicle on its own

➢

Competitive Auto Component Vendor Base: Competitive auto component vendor base which helps to get the required auto components at competitive rates leading to lower manufacturing costs.

Weaknesses:

➢

Research & Development: Even though there is a development in R&D, Indian R&D is not competitive with the other countries. The industry should improve its R&D.

➢

Infrastructure Facilities: India is lacking proper infrastructure facilities. Many companies view that the cost advantages in India is being eroded because of its bad infrastructure facilities.

➢

Low Labor Productivity: The labor productivity in the country is low when compared to the developed countries. This is mainly because of huge unskilled labor force.

➢

High Interest Costs: High interest costs and other overheads make the competition unproductive.

➢

Taxes: Various kinds of taxes push up the costs and hence companies are forced to operate under low profit margins.

Opportunities: ➢

Increasing Disposable Income: With the economy on a high growth path on a secured long-term basis and with the consequent increase in disposable incomes of the population at large, the Indian automotive industry is expected to provide significant growth opportunities.

➢

Vehicle Switchovers: Passenger Cars segment have a bright scope because people are switching from two wheelers to Cars as a result of increased personal disposable income and rising standards of living.

➢

Infrastructure Development Stirs Demand: The increased investments in infrastructure required to maintain the high growth of the Indian economy – such as the National Highway Development Programme with a huge budget - and the increased goods movement in a fast growing economy would result in a high demand for commercial vehicles.

➢

Rising Rural Demand: There is a greater change in the rural consumer’s spending pattern and demand levels because of increasing levels of disposable income.

Threats:

➢

Integration of Indian Economy with Global Economy: With the growing integration of the Indian economy with the Global economy, events around the world have a direct or indirect impact on the Indian automobile industry. In particular, Indian financial markets are highly integrated to global financial markets. As a result, liquidity and availability of credit, an important facilitator for automobile and tractor sales in the Indian market, will be impacted by conditions in the Global markets.

➢

Pollution and Emission Controls: Stringent legislation on pollution and emission requirements will increase the cost of the Company’s products for the Automotive Sector. Holding the price line could have an impact on profitability. Price increases on the other hand could impact volumes.

➢

Increased Competition: The entry of new players will result in ever increasing levels of competition in all the segments of the automobile industry, resulting in intense pressure on the profit margins of all participants

1.

Analysis of Mahindra & Mahindra Limited

8.1. Analysis of Non Financial Information: BASIC DETAILS

Sector

Automobile

CMP

Rs 627.35 (2.19%)

NIFTY

5312.5 (1.07%)

Mkt. Capn.

Rs. 35464.74 Cr

Face Value

Rs.5.00

BSE Code

500520

NSE Code

M&M

52 week High/Low

Rs.645.00/Rs.322.05

M&M SHAREHOLDING PATTERN (Figure 4)

Key Points: ➢ The company is one of the top Tractor selling brands in the world. ➢ The company has a huge market share for its tractors and passenger cars. ➢ The company is planning to invest Rs.250Cr. in Aerospace ➢ The group is going to decide on bidding to acquire Korean SUV Maker Ssangyong Motor by July. ➢ The company is going to market many new variants in its motorcycle segment by the end of the year. ➢ The company’s foray into the electronic vehicles segment is having a greater future growth prospects. ➢ The company plans to open 300 outlets in various parts of the country in the next 3 years. The Mahindra Group: The Mahindra & Mahindra, a company established in the year 1945 as a franchise for assembling Jeeps now a US $7.1 billion Indian multinational employing over 1 lakh people across the globe. The Mahindra Group today is an embodiment of global excellence and enjoys a strong corporate brand image. The company enjoys a leadership position in utility vehicles, tractors and information technology, with a significant and growing presence in financial services, tourism, infrastructure development, trade and logistics. The Management: The Mahindra Group is being managed by eminent persons from various industries who bring diverse experience and expertise to the Board. The present group is headed by Mr. Keshub Mahindra as the Chairman and Mr. Anand G. Mahindra as the Vice Chairman Managing Director. Mahindra & Mahindra Limited: The Mahindra & Mahindra Ltd., is in the automobile business which includes: 1.

Automotive Sector: The Mahindra Group’s Automotive Sector is in the business of

manufacturing and marketing utility vehicles and light commercial vehicles, including threewheelers. It is the market leader in utility vehicles in India since its inception, and currently accounts for about a half of India’s market for utility vehicles. Over the years, the Group has

developed a large product portfolio catering to a diverse customer base spanning rural and semi-urban customers, defense requirements and luxurious urban utility vehicles. The Group exports its products to several countries in Europe, Africa, South America, South Asia and the Middle East. The Automotive Sector continues to be a leader in the utility vehicle segment with a diverse portfolio that includes mass transport as well as new generation vehicles. Mahindra & Mahindra’s foray into the three wheeler segment with Alpha and Champion has also made it a leader in its category. The International Operations of the Automotive Sector focuses on the international business. Mahindra Renault (MRPL) announced the launch of Logan, India’s first wide body car, sporting a host of class-defying features at an aggressive price. Mahindra Navistar Automotives Ltd. (MNAL), a joint venture between Mahindra & Mahindra Limited and International Truck and Engine Corporation, will manufacture trucks and buses for India and export markets. It will also provide component sourcing and engineering services to International Truck and Engine Corporation. M&M has a growing global footprint and has established itself in markets across the world as one of the world’s most prestigious auto brands. The emphasis is now on establishing a solid local presence in these countries as this was the key to long-term success and building trust with the customer. With subsidiaries in South Africa, Europe and Australia and a strong presence in over 15 countries, it aspires to be globally renowned in Utility vehicles. The Mahindra Group entered into the two wheeler market by acquiring the assets of Kinetic Motor Company Limited. The company has a partnership with Taiwan’s Sanyang industry Company Limited which is a leading manufacturer of two wheelers. The company has recently made an entry into the electric vehicles segment by acquiring a major stake in Reva. 2.

Farm Equipments Sector: The Mahindra group's Farm Equipment Sector (FES) is

amongst the top three tractor brands in the world. It has won the Japan Quality Medal in 2007. It also holds the distinction of being the first tractor company globally to win the Deming Application Prize in 2003. FES is the first tractor company worldwide to win these honors. This shows the strong focus of FES on Quality and Customer Satisfaction. Today, the domestic market share of FES is around 42%. (Mahindra brand: 30% and Swaraj brand: 12%).

FES has a subsidiary agricultural tractor manufacturing company in India known as Mahindra Gujarat Tractor Limited (MGTL). The international operations of the Farm Equipment Sector are spread across six continents and in around 25 countries. FES has state-of-the-art manufacturing plants in India and China with a combined capacity to produce more than 1,70,000 tractors a year. Besides, these plants there are assembly plants in USA and Australia. FES has more than 1000 dealers world-wide. In 2008, Mahindra acquired the majority stake in 3rd largest tractor company in China, with forming a Joint Venture (JV) with Jiangsu Yueda Yancheng Tractor Manufacturing Co. Ltd. (Yancheng Tractor), a leading Chinese tractor manufacturer. 1.2.

