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EXECUTIVE SUMMERY

The stock market in India before 1991 was controlled by the


Government with very little free play of demand and supply of
securities in the stock market. With the opening up of the economy
and financial de-regulation, the market has become volatile and the
behaviour pattern of the investors is also changing. Investments
scenario has changed over a period of time especially after the
liberalisation of finance sector in 1991.Government has introduced
several reforms in the capital market like screen based training, online
trading, demat trading, rolling settlements, de-mutualisation,
corporatisation of stock exchanges, book building mechanism. Etc.
In the year 2004 many changes have taken place in the stock
market. SEBI has been regulating the market but inspite of that their
have been scams of an uncontrollable dimension. In particular, in this
year due to elections and the out come results of election favouring
the opposition party (Congress) made many foreign investors to take
back there investments from the stock exchange has led to the
downswing of the stock market.
Although new developments have taken place in listing of
companies through debt securities and to protect the interests of the
investors, they are demanding more security and more services from
stock exchanges. To meet the requirement of investor services the
stock exchanges are arranging investors meet, training programmes
for investors, awareness campaigns and educating investors in
fundamental and technical analysis.

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The researcher has undertaken to study the services provided by
Karvy Consultancy. The present report focuses its attention on
fundamental analysis technical analysis and portfolio management
process for automobile sector.
In order to study the above information the researcher has
organized the present report as per the following:

Chapter 1: Focuses attention on introduction, industry profile and


company Profile of Karvy Consultancy, Shimoga.

Chapter 2: Focuses on design of study, scope and objectives of the


Study, methodology and limitations.

Chapter 3: concentrates on the methods and sources of data collection,


Sample design and tools and techniques of data
collection.
Chapter 4: Is concerned with the analysis and interpretation of data.

Chapter 5: Provides the summary of findings.

Chapter 6: Deals with the suggestions and conclusions for the benefits
of prospective Investors and market analysers.
Lastly, it includes the annexures containing the
questionnaire, appendix and bibliography.

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Introduction to Capital Market
Meaning and Scope of Capital Market
Capital is an important factor of production, necessary for
economic development. A market for raising funds for capital
formation and investment, which is referred to as capital Market, is
thus very vital for economic development of any Country. Investment
comes from savings and mobilization of savings is a major function of
the Capital Market.
Capital Market is a wide term used to comprise all operations in
the new issues and stock market. New issues made by the companies
constitute the primary market, while trading in the existing securities
relates to the secondary market. While we can only buy in the primary
market, we can buy and sell securities in the secondary market.
Capital Market thus provides funds from public who are savers
to investors. The surpluses of the household sector and foreign sector
are used to meet the deficits of the Government and business sectors,
who invest more than they save/ spend more than their income.
Besides the allocation of funds and the flow of funds from less
profitable to more profitable avenues and intermediation between
savers and investors are the functions of the capital market.
Lending and borrowing of these surpluses and deficits and bank
credit and the credit from financial institutions are all channelised
through the capital market. Banks, commercial and cooperative as
also all financial institutions intermediaries operating in the Capital
Market. This facilitates the project financing and growth of the
corporate sector on the one hand and there working in day-to-day
operations on the other.

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Hence the capital market is the market for financial assets that
have long or indefinite maturity. When a company wishes to raise
capital by issuing securities or other entity intends to raise funds
through units, debt instruments, bonds etc. it goes to the primary
market which is the segment of the capital market where issuers
exchange financial securities for long term funds. The primary market
facilitates the formation of capital.
There are 3 ways in which a company may raise capital in the
Primary market: public issue, rights issue and private placement.
Public issue, which involves sale of securities to members of the
public, is the most important mode of raising long term funds. Rights
issue is the method of raising further capital from existing share
holders by offering additional securities to them on a pre-emptive
basis. Private placements are a way of selling securities privately to a
small group of investors.
The secondary market in India, where outstanding securities are
traded, consists of the stock exchanges which are self-regulatory
bodies under the over all regulatory purview of the government /
SEBI. Recently, SEBI has proposed the trading in futures and options
[capital market derivatives].
The government has accorded powers to the SECURITIES
AND EXCHANGE BOARD OF INDIA [SEBI], as an autonomous
body, to oversee the functioning of the securities market and the
operations of intermediaries like mutual funds and merchant bankers,
underwriters, portfolio managers, debenture trustee, bankers to an
issue, registrars to an issue and share transfer agents, stock brokers,
sub-brokers, FIIs [FOREIGN INSTITUTIONAL INVESTORS]

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plantation companies schemes including rating agencies and also to
prohibit insider trading.
STRUCTURE OF THE MARKET
There are various sub-markets in the capital market in India.
The structure has undergone vast changes in recent years. New
instruments and new institutions have emerged on the scene.
The sub-markets are as follows:
1. Market for corporate securities-for new issues and old
securities.
2. Market for government securities.
3. Market for debt instruments-debentures and bonds of private
sector, bonds of public sector undertakings, public financial
institutions, etc.
4. Mutual fund schemes and UTI schemes, etc.

All these markets and sub-markets have both primary markets and
secondary markets. The first one is for raising funds directly from
the public and secondary market is for trading and imparting
liquidity to existing securities.
GENISIS OF THE INDIAN STOCK EXCHANGES
The origin of stock markets goes back to the time when
securities represented the property and promise to pay where first
issue had been transferable from one person to another.
The earliest recorded stock exchange market dealings in India
were transactions in loan stock exchanges of the East India
Company towards the end of 18th century. Wide range of bank and
cotton mills securities were being traded in Bombay and Calcutta
by 1830. The companies act 1850 introduced a new concept of

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limited liability with sole motive to stimulating activities in the
securities market.
The share mania of 1860-65 leads to great and sudden wealth in
Bombay. This was as a result of American civil war, which
stopped the supply of cotton to Europe and thus gave an
opportunity to India to supply cotton. Everyone became crazy with
the spirit of speculation. Man and women, master and servant,
employer and employee, rich and poor of all caste and creed,
officials and everyone were busy in the area of speculation of bits
of paper variously called as allotments, scripts and shares into gold
and silver. At the end of the war the boom collapsed, many
companies became insolvent. Buying of securities was no more.
During the boom of 1860-1900 brokers and bank managers were a
privileged and a respectable class and the police had only “salam”
for them. After the war, brokers were considered as a social
nuisance and were driven from post to pillar. They were shifted
from place to place. Lastly they found a place in a street called
dalal street where they transacted their business.
The first stock exchange in India was established in 1875 in
Bombay on 9th of July. After its establishment in Bombay, the first
stock brokers association or organisatioin called ‘The Native share
and stock brokers Association’ was formally established in 1875,
which later became the Bombay stock exchange. It can rightly be
proud of being the cradle of the oldest stock exchange in Asia. The
process of establishing stock exchanges gradually spread to other
cities of the country.