Analysis of Financial Information:

Balance Sheet:

(Table 1) Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

272.62

239.07

238.03

233.40

116.01

Share application money

-

-

-

-

-

Preference share capital

-

-

-

-

-

4,959.26

4,098.53

3,302.01

2,662.14

1,881.93

981.00

617.26

106.65

216.68

336.82

Unsecured loans

3,071.76

1,969.80

1,529.35

666.71

715.80

Total

9,284.64

6,924.66

5,176.05

3,778.92

3,050.56

4,893.89

3,552.64

3,180.57

2,859.25

2,676.51

12.09

12.47

12.86

13.33

14.32

Less : accumulated depreciation

2,326.29

1,841.68

1,639.12

1,510.27

1,335.56

Net block

2,555.51

1,698.49

1,528.59

1,335.65

1,326.63

646.73

649.94

329.72

205.46

133.93

Sources of funds Owner's fund Equity share capital

Reserves & surplus Loan funds Secured loans

Uses of funds Fixed assets Gross block Less : revaluation reserve

Capital work-in-progress

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

5,786.41

4,215.06

2,237.46

1,669.09

1,189.79

Current assets, loans & advances

5,081.20

3,816.41

3,916.94

2,805.04

2,356.41

Less : current liabilities & provisions

4,797.76

3,468.77

2,854.20

2,254.37

1,980.58

283.44

347.64

1,062.74

550.66

375.83

12.55

13.53

17.55

18.05

24.38

9,284.64

6,924.66

5,176.05

3,778.92

3,050.56

Book value of unquoted investments

4,305.50

1,429.16

1,515.23

1,419.01

1,047.67

Market value of quoted investments

3,218.81

7,669.90

10,285.25

2,030.85

240.83

Contingent liabilities

1,220.39

985.35

1,008.27

946.36

758.14

Number of equity shares outstanding (Lacs)

2726.16

2390.73

2380.33

2334.00

1116.48

Investments Net current assets

Total net current assets Miscellaneous expenses not written Total Notes:

Profit & Loss Account:

(Table 2) Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

13,125.98

11,310.37

9,921.34

8,136.59

6,594.69

9,365.00

7,814.71

6,930.76

5,782.01

4,655.24

174.05

164.68

134.00

111.90

100.65

1,024.61

853.65

666.15

551.78

464.25

Selling expenses

575.34

804.51

635.10

458.32

369.72

Administrative expenses

937.56

561.66

466.22

387.57

317.79

Expenses capitalized

-42.83

-46.49

-47.10

-26.53

-31.84

12,033.73

10,152.72

8,785.12

7,265.04

5,875.81

1,092.25

1,157.65

1,136.22

871.54

718.88

305.98

364.05

404.87

195.82

186.46

1,398.23

1,521.70

1,541.09

1,067.36

905.34

Financial expenses

134.12

87.59

19.80

26.96

30.24

Depreciation

291.51

238.66

209.59

200.01

184.05

Other write offs

-

0.59

0.33

0.28

0.15

Adjusted PBT

972.60

1,194.86

1,311.37

840.12

690.89

Tax charges

199.69

303.40

350.10

242.40

201.50

Income Operating income Expenses Material consumed Manufacturing expenses Personnel expenses

Cost of sales Operating profit Other recurring income Adjusted PBDIT

Adjusted PAT

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

772.91

891.46

961.28

597.72

489.39

63.87

211.91

126.30

259.38

23.28

4.07

-

-19.19

-

-

840.85

1,103.37

1,068.39

857.10

512.67

3,807.00

3,228.45

2,544.13

1,853.50

1,255.52

278.83

282.61

282.23

243.97

150.81

-

-

-

-

-

33.23

38.48

42.50

34.22

21.15

3,494.94

2,907.36

2,219.40

1,575.31

1,083.55

Non Recurring items Other non cash adjustments Reported net profit Earnings before appropriation Equity dividend Preference dividend Dividend tax Retained earnings

Cash Flow Statements:

(Table 3)

Particulars

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

Profit before tax

1,026.20

1,241.57

1,315.69

889.49

700.62

Net cash from operating activities

1,631.30

825.83

1,168.95

686.90

379.21

Net cash (used in)/from investing activities

-1,941.00

-2,075.08

-950.39

-502.66

-174.30

Net cash (used in)/from financing activities

696.91

811.34

418.08

-89.78

192.45

Net inc/dec in cash and equivalents

387.21

-437.91

636.64

94.47

397.36

Cash and equivalents begin of year

1,174.62

1,361.79

725.15

630.69

233.33

Cash and equivalents end of year

1,561.83

923.88

1,361.79

725.15

630.69

Financial Highlights:

➢

On looking at the balance sheet (table 1) we can see that in 2009 the debts (both secured and unsecured) have increased by more than 50 % when compared with the previous year. There is also a huge increase in Fixed Assets and Investments when compared with the figures of 2008.

➢

On looking at the income statement (table 2) we can see that the sales revenue has increased when compared with the previous year but there is a fall in the operating profits which is mainly because of increase in the cost of materials. As a result there is a decrease in the Net Profits also.

➢

On looking at the cash flow statements (table 3) we can say that the company has got better cash flows when compared to the previous year (2008) which is mainly because of increase in the income from operating activities.

1.2.

Analysis of Key Ratios:

To better understand the financial position of the firm the following ratios are considered: (Table 4) Ratios

2008-09

2007-08

2006-07

2005-06

2004-05

Net profit Margin (%)

6.22

9.45

10.34

10.28

7.56

Debt Equity Ratio

0.83

0.62

0.53

0.40

0.60

Return on Equity (%)

16.03

25.51

30.33

29.78

25.97

Earnings Per Share (EPS) (Rs.)

30.69

46.15

44.88

36.72

45.92

Price Earnings Ratio (P/E)

22.52

10.58

16.11

16.93

12.14

Dividend Per Share (DPS) (Rs.)

10.00

11.50

11.50

10.00

13.00

Dividend Payout Ratio (%)

32.58

24.92

25.62

27.23

28.31

1.45

2.35

1.59

1.61

2.33

191.45

180.87

147.98

123.29

176.77

Dividend Yield Ratio (%) Book Value Per Share (Rs.)

Graphs of Key Ratios: 1.

Debt-Equity Ratio:

(figure 5)

Inference: The Debt-Equity Ratio is the ratio between outsider funds and owner’s funds. A Debt-Equity ratio of 1:2 represents high safety margin to the creditors. In the figure 5 we can see that the Debt-Equity Ratio is increasing since 2005-06 which means that the debt is increasingly used for every rupee of own funds. 2.

Return on Equity:

(figure 6)

Inference: The Return on Equity Ratio measures the returns on the equity funds employed by the business. The figure 6 shows that the company made lesser and lesser returns on the equity funds employed in the business since 2006-07.

3.

Price Earnings Ratio:

(figure 7)

Inference: This ratio brings out the relationship between the current prices and the EPS. It shows the amount an investor is willing to pay per rupee of the earnings of the company. In the figure 7 we can see that in the year 2009 the investor is ready to pay Rs.22.52 per rupee of earnings. There is a rise in P/E ratio in spite of a fall in the EPS.

4.

Dividend Per Share (DPS):

(figure 8)

Inference: This ratio shows the earnings that are distributed to the equity shareholders on a per share basis. The figure 8 above shows that the company has declared less dividends in 2009 when compared with the previous years of 2007-08 and 2006-07. 5.

Dividend Payout Ratio:

(figure 9)

Inference: This ratio shows the percentage of profits earned that are distributed as dividends to equity shareholders. In the figure 9 we can see that the company has been declaring lesser and lesser percentage of earnings as dividends till 2007-08. In the year 2008-09 the company declared the highest percentage of the earnings as dividends. 6.

Dividend Yield Ratio:

(figure 10)

Inference: This ratio compares the dividends and the Market Prices of the shares. This ratio shows what the investor gains if he buys the shares for the Market Price. In the figure 10 can see that the Dividend Yield Ratio is not moving with the DPS ratio because the dividend yield ratio also compares the Market Price. The Dividend Yield Ratio will be very low in spite of high DPS if the Market Prices of the shares are very high. 7.

Book Value Per Share:

(figure 11)

Inference: This ratio shows the claim of the shareholders on a per share basis. This ratio shows the worth of a share according to the books. From the figure 11 we can see that the Book value per share is increasing since 2005-06.

1.2.

Analysis of Technical Indicators

1. Moving Averages: Exponential Moving Average (EMA)

(figure 12)

In the above chart two smoothing curves are drawn along with the price curve. EMA 20 represents the 20 day exponential moving average (fast moving average) while EMA 100 represents the 50 day exponential moving average (slow moving average). The purpose of this chart is to identify the price trend and to identify trading signals. Trend Identification: The moving averages are used to find the trend of the stock. ➢

The direction of moving average is used to find the trend. If the moving average is rising, the trend is considered Up. If the moving averages are falling the trend is considered to be Down.

➢

Price location. The location of the price relative to the moving average can be used to determine the basic trend. If the price is

above the moving average, the trend is considered up. If the price is below the moving average, the trend is considered down. ➢

The third technique for trend identification is based on the location of the slow moving average relative to the fast moving average. If the fast moving average is above the slow moving average, the trend is considered up. If the fast moving average is below the slow moving average, the trend is considered down.

Trading Signals: Two moving averages are used to find the trading signals. ➢ A BUY signal is generated if the faster moving average crosses above the slower moving averages. ➢ A SELL signal is generated if the faster moving average crosses below the slower moving average.

Inference: From the figure 12 we can see that: ➢ Both the EMA 20 and EMA 50 are rising ➢ The price is located above both the moving averages ➢ The EMA 20 (fast moving average) is above the EMA 50 (slow moving average) Hence the trend of Mahindra & Mahindra is considered Upward or Bullish. The following trading signals were identified in the chart: ➢

SELL signals were identified during the Mid February and Mid April periods when the EMA 20 crossed below the EMA 50. We can also notice that the prices fell during these signals were generated

➢ BUY signals were identified during the beginning of March, beginning of May and end of May when EMA 20 crossed above EMA 50. We can also find that the prices rose during the period when the signals were identified. ➢ As these signals identified late these signals can be used in the future period if the trend repeats.

1.

Relative Strength Index (RSI):

(figure 13)

In the above chart the price line and the 14 day RSI line are plotted. The RSI line shown at the bottom of the chart is used to identify the overbought and over sold situations. If RSI crosses above 70 level the stock is considered to be oversold and so there are chances for trend reversal. If the RSI falls below 30 level the stock is considered to be oversold and hence undervalued. So there are chances for a trend reversal. An RSI between 50 and 70 is considered bullish while below 50 is considered to be bearish. Inference: The various overbought and oversold conditions in the figure 13 are identified using and marks respectively. In the figure we can also see that the RSI level is above 50 and is also rising. This shows that there is a bullish momentum.

2.

Rate of Change (ROC):

(figure 14)

The rate of change is a pure momentum oscillator which shows the rate of change in prices of the stock over a fixed period of time. In the above chart the price line is shown at the top and 10 days Rate of Change is shown at the bottom. The ROC value oscillates above and below zero levels which shows the percentage change in the price. These values are also used to find the overbought and oversold conditions. Generally the ROC value above 10 is considered to be overbought and below 10 is considered to be oversold. An ROC value above zero or moving from below to above zero level is considered to be bullish. It is considered bearish when the ROC value goes below zero or when it moves from above zero to below zero level. Inference: From the figure 14 we can see that the ROC value is increasing after touching the zero value. Hence the momentum is considered bullish.

3.

Moving Average Convergence and Divergence (MACD):

(figure 15)

The price curve and the MACD curve (red line) are plotted on the figure 15. The MACD chart is plotted along with the MACD signal line (blue line) and MACD histogram (black shaded region). The chart is plotted to identify the strongest momentum i.e. bullish or bearish. This can be identified using signal line crossovers and centerline crossovers. ➢

Signal line crossovers: It is considered bullish if the MACD line crosses above the signal line (its nine day EMA). If the converse happens it is considered bearish

➢

Centerline Crossovers: It is considered bullish if MACD crosses above the centerline. If the converse happens the momentum is considered bearish.

➢ MACD indicator is highly volatile and hence it is always considered along with other indicators. Inference: ➢

The various Bullish and bearish signals are identified in the figure 15 using

and

marks respectively. ➢

In the above chart we can see that at the end of June the MACD curve is below its signal line. Even though the MACD shows a bearish crossover we can see that the

MACD is above zero line and the price is in increasing since many days and has established a support.

1.

Analysis of Tata Motors Limited

9.1. Analysis of Non-Financial Information: BASIC DETAILS

Sector

Automobile

CMP

Rs. 778.50 (0.98%)

NIFTY

5312.50(+1.07%)

Mkt. Capn.

Rs. 44332.71 Cr

Face Value

Rs.1.00

BSE Code

500570

NSE Code

TATAMOTORS

52 week High/Low

Rs.882.70/Rs.254.10

TATA MOTORS SHAREHOLDING PATTERN (figure 16)

Key Points: ➢

The company is considering raising Rs25bn via equity or FCCB to trim debt pile.

➢ The Company is planning to launch Nano in Thailand. ➢ The company is about launch four new variants of its LCVs. ➢ The company is going to increase the production of Nano Cars by this year. ➢ Jaguar Land Rover (JLR), a Tata Motors company, is planning to set up a national sales company in China this year. ➢

The company has reported a whopping 50% jump in its consolidated global sales for the month of May 2010 compared to the year ago period.

➢

The company signs MoU with IOB for vehicle financing.

➢ The company is planning to setup Heavy Truck plant in Myanmar.

The Tata Group: Started in the year 1868 as a private trading firm, today the Tata Group is the India’s largest conglomerate with revenues of $70.8 bn in the financial year ending March 31, 2009. Its 28 publicly listed companies have a combined market capitalization which is one of the highest among all business houses in India and a shareholder base of over 3.5 million. Group companies export products and services to over 85 countries and have operations in over 80 countries. The Tata Group includes 88 companies ranging from consumer products, hotels to steel, energy, IT sector, Telecom, finance, automobiles, chemicals, retail, etc.

The Company: Tata Motors Limited is India's largest automobile company, with consolidated revenues of Rs. 92,519 crores (USD 20 billion) in 2009-10. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer.

Tata Motors, the first company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South Korea's second largest truck maker. The company's commercial and passenger vehicles are already being marketed in several countries in Europe, Africa, the Middle East, South East Asia, South Asia and South America. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine, Russia, Senegal and South Africa.

In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, which India and the world have been looking forward to. The Tata Nano has been subsequently launched, as

planned, in India in March 2009. A development, which signifies a first for the global automobile industry, the Nano brings the comfort and safety of a car within the reach of thousands of families. The standard version has been priced at Rs.100,000 (excluding VAT and transportation cost).

Products: The company produces passenger vehicles, utility vehicles, trucks, commercial passenger vehicles, defence vehicles.