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The second stock exchange started in 1894 at Ahmedabad as
‘Ahmedabad shares and stock brokers association’ to facilitate
dealings in the shares of the textile mills. Now it is called
‘Ahmedabad stock exchange. In 1908, the Calcutta stock exchange
came into existence and business was conducted under the ‘Neem
Trees” in the open with the sole objectives to provide a market for
transaction in plantations and jute mills shares. Next in 1930 at
Madhya Pradesh, 1943 in Hyderabad and in 1957 at Bangalore etc.
as a result the securities contracted in the initial year. It was the
first Act to regulate the stock exchange in the country.
By 1939 speculation arose in the country and the number of
stock exchanges increased from seven to 24 in 1945. During the
world war the security market under went several prolonged
changes that were brought about by the growth in the
manufacturing activities. This lead to the development of
organized stock exchanges in major cities in the country.
In 1950, the constitution was proclaimed that the stock
exchange was placed under the regulation of the government,
under securities contract regulation Act 1956. Only recognized
stock exchanges were permitted to function. The Government took
the responsibility of supervising and controlling the stock markets.
The stock markets in India grew at a moderate base from 1956-
1980. During this period Foreign exchange regulation Act, was
enacted which effected the securities markets whereby
corporations with more than 40% foreign share holders were
required to dilute the foreign ownership. As a result corporations
offered equity to the Indian public.

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The decade of 1980’s, however saw the birth of a number of
new recognized stock exchanges in the country. In 1978 Cochin
stock exchange was stared, in 1982 Pune and U.P stock exchanges
were started. In 1983 at Ludhiana and Guwathi and in 1986 at
Mangalore, Jaipur and patina, stock exchanges were stared. In
1990 at vadodara, in 1991 Coimbatore and Bhopal, stock
exchanges were started. In 1992 the over the counter exchange of
India [OTCEI] and National stock exchange [NSE] were started.
The stock market activities in India were relatively on low key
till the beginning of the decade of 80’s mainly because of an alien
regime until 1947, which concentrated more on administration than
on development and also the public sector dominating the
economy in the independent India after 1947.
The process of liberalization and deregulation was set by the
government headed by the late Sri Rajiv Gandhi as the PM in Nov
1984 and later it was followed more vigorously by the next PM
Sri. P. V. Narasimha Rao and Dr. Man Mohan Singh as the
Finance Minister in July 1991. it was expected that about 25% of
the domestic savings would be invested in corporate securities and
mutual funds by the end of the current century. The Indian
economy had vision the eastern sky. The day was extremely
important from the Indian economy’s point of view as it witnessed
its country take altogether a different shape created and crafted out
finely and timely.
The bold step taken with lots of complexities by the finance
minister had hardly faced any loopholes in the industrial policy.
The reason was same unnecessary bureaucratic control and

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government intervention in certain core areas. The policy aimed to
shed the load of the public sectors, which have shown a very slow
rate of return and high rate of incoming losses over the years, all
these reforms have lead to a pace of growth almost unparalleled in
the history of any nation.
BOMBAY STOCK EXCHANGE AND ITS GROWTH
The stock exchange Mumbai, which was established in 1875 as
“The Native Share and Stock Brokers Association], has been evolved
over the years to its present status as the premium stock exchange of
the country. It may be noted that the stock exchange is the oldest one
in Asia, even older than the Tokyo stock Exchange, which was
founded in 1878.
The exchange while providing an efficient market also upholds
the interests of the investors and ensured redressal of their grievances,
whether against the companies or its own member brokers. It also
strives to educate and enlighten the investors by making available
necessary informative inputs.
A Governing body comprises nine of elected directors [1/3rd of
them retire every year by rotation], an executive director,
3 government nominees, a Reserve Bank of India nominee and 5
public representatives is the apex body which regulates the exchange
and decides its policies.
A President, vice president and an honorary treasurer are
annually elected from among the elected directors by the Governing
board following the election of directors.
The Executive director as the chief executive officer is
responsible for the day-to-day administration of the exchange.

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The exchange has obtained permission from the Security
Exchange Board of India (SEBI) for expansion of the BSE-On-Line-
Trading [BOLT] network to locations outside Mumbai. In terms of the
permissions granted by SEBI, the members of the exchange are free to
install their trading terminals at various places in the country.
The then Finance Minister, Government of India Shri. P.
Chidambaram on August 30, 1997 inaugurated the expansion of
BOLT network. The exchange has now expanded the BOLT network
to centers outside Mumbai and covers 255 centers having 883 VSAT
[Very Small Aperture Terminals] and1146 TWS [Trader Work
Station] as on March 31, 2000.
With the expansion of BOLT outside Mumbai, the average
daily turn over at the exchange has increased. From Rs 1284 crores in
2001-02 to Rs 2729 crores in 2002-03. In the year 2004-05 it was Rs.
1326.33 crores. The average daily traders, which were about 80000 in
2000-01, has increased to 1, 95,000 in 2002-03. In the year 2004 the
number of traders has reached 148,001.44.

Total No1.1 GROWTH OF BSE IN THE LAST 4 YEARS.