The Management: Mr. Ratan N Tata, Chairman Mr. PM Telang, Managing Director-India Operations

Joint Ventures, Subsidiaries, etc: The Tata Motors is expanding its business through subsidiaries, acquisitions and joint ventures. They include Jaguar Land Rover, Tata Technologies Ltd. (TTL) and its subsidiaries, Telco Construction Equipment Co. Ltd. (Telcon), HV Axles Ltd. (HVAL), HV Transmissions Ltd. (HVTL), TAL Manufacturing Solutions Ltd. (TAL), Sheba Properties Ltd. (Sheba), Concorde Motors (India) Ltd. (Concorde), Tata Daewoo Commercial Vehicle Company Ltd (TDWCV), Hispano Carrocera S. A. (HC), Tata Motors Insurance Broking & Advisory Services Ltd (TMIBASL), Tata Motors European Technical Centre plc, Tata Motors Finance Limited, Tata Motors Thailand, Tata Marcopolo Motors Ltd (TMML), Tata Motors(SA) Proprietary Ltd (TMSA), TML Distribution Company Ltd (TDCL)

1.2.

Analysis of Financial Results

1.

Balance Sheet:

(table 5) Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

514.05

385.54

385.41

382.87

361.79

Share application money

-

-

-

-

-

Preference share capital

-

-

-

-

-

11,855.15

7,428.45

6,458.39

5,127.81

3,749.60

Secured loans

5,251.65

2,461.99

2,022.04

822.76

489.81

Unsecured loans

7,913.91

3,818.53

1,987.10

2,114.08

2,005.61

25,534.76

14,094.51

10,852.94

8,447.52

6,606.81

13,905.17

10,830.83

8,775.80

7,971.55

6,611.95

25.07

25.51

25.95

26.39

-

Less : accumulated depreciation

6,259.90

5,443.52

4,894.54

4,401.51

3,454.28

Net block

7,620.20

5,361.80

3,855.31

3,543.65

3,157.67

Capital work-in-progress

6,954.04

5,064.96

2,513.32

951.19

538.84

12,968.13

4,910.27

2,477.00

2,015.15

2,912.06

Current assets, loans & advances

10,836.58

10,781.23

10,318.42

9,812.06

7,248.88

Less : current liabilities & provisions

12,846.21

12,029.80

8,321.20

7,888.65

7,268.80

Total net current assets

-2,009.63

-1,248.57

1,997.22

1,923.41

-19.92

2.02

6.05

10.09

14.12

18.16

25,534.76

14,094.51

10,852.94

8,447.52

6,606.81

12,358.84

4,145.82

2,117.86

1,648.57

2,480.15

558.32

2,530.55

1,323.08

1,550.00

1,260.05

Contingent liabilities

5,433.07

5,590.83

5,196.07

2,185.63

1,450.32

Number of equity shares outstanding (Lacs)

5140.08

3855.04

3853.74

3828.34

3617.52

Sources of funds Owner's fund Equity share capital

Reserves & surplus Loan funds

Total Uses of funds Fixed assets Gross block Less : revaluation reserve

Investments Net current assets

Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments

2.

Profit & Loss Account:

(table 6)

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

25,660.67

28,767.91

26,664.25

20,088.63

17,199.17

19,039.41

20,931.81

19,529.88

14,376.11

12,101.28

Manufacturing expenses

1,171.59

1,230.14

1,200.36

929.82

830.45

Personnel expenses

1,551.39

1,544.57

1,367.83

1,143.13

1,039.34

Selling expenses

1,224.15

1,179.48

1,068.56

759.54

598.75

Administrative expenses

1,867.05

1,982.79

1,488.16

1,042.52

911.73

-916.02

-1,131.40

-577.05

-308.85

-282.43

23,937.57

25,737.39

24,077.74

17,942.27

15,199.12

1,723.10

3,030.52

2,586.51

2,146.36

2,000.05

841.54

359.42

887.23

685.18

399.94

2,564.64

3,389.94

3,473.74

2,831.54

2,399.99

Financial expenses

704.92

471.56

455.75

350.24

234.30

Depreciation

874.54

652.31

586.29

520.94

450.16

Other write offs

51.17

64.35

85.02

73.78

67.12

Adjusted PBT

934.01

2,201.72

2,346.68

1,886.58

1,648.41

12.50

547.55

660.37

524.93

415.50

921.51

1,654.17

1,686.31

1,361.65

1,232.91

Nonrecurring items

79.75

374.75

227.15

167.23

4.04

Other non cash adjustments

15.29

-

-0.07

-

-1.54

Reported net profit

1,016.55

2,028.92

1,913.39

1,528.88

1,235.41

Earnings before appropriation

2,399.62

3,042.75

2,690.15

2,094.54

1,601.21

311.61

578.43

578.07

497.94

452.19

-

-

-

-

-

34.09

81.25

98.25

69.84

63.42

2,053.92

2,383.07

2,013.83

1,526.76

1,085.60

Income Operating income Expenses Material consumed

Expenses capitalized Cost of sales Operating profit Other recurring income Adjusted PBDIT

Tax charges Adjusted PAT

Equity dividend Preference dividend Dividend tax Retained earnings

3.

Cash Flow Statement:

(table 7) Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

Profit before tax

1,001.26

2,028.92

1,913.46

1,528.88

1,236.95

Net cash flow from operating activities

1,295.02

6,174.50

2,210.13

-221.03

1,249.82

-10,644.67

-5,721.86

-2,805.10

-1.06

-956.57

8,104.70

1,132.46

303.58

-855.27

940.67

-1,244.95

1,585.10

-291.39

-1,077.36

1,233.92

Cash and equivalents- begin of year

2,386.77

806.21

1,118.15

2,196.79

771.12

Cash and equivalents- end of year

1,141.82

2,391.31

826.76

1,119.43

2,005.04

Net cash used in investing activities Net cash used in fin. Activities Net inc/dec in cash and cash equivalents

Financial Highlights: ➢

On looking at the balance sheet (table 5) we can see that in the year 2008-09 there is a huge increase of above 100% in loan funds when compared to the year 2007-08.

➢ At the same time there is also a huge increase in the investments and a marginal increase in the fixed assets when compared with the year 2007-08. ➢

On looking at the Profit & Loss Account (table 6) we can see that there is a decrease in the sales revenue and increase in the cost of goods sold. This has mainly lead to the lower profits for the year 2008-09.

➢

We can also find some increase in the financial expenses due to huge borrowings.

➢

On looking at the Cash Flow Statements (table 7) we can see that the company has got a better cash flows when compared to the previous year in spite of very less generated from operating activities and a heavy outflow on investment activities. This is because of high amounts of cash is generated from financing activities.

1.2.

Key Ratio Analysis:

To better understand the financial position of the firm the following ratios are considered: (table 8) Ratios

2008-09

2007-08

2006-07

2005-06

2004-05

Net profit Margin (%)

3.77

6.96

6.94

7.35

7.02

Debt Equity Ratio

0.49

0.49

0.31

0.41

0.59

Return on Equity (%)

8.09

25.98

28.00

27.81

30.21

Earnings Per Share (EPS) (Rs.)

19.48

52.63

49.65

39.94

34.19

Price Earnings Ratio (P/E)

14.93

8.09

13.50

19.90

12.44

6.00

15.00

15.00

13.00

12.50

30.80

28.50

30.21

32.55

36.56

2.06

3.52

2.24

1.63

2.94

240.60

202.70

177.33

143.58

113.15

Dividend Per Share (DPS) (Rs.) Dividend Payout Ratio (%) Dividend Yield Ratio (%) Book Value Per Share (Rs.)

Graphs of Key Ratios: 1.

Debt Equity Ratio:

(figure 17)

Inference: The Debt-Equity Ratio is the ratio between outsider funds and owner’s funds. A Debt-Equity ratio of 1:2 represents high safety margin to the creditors. In the figure 17 we can see that the Debt-Equity Ratio for the years 2007-08 and 2008-09 is 0.49 which means Rs.0.49 of debt is used with every rupee of own funds. The ratio of 1:2 for the last two years shows high safety margin and low claim for the creditors. 2.

Return on Equity:

(figure 18)

Inference: The Return on Equity Ratio measures the returns on the equity funds employed by the business. The figure 18 shows that the returns for the equity funds are very low in 2008-09 when compared to all the other years. 3.

Price Earnings Ratio:

(figure 19)

Inference: This ratio brings out the relationship between the current prices and the EPS. It shows the amount an investor is willing to pay per rupee of the earnings of the company, from the figure 19 we can see that in the year 2009 the investor is ready to pay Rs.14.93 per rupee of earnings.

4.

Dividend Per Share (DPS):

(figure 20)

Inference: This ratio shows the earnings that are distributed to the equity shareholders on a per share basis. The figure 20 shows that the company has declared lower dividends in 2009 when compared with all other years. 5.

Dividend Payout Ratio:

(figure 21)

Inference: This ratio shows the percentage of profits earned that are distributed as dividends to equity shareholders. In the figure 21 we can see that the company has been declaring lesser and lesser percentage of earnings as dividends till 2007-08. Again in the year 2008-09 the company declared the high percentage of earnings as dividends. This means that the company has retained lesser profits in 2008-09. 6.

Dividend Yield Ratio:

(figure 22)

Inference: This ratio compares the dividends and the Market Prices of the shares. This ratio shows what the investor gains if he buys the shares for the Market Price. In the figure 22 we can see that the Dividend Yield Ratio is not moving with the DPS ratio because the dividend yield ratio also compares the Market Price. In 2009 the dividend yield ratio is very low only because of very low DPS. 7.

Book Value Per Share:

(figure 23)

Inference: This ratio shows the claim of the shareholders on a per share basis. This ratio shows the worth of a share according to the books. From the above graph we can see that the Book value per share is continuously increasing since 2004-05.

1.2.

Analysis of Technical Indicators:

1. Moving Averages: Exponential Moving Average (EMA):

(figure 24)

In the above chart two smoothing curves are drawn along with the price curve. EMA 20 represents the 20 day exponential moving average (fast moving average) while EMA 100 represents the 50 day exponential moving average (slow moving average). The purpose of this chart is to identify the price trend and to identify trading signals. Trend Identification: The moving averages are used to find the trend of the stock.

➢

The direction of moving average is used to find the trend. If the moving average is rising, the trend is considered Up. If the moving averages are falling the trend is considered to be Down.

➢

Price location. The location of the price relative to the moving average can be used to determine the basic trend. If the price is above the moving average, the trend is considered up. If the price is below the moving average, the trend is considered down.

➢

The third technique for trend identification is based on the location of the slow moving average relative to the fast moving average. If the fast moving average is above the slow moving average, the trend is considered up. If the fast moving average is below the slow moving average, the trend is considered down.

Trading Signals: Two moving averages are used to find the trading signals. ➢ A BUY signal is generated if the faster moving average crosses above the slower moving averages. ➢ A SELL signal is generated if the faster moving average crosses below the slower moving average.

Inference: In the figure 24 we can find that: ➢

The prices started an uptrend at the end of the month on noticing the candlesticks of last few days.

➢ We can also see that the price is above both EMA 20 and EMA 50. ➢ Both the moving averages are rising ➢ The fast moving average (EMA20) is above the slow moving average (EMA 50)

Hence the trend of the Tata Motors stock is considered Up or Bullish The various trading signals identified using the moving averages crossovers are: ➢ SELL signals were identified during February and May where the EMA 20 crosses below the EMA 50. ➢

BUY signals were identified in the beginning of March and at the end of June.

➢ The SELL and BUY signals are shown with and respectively.

1.

Relative Strength Index (RSI):

(figure 25)

In the above chart (figure 25) the price line and the 14 day RSI line are plotted. The RSI line shown at the bottom of the chart is used to identify the overbought and over sold situations. If RSI crosses above 70 level the stock is considered to be oversold and so there are chances for trend reversal. If the RSI falls below 30 level the stock is considered to be oversold and hence undervalued. So there are chances for a trend reversal. An RSI between 50 and 70 is considered bullish while below 50 is considered to be bearish. Inference: The various overbought and oversold conditions in the above chart are identified using and marks respectively. In the figure 25 we can also see that the RSI level is above 50 and is also rising. This shows that there is a bullish momentum.

2.

Rate Of Change (ROC)

(figure 26)

The rate of change is a pure momentum oscillator which shows the rate of change in prices of the stock over a fixed period of time. In the above chart the price line is shown at the top and 10 days Rate of Change is shown at the bottom. The ROC value oscillates above and below zero levels which shows the percentage change in the price. These values are also used to find the overbought and oversold conditions. Generally the ROC value above 10 is considered to be overbought and below 10 is considered to be oversold. An ROC value above zero or moving from below to above zero level is considered to be bullish. It is considered bearish when the ROC value goes below zero or when it moves from above zero to below zero level. Inference: From the above chart (figure 26) we can see that the ROC value is in falling below the zero level. Hence the momentum is considered bearish.

3.

Moving Average Convergence and Divergence:

(figure 27)

The price curve and the MACD curve (red line) are plotted on the above chart. The MACD chart is plotted along with the MACD signal line (blue line) and MACD histogram (black shaded region). The chart is plotted to identify the strongest momentum i.e. bullish or bearish. This can be identified using signal line crossovers and centerline crossovers. ➢

Signal line crossovers: It is considered bullish if the MACD line crosses above the signal line (its nine day EMA). If the converse happens it is considered bearish

➢

Centerline Crossovers: It is considered bullish if MACD crosses above the centerline. If the converse happens the momentum is considered bearish.

➢ MACD indicator is highly volatile and hence it is always considered along with other indicators. Inference: ➢ The various Bullish and bearish signals are identified on the chart using and marks respectively. ➢

In the above chart (figure 27) we can see that at the end of June the MACD curve is above its signal line. So there is a bullish signal crossover.

1.

Analysis of Ashok Leyland Limited

10.1. About Ashok Leyland Ltd.

BASIC DETAILS

Sector

Automobile

CMP

Rs 63.75 (-0.16%)

NIFTY

5312.50 (+1.07%)

Mkt. Capn.

Rs. 44759.22Cr

Face Value

Rs.1.00

BSE Code

500477

NSE Code

ASHOKLEY

52 week High/Low

Rs.70.70/Rs.28.10

ASHOK LEYLANDSHAREHOLDING PATTERN (figure 28)

Investment Arguments: ➢ The NHAI has awarded projects worth Rs.9000Cr to the company. ➢ Backed by increase in industrial activity and improvement in availability of finance, CV volumes have witnessed a robust growth in the past few months. ➢ Going ahead we can expect the momentum to be continued as impetus by government to improve the road infrastructure which will propel demand for goods and services. ➢ We can expect a 15% growth in volumes for FY11 and FY12. ➢ The impact of higher raw material costs is expected to be set off by operational leverage. ➢ The company has also established its presence in the northern and western regions of the country.