2001-02 2002-03 2003-04 2004-05


Average daily
1284 2729 1916.45 1326.33
turnover (Rs.Crores)
No. of traders (in
60,727.47 1,95,000 1,32,799.73 1,48,011.44
000’s)
Total turnover (Rs.
5,27,960.16 9,98,655.27 4,75,278.79 3,32,909.01
Crores)

Source: WWW.BSE INDIACOM

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NATIONAL STOCK EXCHANGE AND ITS GROWTH
The high powered study group on establishment of new stock
exchanges popularly known as Pherwani committee had in 1991
recommended the promotion of a new stock exchange at New
Bombay as a model stock exchange and to act as the National Stock
exchange.
In order to provide nationwide stock Exchange facilities to
investors, upgrading the facilities and to bring the Indian capital
market in line with the international markets in 1992, the National
stock Exchange was established. The exchange has two separate
segment viz., capital market segment and money market segment
would cover trading inequalities, convertible debentures, non-
convertible debentures etc… NSE provides access to investors form
all across the country on an equal footing and works as an integral
component of the National stock Market system.
The growths of business on NSE in the recent years have been
very impressive since the time when exchange started its operations
i.e., on November 3, 1994. Over the period, the average trading
volume has increased manifold.
The value of the traded scripts during the year 1999-2000 on
NSE was 8,39,052 crores [40% of the total turnover of all the stock
exchanges combined in India]. Compared to Rs 3, 69,052 [30.49% of
the total turnover of all the stock exchanges in India] on the country’s
premium bourse the Bombay stock exchange.

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Table 1.2: GROWTH RATE OF NSE IN THE LAST 6 YEARS
Market segment – Selected indicators.
1999-2000 to
Segment At the end of March 2002 2004-05
2004-05
No of Turnover Market Annual
No of Market
securities (Rs. Share Compound
members capitalization
available a Crore) (%) growth rate (%)
CM 928 890 636861 513167 57 40.3
WDM 88 1790 756794 947191 60b 107.5
F&O 484 2010 c - 101925 d 98 -
Total 936 e 4690 1393655 1562283 80 f 64.4

CM - Capital Market
WDM - Wholesale Debt Market.
F&O - Futures and Options
a – Excludes suspended securities.
b – Share in SGL
c – Includes 3 futures, 68 index options, 93 stock features and 1846 stock
option contracts.
d – Includes notional turnover [(strike price + premium)*quantity] in case
of index options and stock options.
e – Do not add up to total because of multiple memberships
f – Share in turnover of all exchanges.
The year 2004-05 witnessed a total turnover of Rs 15, 62,283 crores
a turnover of Rs 17, 70,457 crores in the previous year. The annual
compound growth rates of turnover on NSE over 6 years from 1999-2000
to 2004-05 have been 64.4%. The CM and F & O segments of NSE
accounted for 57% and 98% of total turnover in the country in equities and
derivatives, respectively, while WDM segment accounted for 60% of total
SGL turnover during 2004-05.
Source: www.NSC INDIA.COM

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Table no 1.3 showing Growth, Establishment and recognition of
stock exchanges.
Year of Recognition
Sl.No Name of Stock Exchange
Establishment Date
1 NSE 1992 NOV-1992
2 BSE 1875 31-08-1987
3 CALCUTTA 1908(INC.1923) 10-10-1957
4 DELHI 1947 09-10-1957
5 AHMEDABAD 1984 16-10-1957
6 UTTAR PRADESH 1982 03-06-1982
7 LUDIANA 1983 29-04-1983
8 PUNA 1982 02-09-1982
9 BANGALORE 1957 16-02-1963
10 HYDERABAD 1943 02-09-1958
INTER CONNECTED STOCK
11 1999 1999
EXCHANGE
12 COCHIN 1978 10-05-1979
13 OTCEI 1989 AUG-1989
14 MADRAS 1908 15-10-1975
15 MADHYA PRADESH 1930 04-12-1958
16 VADODARA 1990 05-11-1990
17 GAUHATI 1984 01-05-1984
18 BHUBANESHWAR 1989 05-06-1989
19 COIMBATORE 1991 18-09-1991
20 MAGADH 1986 11-12-1986
21 JAIPUR 1983-84 09-11-1989
22 MANGALORE 1984 09-09-1985

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Karvy stock Broking Limited-Profile
Origin, History and Growth
In 1982, a group of Hyderabad based practicing Charted
Accountants started Karvy consultations Limited. With a capital of Rs
150,000 offering auditing taxation services initially, later it forayed
into the registrar and share transfer activities and subsequently into
financial serves. All along Karvy’s strong work ethics and
professional background leveraged with information technology
enabled it to deliver quality services to the individual.
A decade of commitment, professional integrity and vision
helped Karvy to achieve a leadership position in its field when it
handled in the history of the Indian stock Market in a year Karvy
made in roads into a host of capital market services, corporate and
retail which proved to be a sound business synergy.
Today, Karvy has access to millions of Indian share holders,
besides companies, banks, financial institutions and regular agencies.
Over the past one and half decades Karvy has evolved as a veritable
link between industry, finance and people. In Jan 98 Karvy became
the first depository participant in Andhra Pradesh. An ISO9002
company certified Karvy because of its commitment to quality and
retail reach has made it an integrated service company.
Group Companies:
Karvy Consultants Limited:
Deals in registrar and demat.

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Karvy Securities Limited:
Deals in distribution of various investments products viz. mutual fund,
bonds, debentures, Fixed Deposits, Insurance policies for the investor.
Karvy Investor’s Service Limited.
Deals in issue management, investment banking.
Karvy Stock Broking Limited
Deals in buying and selling equity shares and debentures on the
NSE, the Hyderabad Stock Replace [HSE]. Over The Counter
Exchange of India and BSE
Alliance:
Karvy has a strategic alliance with Jardine Flaming India
Securities Limited [JFISC], one of the Asia’s most prestigious
investment bankers. Hence, Karvy leverage on the letter’s investment
banking expertise. This would provide the Indian investor access to
the best global and locals insights on financial markets.
Jardine is a respected investment bankers with a demonstrated
track record of delivering value to its clients spread over 43 countries.
It is ranked amongst the world’s top three FII’s.
Quality Policy
To achieve and retain leadership, Karvy still aim for complete
customer’s satisfaction, by combining its human and technology
resources to provide superior quality financial services. In the process,
Karvy will strive to exceed customer’s expectation.