The Hinduja Group: The Hinduja Group established in the 1914 is one of the largest groups in the country which now has its global presence in 30 countries across various field like Automotives (Ashok LEYLAND), Energy & Oil (Gulf Oil), IT/ITES (HMT IT), Banking and Financial Services (Hinduja Bank, Geneva), Media & Entertainment and Infrastructure.

The Company: The Ashok Leyland was setup in the year 1948 in the name of Ashok Motors, a company for assembling Austin Cars. Since then Ashok Leyland has been a major presence in India's commercial vehicle industry with a tradition of technological leadership, achieved through tie-ups with international technology leaders and through vigorous in-house R&D. Ashok Leyland vehicles have built a reputation for reliability and ruggedness. In the populous Indian metros, four out of the five State Transport Undertaking (STU) buses come from Ashok Leyland. Some of them like the double-decker and vestibule buses are unique models from Ashok Leyland, tailor-made for high-density routes. Ashok Leyland has seven manufacturing plants - the mother plant at Ennore near Chennai, three plants at Hosur (called Hosur I and Hosur II, along with a Press shop), the assembly plants at Alwar, Bhandara and state-of-the-art facility at Pantnagar. Ashok Leyland reached a major milestone in 1993 when it became the first in India's automobile history to win the ISO 9002 certification. It has also become the first Indian auto company to receive the latest ISO/TS 16949 Corporate Certification (in July 2006) which is specific to the auto industry. The NHAI awarded contracts worth 9000crores to the company of which 27% belongs to South.

The Management: ➢

R J Shahaney, Chairman

➢

D G Hinduja, Co-Chairman

➢

R Seshassayee, Managing Director

Associate Companies: ➢ Automotive Coaches and Components Ltd (ACCL) ➢ Lanka Ashok Leyland ➢ IRIZAR-TVS ➢ Ashok Leyland Project Services Ltd

Joint Ventures: ➢

Nissan Motor Company: To develop, manufacture and distribute LCVs. The JV will launch products by 2011.

➢

John Deere: To manufacture and market Construction Equipments. The JV will start production by the end of 2010.

➢

Automotive Infotronics: To develop, design and adopt Infotronics products to use in Ashok Leyland and also to other customers.

➢

Ashley Alteams: To produce High Pressure Dye Casting used in telecom and automotive sectors.

Products: The company manufactures and markets Buses, Trucks, Engines and Defence Purpose Vehicles. It caters to both domestic and international markets.

10.1.

Analysis of Financial Information:

Balance Sheet:

(table 9) --------------------------Rupees in Cr.-----------------------

Particulars

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

133.03

133.03

132.39

122.16

118.93

Share application money

-

-

-

-

-

Preference share capital

-

-

-

-

-

1,976.00

1,993.57

1,739.23

1,266.35

1,024.35

304.41

190.24

360.22

184.69

263.50

Unsecured loans

1,657.57

697.26

280.18

507.24

616.91

Total

4,071.01

3,014.10

2,512.02

2,080.44

2,023.69

Gross block

4,953.27

2,942.44

2,620.20

2,138.50

2,002.25

Less : revaluation reserve

1,364.86

22.38

22.95

23.96

24.59

Less : accumulated depreciation

1,554.16

1,416.89

1,313.16

1,195.23

1,108.40

Net block

2,034.25

1,503.17

1,284.09

919.31

869.26

Capital work-in-progress

1,043.19

661.08

407.70

198.32

85.16

263.56

609.90

221.09

368.18

229.19

Current assets, loans & advances

3,195.69

2,759.38

2,544.92

2,183.13

2,161.15

Less : current liabilities & provisions

2,475.37

2,541.72

1,970.20

1,595.81

1,340.40

720.33

217.66

574.72

587.32

820.75

9.69

22.29

24.42

7.31

19.33

4,071.01

3,014.10

2,512.02

2,080.44

2,023.69

Book value of unquoted investments

101.69

365.07

43.22

56.28

54.49

Market value of quoted investments

193.98

391.84

281.39

469.80

354.36

Sources of funds Shareholder’s Funds Equity share capital

Reserves & surplus Loan funds Secured loans

Application of funds Fixed assets

Investments Net current assets

Total net current assets Miscellaneous expenses not written Total Notes:

--------------------------Rupees in Cr.----------------------Particulars Contingent liabilities Number of equity shares outstanding (Lacs)

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

754.37

1,783.97

1,129.49

946.29

699.23

13303.38

13303.38

13238.70

12215.87

11892.94

Profit & Loss Account:

(table 10) ---------------------------Rupees in Cr.-----------------------

Particulars

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

6,051.63

7,972.52

7,358.88

5,359.94

4,269.36

4,553.31

5,855.39

5,521.20

3,897.38

3,084.49

88.72

102.76

87.13

74.69

78.23

Personnel expenses

566.26

616.17

480.70

403.89

354.05

Selling expenses

316.57

194.63

170.70

117.30

76.01

Administrative expenses

64.91

399.76

413.10

326.71

254.24

Expenses capitalized

-8.20

-0.67

-0.13

-0.41

-0.81

5,581.57

7,168.04

6,672.71

4,819.56

3,846.20

470.06

804.48

686.18

540.38

423.15

62.80

70.30

63.19

42.76

43.72

Adjusted PBDIT

532.86

874.78

749.37

583.14

466.88

Financial expenses

154.27

83.63

31.82

38.37

30.40

Depreciation

178.41

177.36

150.57

126.01

121.36

Other write offs

-

0.49

0.30

0.31

0.30

Adjusted PBT

200.17

613.30

566.67

418.45

314.81

18.45

168.84

163.22

124.98

83.60

181.72

444.46

403.45

293.47

231.21

Nonrecurring items

8.27

24.85

37.83

33.85

28.05

Other non cash adjustments

0.26

-

2.96

-

-

Reported net profit

190.25

469.31

444.25

327.32

259.26

Earnings before appropriation

692.53

831.00

674.62

505.73

393.19

Equity dividend

133.03

199.77

198.58

159.79

118.93

-

-

-

-

-

22.61

33.95

27.85

22.41

16.91

Income Operating income Expenses Material consumed Manufacturing expenses

Cost of sales Operating profit Other recurring income

Tax charges Adjusted PAT

Preference dividend Dividend tax

---------------------------Rupees in Cr.----------------------Particulars Retained earnings

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

536.89

597.27

448.19

323.54

257.35

Cash Flow Statement: 11)

Particulars

(table

Mar ' 09

Mar ' 08

Mar ' 07

Mar ' 06

Mar ' 05

208.45

638.15

604.51

452.30

355.01

Net cash flow-operating activities

-525.58

1,065.69

499.95

322.02

447.35

Net cash used in investing activities

-664.18

-809.68

-749.69

-133.59

-155.45

459.18

364.52

-289.38

-257.60

280.38

Net inc/dec in cash and equivalents

-730.58

620.53

-539.12

-69.17

572.28

Cash and equivalents begin of year

815.73

195.20

850.32

919.49

348.19

Cash and equivalents- end of year

85.15

815.73

311.21

850.32

920.47

Profit before tax

Net cash from Financing Activities

Financial Highlights: ➢ On looking at the balance sheet we can see that there is an increase in the fixed assets. ➢ The loan funds has increased and there is also a fall in the value of investments ➢

On looking at the profit and loss account we can see that the sales revenue fell by almost 25% when compared to the sales figures of 2007-09. As a result the profits have also reduced.

➢

On looking at the Cash Flow Statement we can see that the cash flows of the company are better when compared to the previous year in spite of cash lost in operating and investing activities. This is because the company has generated inflows by financing activities.

10.1. Analysis of Key Ratios: To better understand the financial position of the firm the following ratios are considered: (table 12) Ratios

2008-09

2007-08

2006-07

2005-06

2004-05

Net profit Margin (%)

3.10

5.83

5.94

6.05

6.29

Debt Equity Ratio

0.93

0.41

0.25

0.24

0.38

Return on Equity (%)

9.05

22.30

23.88

23.69

24.14

Earnings Per Share (EPS) (Rs.)

1.43

3.53

3.33

2.68

2.28

57.28

14.11

15.41

20.77

10.39

1.00

1.50

1.50

1.20

1.00

69.93

42.49

45.04

44.78

43.86

Dividend Yield Ratio (%)

1.22

3.01

2.92

2.15

4.22

Book Value Per Share (Rs.)

2.40

15.82

13.95

11.31

9.45

Price Earnings Ratio (P/E) Dividend Per Share (DPS) (Rs.) Dividend Payout Ratio (%)

Graphs of Key Ratios 1.

Debt-Equity Ratio:

(figure 29)

Inference: The Debt-Equity Ratio is the ratio between outsider funds and owner’s funds. A Debt-Equity ratio of 1:2 represents high safety margin to the creditors. In the above graph (figure 29) we can see that the Debt-Equity Ratio for the years 2005-09 is in rising trend which means more and more amount of debt is used with every rupee of own funds. 2.

Return on Equity:

(figure 30)

Inference: The Return on Equity Ratio measures the returns on the equity funds employed by the business. The above graph (figure 30) shows that the returns for the equity funds are very low in 2008-09 when compared to all the other years. 3.

Price Earnings Ratio (P/E):

(figure 31)

Inference: This ratio brings out the relationship between the current prices and the EPS. It shows the amount an investor is willing to pay per rupee of the earnings of the company, from the above chart (figure 31) we can see that in the year 2009 the investor is ready to pay Rs.57.28 per rupee of earnings. 4.

Dividend Per Share:

(figure 32)

Inference: This ratio shows the earnings that are distributed to the equity shareholders on a per share basis. The graph above (figure 32) shows that the company has been declaring higher dividends during 2004-07. But in the year 2008-09 the company declared less dividend of Re.1 per share because of reduced profits. 5.

Dividend Payout Ratio:

(figure 33)

Inference: This ratio shows the percentage of profits earned that are distributed as dividends to equity shareholders. From the above graph (figure 33) we can see that the company has been declaring higher percentage of profits as dividends except for the year 2007-08. 6.

Dividend Yield Ratio:

(figure 34)

Inference: This ratio compares the dividends and the Market Prices of the shares. This ratio shows what the investor gains if he buys the shares for the Market Price. In the above chart (figure 34) we can see that the Dividend Yield Ratio is not moving with the DPS ratio because the dividend yield ratio also compares the Market Price. In 2009 the dividend yield ratio is very low because of low DPS and high Market Price. 7.

Book Value Per Share:

(figure 35)

Inference: This ratio shows the claim of the shareholders on a per share basis. This ratio shows the worth of a share according to the books. From the above graph (figure 35) we can see that the Book Value Per Share was increasing till 2007-08 and it fell to its all time low in 2008-09 which is not healthy.

10.1. Analysis of Technical Indicators: 1. Moving Averages:

Exponential Moving Average (EMA)

(figure 36)

In the above chart two (figure 36) smoothing curves are drawn along with the price curve. EMA 20 represents the 20 day exponential moving average (fast moving average) while EMA 100 represents the 50 day exponential moving average (slow moving average). The purpose of this chart is to identify the price trend and to identify trading signals. Trend Identification: The moving averages are used to find the trend of the stock. ➢

The direction of moving average is used to find the trend. If the moving average is rising, the trend is considered Up. If the moving averages are falling the trend is considered to be Down.

➢

Price location. The location of the price relative to the moving average can be used to determine the basic trend. If the price is

above the moving average, the trend is considered up. If the price is below the moving average, the trend is considered down. ➢

The third technique for trend identification is based on the location of the slow moving average relative to the fast moving average. If the fast moving average is above the slow moving average, the trend is considered up. If the fast moving average is below the slow moving average, the trend is considered down.

Trading Signals: Two moving averages are used to find the trading signals. ➢ A BUY signal is generated if the faster moving average crosses above the slower moving averages. ➢ A SELL signal is generated if the faster moving average crosses below the slower moving average.

Inference: In the above chart (figure 36) we can find that: ➢

The prices started an uptrend at the end of the month on noticing the candlesticks of last few days.

➢ We can also see that the price is above both EMA 20 and EMA 50. ➢ Both the moving averages are rising ➢ The fast moving average (EMA20) is above the slow moving average (EMA 50)

Hence the trend of the Ashok Leyland stock is considered Up or Bullish The various trading signals identified using the moving averages crossovers are: ➢

SELL signals were identified during the mid of February where the EMA 20 crosses below the EMA 50.

➢

BUY signals were identified in the beginning of March.

➢ The SELL and BUY signals are shown with and respectively.

1.

Relative Strength Index (RSI):

(figure 37)

In the above chart (figure 37) the price line and the 14 day RSI line are plotted. The RSI line shown at the bottom of the chart is used to identify the overbought and over sold situations. If RSI crosses above 70 level the stock is considered to be oversold and so there are chances for trend reversal. If the RSI falls below 30 level the stock is considered to be oversold and hence undervalued. So there are chances for a trend reversal. An RSI between 50 and 70 is considered bullish while below 50 is considered to be bearish. Inference: The various overbought and oversold conditions in the above chart are identified using and marks respectively. In the above chart (figure 37) we can also see that the RSI level is above 50 and is also rising. This shows that there is a bullish momentum.

2.

Rate Of Change (ROC):

(figure 38)

The rate of change is a pure momentum oscillator which shows the rate of change in prices of the stock over a fixed period of time. In the above chart the price line is shown at the top and 10 days Rate of Change is shown at the bottom. The ROC value oscillates above and below zero levels which shows the percentage change in the price. These values are also used to find the overbought and oversold conditions. Generally the ROC value above 10 is considered to be overbought and below 10 is considered to be oversold. An ROC value above zero or moving from below to above zero level is considered to be bullish. It is considered bearish when the ROC value goes below zero or when it moves from above zero to below zero level. Inference: From the above chart (figure 38) we can see that the ROC value is rising from below to above zero level. Hence the momentum is considered bullish.

3.

Moving Average Convergence Divergence (MACD):

(figure 39)

The price curve and the MACD curve (red line) are plotted on the above chart. The MACD chart is plotted along with the MACD signal line (blue line) and MACD histogram (black shaded region). The chart is plotted to identify the strongest momentum i.e. bullish or bearish. This can be identified using signal line crossovers and centerline crossovers. ➢

Signal line crossovers: It is considered bullish if the MACD line crosses above the signal line (its nine day EMA). If the converse happens it is considered bearish

➢

Centerline Crossovers: It is considered bullish if MACD crosses above the centerline. If the converse happens the momentum is considered bearish.