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Quality Objectives
As per the quality policy, Karvy will
• Build in house processes that will ensure transparent and
harmonious relationship with its client and investors to
provide high quality services.
• Establish a partner’s relationship with its investor services
agents and vendors that will help in keeping up its
commitments to the customers.
• Provide high quality of work life for all its employees and
equip them with adequate knowledge and skills to respond
to customer needs.
• Continue to uphold the values of honesty, integrity and
strive to establish unparalleled standards in business ethics.
• Use state of the art information technology in developing
new and innovative financial products and services to meet
the changing needs of investors and client.
• Strive to keep all stake holders [share holders, client,
investors, employees, supplier and regulatory authorities]
proud and satisfied.
• Strive to be reliable source of value added financial
products, services and constantly guide the individuals and
institutions in making a judicious choice of the scheme.
Achievements:
♦ Largest mobiles of funds as per prime database.
♦ First ISO-9002 certified register in India.
♦ A category – I register to public issues.

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♦ Ranked as “the most admired register” by MARG.
♦ Handled the largest every public issues as IDBI.
♦ Strategic tie up with Jardine Flaming India service limited.
♦ Handled over 500 public issues as registrars.
♦ Handled the Reliance accounts for nearly 10 million account holders.
♦ First depository participant from AP.
Karvy stock Broking Limited, Shimoga Branch.
Karvy stock Broking limited, Shimoga branch was setup on 24
April 2000. Till now it has been rendering on excellent service to
public at large.
From the date of its establishment till 2005 it has made 5000
investors, holding 2000 trading accounts and 3000 DMAT accounts.
Moreover, it has achieved a turnover around 3 crore, including retail
and High Net-worth Individuals [HNIs].
Working Procedure
♦ First of all a Demat account has to be opened by the customer.
♦ Secondly he has to open trading account for purchase/sale of
securities in the stock market.
♦ Weakly share market carries on work from Monday to Friday
daily from 9.55am to 3.30pm, where purchase and sale of
transactions takes place.
♦ After the end of days transaction the customer must issue carry
over cheque to retain and to hold those securities in the future
and its value will be credited in Demat account of the
customers.

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♦ After the issue of cheque they would be issued a buying
contract note from the Karvy.
♦ A margin at 10% on purchase/sale on cost has to be maintained
on each and every security.
♦ Finally, the settlements are done on T+2 settlement basis on the
sale of the securities.
Finally, chances of grievances are very low as the transactions are
made after giving each and every information to the customers.

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INVESTMENT

Investment is the sacrifice of certain present value for the


uncertain future reward. Such decision – making has not only to be
continuous but rational too. Broadly speaking, an investment decision
is a trade off between risk and return.
Investment choices or decisions are found to be the outcome of
3 different but related classes of factors.
1. The first may be described as factual or informational premises.
2. The second class of factors is expectational premises.
3. The third and final class of factors may be valuational premises.
Investing has been an activity confined to the rich and business
class in the past. But, today we find that investment has become a
house hold word and is very popular with people from all walks of
life. Increasing popularity of investment can be attributed to the
following factors:
1. Increasing in working population, larger family incomes and
consequent higher savings.
2. Previsions of tax incentives in respect of investment in
specified channels.
3. Increase in tendency of people to hedge against inflation.
4. Availability of large and attractive investment alternatives.
5. Increase in investment related publicity.
6. Availability of investments to provide income and capital
gains etc.

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THE INVESTMENT PROCESS
The investment process describes how an investor should go
about making decisions about marketable securities in which to invest,
how extensive the investment should be and when the investment
should be made.
The 5 steps procedure for making these decisions forms the
basis of the investment process.
• Set investment policy.
• Perform Security analysis.
• Construct a portfolio.
• Revise the portfolio.
• Revise the Portfolio.
• Evaluate the performance of the portfolio.
All investment are risky, as the investor parts with his money.
An efficient investor with proper training can reduce the risk and
maximize the returns. He can avoid pit falls and protect his interests.
The management of risk and return requires expertise. Investment is
both an art and a science. Investment in financial market is not a
gamble or speculation that some investors indulge in and it is highly
risky. Investors should be those who invest with the objective of
receiving some income, share in the prosperity of the company and
gain capital appreciation in a longer time span.
Investing in stock market is always interesting. Challenging and
rewarding. Interesting because the stock market is dynamic; there is
never a dull movement. Challenging because its uncertain; the only
certainty is uncertainty. Rewarding because it is risky and is likely to

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yield high returns. Risk and reward go together. Stock markets are
dynamic, volatile and unpredictable.

OBJECTIVES OF THE STUDY


• To study the share price movement of automobile companies.
• To study the relative movements of the share prices with NSE
NIFTY index.
• To find out the average returns and standard deviation for
automobile shares.
• To calculate beta for automobile shares.
• To find out the co-efficient of correlation between the NSE
NIFTY index and individual automobile shares.
• To find out the co-efficient of correlation between different
automobile shares.
• To find out the diversifying investment opportunities by
reducing the risk.
Methodology
1. Computation of rate of return for automobile share. The rate of
return for automobile stocks is calculated using weekly closing
share price of each company.
Y = Rt = Closing price – opening price x 100
Opening price
Rt is rate of return on common stock for time’t’.
2. Computation of rate of return for NSE NIFTY index. The rate of
return for NSE NIFTY index is calculated using weekly closing
index price.
X = Rxt = Closing price – opening price x 100

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Opening price
Rxt is rate of return on index stock for time’t’.
3. Computation of Beta.
β = NΣ RxRy – Σ Rx.Σ Ry
NΣ Rx2 – (Σ Rx)2
Where, Rx = Market returns
Ry = Individual Stock returns.
N = Number of pairs of observations.
4. Computation of co-efficient of correlation. Co-efficient of
correlation is a statistical technique, which measure the
degree or extent to which two/more variables fluctuate with
reference to one another. It is calculated using the following
formula.
r= NΣ RxRy – Σ Rx . Σ Ry
NΣ Rx2 – (Σ Rx) 2. NΣ Ry2 – (Σ Ry) 2
Where, r = Co-efficient of correlation between x & y,
Rx = Returns on index,
Ry = Returns on automobile company.
N = Number of pairs of observations.
5. Usage of MS-Office programs for calculating average
returns, standard deviation, Beta values and correlate
companies securities with market index as well as security
returns.

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Limitations
• A good number of explanatory variables must be taken in to
consideration in order to assess the share price movement. But
due to time constraints detailed analysis of each company were
not made.
• The information regarding the company’s, which were
considered for the analysis, not uniform in nature. That is,
number of observations differs from one/two company’s to
other company’s.
• Generalization of findings and conclusions of the study are
likely to be disputed as security prices are determined by so
many factors. However, the findings and conclusions drawn
upon the primary and secondary data collected are expected to
throw some light on volatility of share prices.
• This is a one time study.
• This being an academic study suffers from time and cost
constraints.

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Primary data

The primary data for the study was collected from Karvy Stock
Exchange database (Shimoga) and survey.
Secondary data
The secondary data for the study was collected from the
relevant journals, newspapers and text books.
Sample design
The survey was focused on 8 automobile companies along with
S&P Cnx Nifty index. The data is collected for the following
companies.
Ashok Leyland
Bajaj Auto
Hero Honda
Hindustan Motors
Mahindra and Mahindra
LML
TATA Motors
TVS Motors

The share price data of the above company’s along with S & P
Cnx Nifty was collected from Karvy Stock exchange databank 1st
April 2000 to 31st March 2005.

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TOOLS AND TECHNIQUES OF DATA COLLECTION.

Information used for the study.


The statistical measures are calculated using the data of
5 years. The weekly closing share prices of each company to be
collected for the above period. The weekly NSE NIFTY indexes
for the above period have been used as the market index.
Usage of MS-Office programs for calculating average
returns, standard deviations, Beta values and correlate company’s
securities with market index as well as security returns.

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Analysis
If you have more money than you need for current
consumption, you are a potential investor. You may deposit your
surplus in a bank account to earn a fixed rate of interest or purchase a
speculative share on the stock market or buy gold or invest in some
other form. What every decision, you are essentially making a
sacrifice at present with the hope of deriving benefits in future. Your
economic well being in the long sun depends significantly on how
wisely or foolishly you invest.
Investing in stock market is an activity that fascinates people
from all walks of life regardless of their occupation, economic status,
education, family background etc. very few of them, however,
succeed in turning this into a profitable venture because majority of
investors do not evolve their portfolio scientifically.
The following study will show an investor can reduce expected
risk through diversification, why this risk reduction results from
“proper” diversification and how the investor may estimate the
expected return and expected risk level of a given portfolio of assets.
Security Analysis
“The entire process of estimating return and risk for individual
securities is known as “security analysis”.
Security analysis takes three forms:
1. Fundamental Analysis.
2. Technical Analysis.
3. Efficient capital market theory.

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Fundamental Analysis
The objective of fundamental analysis is to appraise the
‘intrinsic value’ of the security. The intrinsic value is the true
economic worth of a financial asset. Fundamental analysis involves an
in depth analysis of the earnings of the company whose security is
being evaluated, its management, the economic outlook the forms
competitors, the market conditions and other factors which are likely
to influence the earning capacity of the company.
Relying upon this reasoning, the fundamentalists attempts the
real worth of a security by considering the earning potential of a firm
which in turn will depend on investment environmental factors such
as state and growth of national economy, monetary policies of the
Reserve Bank of India, corporate laws, social and political
environment and the factor relating to the specific industry such as
state of product and the growth potential of the industry.
Fundamental analysis involves establishment of the relationship
between various economy, industry and company variables.
Economic Analysis
An investor would like to be rational in his investment activity
and evaluate a lot of information about the past performance and the
expected future performance of company’s, industries and the
economy as a whole before taking investment decision.
Under the aegis of Dr. Man Mohan Singh as finance minister,
India began its transaction from state dominated, licence – intensive,
foreign investment hostile country to a market oriented, competition
promoting and internationally responsive economy.

27
After liberalization, India has seen many changes in terms of its
social environment, economic environment, corporate sector, etc., the
entry of MNC’s gave corporate sector a new look.
The GDP is expected to grow at 6% in the year 2006. The
industry and service sector is contributing largely to the economy. The
Manufacturing sector in India is picking up year after year. After
liberalization many India company’s have entered global markets. The
automobile industry has entered African continent. The present trend
of economy is showing good signs of growth.
The economic analysis involves the study of various economic
indicators such as :
• Gross national product.
• Employment level.
• Personal income and personal disposable income.
• Balance of payment position.
• Inflation.
• Government deficits.
• Inflation and aggregate corporate growth and profits.
• Government policies on economic growth and their impact on
economic development.
• International economic trends and their impact on the Indian
economy.
Industry Analysis
The Indian automobile industry has a total sales of over Rs
20,000 crores, with more than 400 players who have together invested

28
Rs 11,500 crores, offering direct employment to over 2.5 lakh people.
It caters to the transport sector and is the backbone of the economy.
To put the industry’s current scenario in perspective let us re-
examine how it evolved over the years. Till the onset of liberalization
in the early 1990’s, the automobile industry was less complicated in
terms of models and technology. There was no incentive either to
invest in research and development [R & D] or in product
development.
The opening up of the economy in 1991 transformed the
scenario entirely. There was a sudden influx of foreign models in cars
and bikes as the country jumped from the technology of the 1950’s, as
represented by the Ambassador, to the latest from the who’s who of
the global auto industry. The domination of a few players in the early
1990’s has done a complete turn around into a mature market with
increased customer choice, large number of manufacturers catering to
different customer segments, lower vehicle or model life, and
increasing demand and production of vehicles. The auto sector
comprises a wide range of vehicles:
• Medium and heavy commercial vehicles.
• Light commercial vehicles.
• Passenger cars.
• Multi-utility vehicles.
• Two wheelers [Scooters, Mopeds, Motorcycles].
• Three wheelers.

29
The key players are:
* Ashok Leyland * Bajaj Auto
* Daewoo Motors * Eicher Motors
* Hyundai India Auto Ltd * General Motors
* Hero Honda * Hindustan Motors.
* Honda Motors * Ford
* Kinetic Motors * LML
* Mahindra and Mahindra * MUL
* Royal Enfield * Skoda
* Swaraj Mazda Limited * Volva
* TVS Motors
An analysis of the industrial sector in which the company
operated and its projected growth vis-à-vis other industry is made.
• Industry’s vulnerability to the business cycle.
• Policy of the Government.
• Export potential of the industry.
• Pricing and production control.
• Infrastructure.
• The implication of labour relations.
• Trends in the International Market.
• Prospective technology change.
• The life cycles.
• Economic phase of industry.
These are the few aspects, which are analysed while conducting
the industry analysis. The figure for the entire year 2004-2005 shows
encouraging results for all segments of the automobile industry.