➢ MACD indicator is highly volatile and hence it is always considered along with other indicators. Inference: ➢ The various Bullish and bearish signals are identified on the chart using and marks respectively. ➢

In the above chart (figure 39) we can see that at the end of June the MACD curve is above its signal line. So the momentum is considered Bullish.

10. FINDINGS 1. Mahindra & Mahindra Ltd: Fundamental Analysis:

➢

(figure 40)

From the above charts (figure 40) we can see that the EPS has increased considerably in the 2009 and the net profits had recorded almost 100% growth after a fall in 200809. These show that the company has recovered from the global slowdown and started to grow again.

➢

The higher P/E Ratio (figure 7) shows that the investors’ confidence level is more

➢ The company is a global leader in tractors and has also entered into the electronic vehicles segment which has a bright scope in the future. Technical Analysis: Based on the analysis using technical indicators we can see that: ➢

The EMA 20 and 50 are rising and indicates that the trend is bullish (figure 12)

➢

The RSI is rising and above 50 level which indicates an upward momentum (figure 13

➢

The ROC is above zero and rising (figure 14) which also indicates an upward momentum.

➢

The MACD shows a bearish signal crossover (figure 15) and is located above the zero level. We can also see that the price is increasing since few days and has established a support level. The price is still above the support level.

1. Tata Motors Ltd: Fundamental Analysis:

➢

(figure 41)

From the above charts (figure 41) we can see that EPS was continuously rising till 2007-08 and during the year 2008-09 the EPS was very low because of global slowdown and acquisition of Jaguar Landrover. But in the year 2009-10 the company again started to post more EPS.

➢ There is also a rise in the Net Profit Margin which shows a sign of recovery.

➢

The Book Value Per Share (figure 23) is continuously increasing which shows that the value of shares are increasing and the rising P/E Ratio (figure 19) shows increasing investor confidence.

Technical Analysis: ➢

From (figure 24) we can see that the EMA 20 and EMA 50 are increasing which shows that the current trend is upward. We can also notice that both the EMA are moving closely which shows that the stock is highly volatile

➢

From (figure 25) we can see that the RSI is rising and it is above 50. This shows that the bullish momentum is stronger

➢

In (figure 26) we can see that the ROC has gone below -10 many times which shows that the stock is highly volatile. At the end of June we can see that the ROC is below zero which indicates a bearish momentum.

➢

In (figure 27) we can see that the MACD is above its signal line which shows a bullish momentum. We can also see that the MACD is moving close to its signal line. This is also an indicator of high volatility.

1. Ashok Leyland Ltd: Fundamental Analysis:

➢

(figure 42)

From the above chart (figure 42) we can see that the EPS was very low during the year 2008-09 and it has increased in the year 2009-10. Likewise the net profit margin also rose from the previous year. This shows that the company has recovered from the slowdown and is back to normal.

➢

In spite of falling Book Value Per Share (figure 35) we can see that the investor confidence has increased i.e. P/E Ratio (figure 31)

➢ The company has also got a lot of projects from the government which ensures stable returns for a few years. Technical Analysis: ➢

In the figure 36 we can see that both the EMA 20 and EMA 50 are rising. The difference between them is also high. This shows that the prices are making new highs and hence the trend is considered upward.

➢

The figure 37 shows that the RSI is above 50 level and is rising. This shows that there is a strong bullish momentum.

➢

The figure 38 shows that the ROC is above zero and is rising. This also shows that the momentum is bullish

➢

In the figure 39 we can see that MACD is above the signal line and there is a bullish signal line crossover. We can also notice that the MACD is moving close to its signal line.

The Indian Automobile Industry: From the analysis we can find that: ➢ The Indian Automobile Industry is growing at the rate of 18% per annum and contributes around 5% to the GDP. It is expected to contribute to around 10% of GDP in the future. ➢ India is one of the largest manufacturer and a largest exporter. ➢

The competitive advantage is the low cost of labor.

➢

There is a huge domestic market for automobiles in India.

➢

So the Indian Automobile Industry is expected to grow in the future.

➢ The industry suffered from profitability during the slow down but has started to report profits. ➢

India is enjoying a global position in the global automobile market.

➢

The automobile exports are continuously increasing.

➢

Many global automobile companies are established in the country.

10. CONCLUSIONS From the analysis and the findings we can conclude the following: Indian Automobile industry: The industry has recovered from the global slowdown and started to make good returns and the industry is expected to grow in the future years. So investment in the automobile companies is good for long term. Mahindra & Mahindra Ltd: ➢ From the fundamental analysis we can conclude that the company is strong in its fundamentals and has a good future value. ➢

From the technical analysis we can conclude that the prices are in uptrend even though the MACD shows a bearish signal line crossover because the MACD is above zero. So the prices are expected to rise in the near future.

Tata Motors Ltd: ➢ From the fundamental analysis we can conclude that the company is strong in its fundamentals and has a good future value. ➢

From the technical analysis we can conclude that the prices are in uptrend and since EMAs are moving closer and the stock is highly volatile. The ROC is negative which shows a bearish signal. But we can see that the MACD is above its signal line. So there is strong upward momentum, but the prices may fall very soon but will rise again.

Ashok Leyland: ➢ From the fundamental analysis we can conclude that the company is strong in fundamentals and prices are expected to rise in the future. ➢

From the technical analysis we can see that the EMAs are rising. We can also notice that the MACD, ROC and RSI also show bullish momentum. So, we can conclude that the prices will rise in the short term.

10. Recommendations Fundamental Analysis is used for making long term investment decisions while Technical Analysis is used for making short term investment decisions. Based on the fundamental and technical analysis and conclusions drawn the following investment recommendations are made to the investors: Mahindra & Mahindra Ltd Stocks: Mode of Investment

Recommendation

Long term Investment

BUY

Short Term Investment

BUY

Tata Motors Ltd Stocks: Mode of Investment

Recommendation

Long term Investment

BUY

Short Term Investment

HOLD/SELL

The investor has to wait till the target price is reached or as soon as the EMA 20 and EMA 50 converge to make a crossover. Ashok Leyland Ltd Stocks: Mode of Investment

Recommendation

Long term Investment

BUY

Short Term Investment

BUY

11. REFERENCES ➢

KHAN M Y, JAIN P K., 2010. Management Accounting. New Delhi: Tata McGraw Hill Education Private Limited.

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GREWAL T S., 2005. Analysis of Financial Statements. New Delhi: Sultan Chand & Sons (P) Ltd.

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Available from: http://www.investopedia.com [Accessed between 1st June 2010 and 6th June 2010]

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Available from: http://www.mahindra.com [Accessed between 6th June 2010 and 10th June 2010]

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Available from: http://www.tatamotors.com [Accessed between 6th June 2010 and 12th June 2010]

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Avaiable from: http://www.ashokleyland.com [Accessed between 10th June and 20th June 2010]

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Available from http://www.oica.net [Accessed between 10th June 2010 and 16th June 2010]

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Available from http://www.siam.in [Accessed between 10st June 2010 and 16th June 2010]

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Available from http://icharts.in/oldcharts [Accessed between 1st July 2010 and 5th July 2010]

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Available from http://nseindia.com/historicaldata [Accessed between 1st July and 10th July]

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Available from http://munothfinancial.com [Accessed on 1st July 2010]