30
Mr. Seshasayee, president, SIAM and managing Director,
Ashok Leyland limited, said that the year gone by has been quite
eventful for the vehicle manufacturers. New vehicles indigenously
developed by home grown vehicle manufacturers had generated a lot
of excitement and have created strong and healthy competition. In the
process the confidence gained by them promises introduction of more
such launches during the year 2004-05. This would prompt a lot of
activities in R&D, Designing and styling. During the year 2004-05 the
automobile industry has registered a growth of around 15% in number
and 14% in value terms. The union government has also pitched in
with positive changes in the budge proposals for the year 2005-06.
Table No 4.1:
The Market share of wide range of vehicles in auto sector in
2004-05.
Market share 2004-05
CVs 3%
Passenger Vehicles 12%
Two Wheelers 81%
Three Wheelers 4%
Graph no 4.01 Market share of vehicles in auto sector in 2004-05
Market Share 2004-05
100% 81%
80%
Series1
Market share 60%
Percentage
40%
3% 12%
20% 4%

0%
CVs Passenger Two Wheelers Three Wheelers
Vehicles
Vehicles

31
Table No 4.2
The Gross turn over of the automobile industry in 2004-05.
Rs
Year
[in Million]
1999-00 313580
2000-01 364450
2001-02 365411
2002-03 368262
2003-04 422933
2004-05 492024

Graph No 4.2
The Gross turn over of the automobile industry in 2004-05.
Gross turnover of automobile industry

500000
450000
400000
350000
300000
250000
200000 Rs [in Million]
150000
100000
50000
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

years

32
Table no: 4.3
The domestic sales of the automobile industry in 2004-05

Catogory 2000-01 2001-02 2002-03 2003-04 2004-05


M & HCVs 79124 106106 82071 89999 116167
LCVs 50698 55301 54602 56672 75034
Total CVs 129822 161407 136673 146671 191201
Passenger Cars 384483 615544 567734 509088 541738
UVs 109089 118274 122831 104253 114316
MPVs - - - 61775 52024
Total Passenger
493565 733818 690565 675116 708078
Vehicles
Total 4 Wheelers 623387 895225 827238 821787 899279
Scooters 1297115 1233781 876252 908268 835508
211469 288719
Motor cycle 1360196 1761439 3705893
3 4
Mopeds 646114 698321 643461 408263 332588
Total Two 363440 420372
3303425 3693541 4873989
Wheelers 6 5
Three Wheelers 189082 186850 181899 200276 226052
464354 522578
Grand Total 4115894 4775616 5999320
3 8

Graph no: 4.3 The domestic sales of automobile industry

33
D o m a stic S a le s o f A u to m o b ile In d u s tr y
5000000
4500000
4000000
3500000
3000000
2500000
T o ta l 4 W h e e le r s
Vehicle Sold
2000000
1500000
T o ta l T w o W h e e le r s
1000000 T h re e W h e e le rs
500000
0
2 0 0 0 -0 1 2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5

Y e ars

34
Table no: 4.4
The export sales of the automobile industry in 2004-05
Catogory 2000-01 2001-02 2002-03 2003-04 2004-05
M & HCVs 4544 5089 5517 4824 4804
LCVs 5564 4823 8262 7046 5900
Total CVs 10108 9912 13779 11870 10704
Passenger Cars 25468 23271 22913 49273 69977
UVs 2654 5148 4122 3077 1106
MPVs - - - 815 570
Total Passenger
28122 28419 27035 53165 71653
Vehicles
Total 4
38230 38331 40814 63035 82357
Wheelers
Scooters 28753 20188 25625 28332 30116
Motor cycle 35461 35295 41339 56880 126122
Mopeds 35788 27754 44174 18971 23330
Total Two
100002 83237 111138 104183 179568
Wheelers
Three Wheelers 21138 18388 16263 15462 43443
Grand Total 159370 139956 168215 184680 305368

Graph no: 4.4


The export sales of automobile industry
E x p o rt S a l e s o f A u to m o b i l e In d u str y

180000
160000
140000
120000
100000
Vehicles sold

80000 T h r e e W h e e le r s

60000 T o t a l T w o W h e e le r s

40000 T o t a l 4 W h e e le r s

20000
0
2 0 0 0 -0 1 2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5

Y e ars

Company Analysis

35
The company analysis involves the consideration of the
following major factors in appraising the value of a share.
Accounting Practices
A company balance sheet and income statement are not taken
by the security analyst at face value. Interpretation of reported figures
is an essential past of analysis because analysis of the accounting
practices adopted by different units in the industry facilitates proper
comparison of the working and financial health of two or more units
in the same industry.
Capital Structure
Study of the capital structure of a company reveals the status of
long terms liabilities of a company towards repayment of long term
loans, larger bank loans or short term loans undermine the position of
a company’s security, if there is any question on the ability of the
enterprise to pay such obligations as they fall due.
Dividend Prospects and the retention policy
Price earning ratio is affected by the amount to be paid in the
shape of dividend. This payment of dividend enhances “the growth
image” of the company and creates investor confidence and interest in
the company. The retention policy is greatly affected by investment
avenues available to a company. Other than this company may, as a
matter of policy follow a conservative dividend payment policy.
Cash Flows
It may be required for the purposes of acquisition of new
productive assets, to reply debts and other corporate expenses etc.,
which affects capital earnings.
Working capital position

36
Strong working capital position gives assurance that the
company shall maintain the dividend status despite fall in earning
temporarily weak working capital funds and hence due to the funds
constraints, dividends to the share holders nay not be forth coming.
Block up of funds in inventory, high receivables or high liability all
indicate weak working capital status of the company.
Prospective earning [profitability]
Sales prospects, selling price and costs are the main
considerations that give a clue about the future growth of the company
and its competitive strength in the market.
There are also certain other factors which are considered while
understanding company analysis are:
• Company market value.
• Its cost structure and break even analysis.
• Turn over of assets.
• Capacity utilization.
• Product lines of the company.
• Attitude of the government towards the company.
• Quality of management and assets.
• Technological superiority over other companies.

37
Table no: 4.5 Showing the prospective earnings of
ASHOK LEYLAND
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 0.83 0.84 0.84
Long term debt 0.67 0.65 0.66
equity ratio
Current ratio 1.59 1.82 2.2

TURNOVER RATIOS
Fixed assets 1.81 1.69 1.79
Inventory 6.22 4.85 5.47
Debtors 6.18 4.65 3.75
Interest cover 2.78 2.15 1.77
ratio
PBITDTM (%) 11.8 12.71 12.08
PBITM (%) 8.5 9.18 8.77
PBDTM (%) 8.75 8.44 7.13
CPM (%) 7.14 6.96 6.74
APATM (%) 3.85 3.42 3.43
ROCE (%) 14.99 12.47 11.29
RONW (%) 12.37 8.53 8.1

It is observed from the table that the Ashok Leyland company’s


current ratio has declined from 2.2 to 1.59 from 2002-03 to
2004-05.This shows that it is not having the sufficient liquidity
position.
It is also observed that inventories and debtors turnover ratio
has increased for the same period. This has increased the interest
coverage ratio.

38
Table no: 4.6 Showing the prospective earnings of
BAJAJ AUTO LTD
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 0.24 0.21 0.17
Long term debt 0.23 0.19 0.15
equity ratio
Current ratio 1.02 1.19 1.32

TURNOVER RATIOS
Fixed assets 1.85 1.66 1.6
Inventory 24.67 19.17 13.98
Debtors 26.15 26.01 23.48
Interest cover ratio 704.8 176.39 45.97
PBITDTM (%) 20.12 18.71 14.37
PBITM (%) 16.53 14.38 9.44
PBDTM (%) 20.09 18.63 14.16
CPM (%) 14.86 14.9 13.31
APATM (%) 11.28 10.57 8.39
ROCE (%) 20.91 18.03 9.94
RONW (%) 17.63 15.93 10.33

It is observed from the table that the BAJAJ company’s current


ratio has declined from 1.32 to 1.02 from 2002-03 to 2004-05.This
shows that it is not having the sufficient liquidity position.
It is also observed that inventories and debtors turnover ratio
has increased for the same period. This has increased the interest
coverage ratio.

39
Table no: 4.7 Showing the prospective earnings of
HERO HONDA
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 0.16 0.14 0.11
Long term debt equity ratio 0.16 0.14 0.11
Current ratio 0.47 0.65 0.86

TURNOVER RATIOS
Fixed assets 6.92 6.77 5.68
Inventory 26.9 23.7 17.23
Debtors 42.3 62.89 85.15
Interest cover ratio 512.31 460.85 149.99
PBITDTM (%) 18.51 16.73 13.36
PBITM (%) 17.37 15.58 11.97
PBDTM (%) 18.47 16.69 13.28
CPM (%) 12.52 11.51 9.18
APATM (%) 11.38 10.37 7.79
ROCE (%) 99.82 94.84 64.86
RONW (%) 75.09 70.41 45.82

It is observed from the table that the HERO HONDA


company’s current ratio has declined from 0.86to 0.47 from 2002-03
to 2004-05.This shows that it is not having the sufficient liquidity
position. It is also seen the profits and returns have increased in last
two years to a greater extent compared to 2001.
It is also observed that inventories and debtors turnover ratio
has increased for the same period. This has increased the interest
coverage ratio.

40
Table no: 4.8 Showing the prospective earnings of
HINDUSTAN MOTORS
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 2.38 1.95 2.57
Long term debt equity ratio 1.78 1.37 1.81
Current ratio 1.15 1.12 1.18

TURNOVER RATIOS
Fixed assets 1.48 1.69 2.23
Inventory 5.65 6.37 6.13
Debtors 7.85 6.82 7.85
Interest cover ratio 0.26 0.11 -0.19
PBITDTM (%) 5.21 3.9 1.56
PBITM (%) 1.33 0.53 -1.12
PBDTM (%) 0.1 -1.12 -4.38
CPM (%) 1.39 0.56 -4.38
APATM (%) -2.49 -2.81 -7.07
ROCE (%) 0 0 -2.78
RONW (%) 0 0 -61.22

It is observed from the table that the HINDUSTAN MOTORS


company’s current ratio has declined from 1.18 to 1.15 from 2002-03
to 2004-05.This shows that it is not having the sufficient liquidity
position. .
It is also observed that inventories and debtors turnover ratio
has increased for the same period. This has increased the interest
coverage ratio.

41
Table no: 4.9 Showing the prospective earnings of
LML MOTORS
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 2.32 1.43 1.56
Long term debt equity ratio 1.83 1.17 1.28
Current ratio 1.01 1.15 1.28

TURNOVER RATIOS
Fixed assets 1.18 1.46 1.87
Inventory 3.66 4.41 5.78
Debtors 17.53 17.27 13.77
Interest cover ratio -0.56 -0.15 1.26
PBITDTM (%) -0.27 2.82 7.74
PBITM (%) -4.59 -0.83 4.61
PBDTM (%) -8.4 -2.9 4.09
CPM (%) -3.91 -2.9 3.98
APATM (%) -8.23 -6.57 0.85
ROCE (%) 0 -1.58 9.47
RONW (%) 0 -27.98 4.29

It is observed from the table that the LML MOTORS


company’s current ratio has declined from 1.28 to 1.01 from 2002-03
to 2004-05.This shows that it is not having the sufficient liquidity
position. It is also observed that there is no profits and returns for the
last two years. It shows that the company is incurring loss.

42
Table no: 4.10 Showing the prospective earnings of
MAHINDRA & MAHINDRA LTD
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 0.83 0.71 0.52
Long term debt equity ratio 0.77 0.59 0.43
Current ratio 1.25 1.34 1.15

TURNOVER RATIOS
Fixed assets 2.01 1.97 2.36
Inventory 9.71 7.7 8
Debtors 7.72 6.15 7.82
Interest cover ratio 2.18 1.84 2.14
PBITDTM (%) 9.29 8.94 8.92
PBITM (%) 5.61 5.4 5.64
PBDTM (%) 6.72 6 6.28
CPM (%) 5.92 6.53 6.1
APATM (%) 2.24 2.99 2.82
ROCE (%) 9.15 7.28 8.38
RONW (%) 6.63 6.64 5.95

It is observed from the table that the MAHINDRA &


MAHINDRA LTD company’s current ratio has declined from 1.55 to
1.25 from 2002-03 to 2004-05.This shows that it is not having the
sufficient liquidity position.
It is also observed that inventories and debtors turnover ratio
has increased for the same period. This has increased the interest
coverage ratio.

43
Table no: 4.11 Showing the prospective earnings of
TATA MOTORS
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 0.74 0.93 0.86
Long term debt
0.66 0.74 0.64
equity ratio
Current ratio 0.89 0.88 0.91

TURNOVER RATIOS
Fixed assets 1.84 1.52 1.43
Inventory 9.95 8.29 7.56
Debtors 12.33 11.24 9.77
Interest cover ratio 2.65 0.85 -0.02
PBITDTM (%) 11.04 8.14 4.27
PBITM (%) 7.68 4.05 -0.11
PBDTM (%) 8.15 3.35 -1.93
CPM (%) 6.18 3.99 -1.93
APATM (%) 2.81 -0.1 -6.31
ROCE (%) 18.77 6.95 -0.16
RONW (%) 11.86 -0.29 -14.28

It is observed from the table that the TATA MOTORS


company’s current ratio has declined from 0.91 to 0.81 from 2002-03
to 2004-05.This shows that it is not having the sufficient liquidity
position.
It is also observed that inventories and debtors turnover ratio
has increased for the same period. This has increased the interest
coverage ratio.

44
Table no: 4.12 Showing the prospective earnings of
TVS MOTORS
YEAR 2004-05 2003-04 2002-03
Debt-equity ratio 0.59 0.66 0.67
Long term debt equity ratio 0.51 0.6 0.66
Current ratio 1.18 1.4 1.46

TURNOVER RATIOS
Fixed assets 3 3.1 5.52
Inventory 12.83 13.45 25.96
Debtors 19.96 18.61 34.73
Interest cover ratio 5.59 4.56 6.36
PBITDTM (%) 7.75 8.15 13.23
PBITM (%) 5.2 5.75 10.6
PBDTM (%) 6.82 6.89 11.56
CPM (%) 5.34 5.84 9.48
APATM (%) 2.79 3.44 6.85
ROCE (%) 18.59 18.75 62.08
RONW (%) 15.84 18.63 66.98

It is observed from the table that the TVS MOTORS company’s


current ratio has declined from 1.46 to 1.18 from 2002-03 to 2004-
05.This shows that it is not having the sufficient liquidity position.
It is also observed that inventories and debtors turnover ratio
has increased for the same period. This has increased the interest
coverage ratio.

45
Technical Analysis
The technical analysis believe that the prices of stock depends
on supply and demand in the market place and has little relationship to
value, if any such concept even exists. Price is governed by basic
economic and psychological inputs so numerous and complex that no
individual can hope to understand and measure them correctly. All
financial data and market information of a given security already
reflected in the market price of a security. There fore an attempt is
made through charts to identify price movement patterns, which
predict future movements of the security.
The Dow Theory is one of the oldest technical methods still
widely followed. There are many version of this theory, but
essentially it consists of three types of market movements: the Major
market trend, which can often last a year or more; a secondary
intermediate trend, which can move against the primary trend for one
or several months; and minor movements lasting only for hours to a
few days.
The Dow Theory is built upon the assertion that measures of
stock prices trend to move together. If the Dow Jones industrial
average is rising, then, the transportation averages a strong bull
market. Conversely, a decline in both the industrial and transportation
averages are moving in opposite directions, the market is uncertain as
to the direction of future stock prices.
If one of the averages starts to decline after a period of rising
stock prices, then the two are at odds. The converse occurs when after
a period of falling security prices one of the averages starts to rise
while the other continue to fall. According to the Dow Theory, this

46
divergence suggests that this phase is over and that security prices in
general will soon start to rise.
If investors believe this theory, they will try to liquidate
when a sell signal becomes apparent, which in turn will drive down
prices. Buy signals have the opposite effect. Investors will try to
purchase securities, which will drive up their prices. Unfortunately, by
the time many investors perceive the signal and act, the price change
will have already occurred, and much of the potential profit from the
alternation in the portfolio will have evaporated.
There are several problems with the Dow Theory. The
first is that it is not a theory but an interpretation of known data. It
does not explain why the two averages should be able to forecast
future stock prices. In addition, there may be a considerable lag
between actual turning point and those indicated by the forecast. It
may be months before the two averages confirm each other, during
which time individual stocks may show substantial price changes.
The accuracy of the Dow Theory and its predictive power has
been the subject of much criticism. Between 1929 and 1960 the Dow
Theory made only 9 correct predictions out of 24 buy or sell signals.
The Dow Theory might work only when a long, wide, upward or
downward movement is registered in the market. It is mostly
unsuitable as a market predictor when the market unsuitable as a
market predictor when the market trend frequently reserves itself in
the short or intermediate term. Another major drawback is that the
theory does not attempt to explain a consistent pattern of the stock
price movements.

47
Efficient Capital Market Theory
Market efficiency implies that all known information is
immediately discounted by all investors and reflected in share prices
in the stock market. As such no one has an information edge. In the
ideal efficient market, everyone knows all possible - to – know
information simultaneously, interprets it similarly and behaves
rationally. But, human beings what they are, this of course rarely
happens.
James. H. Lorie explained what is meant by efficient
security market in these words “Efficiency in this context means the
ability of the capital markets to function so that prices of securities
react rapidly to new information. Such efficiency will produce prices
that are ‘appropriate’ in terms of current knowledge and investors will
be less likely to make unwise investments. A corollary is that
investors will also be less likely to discover great bargains and thereby
earn extra ordinary high rates of return”.
The requirements for a securities market to be efficient are:
1. Prices must be efficient so that new inventions and better
products will cause a firms security prices to rise and
motivate investors to supple capital to the firm [i.e., buy it
stock];
2. Information must be discussed freely and quickly across the
nations so all investors can react to new information;
3. Transactions costs such as sales commissions on securities
are ignored;
4. Taxes are assumed to have no noticeable effect on
investment policy;

48
5. Every investors is allowed to borrow or lend at the same
rate; and finally.
6. Investors must be rational and able to recognize efficient
assets and that they will want to invest money where it is
needed most [i.e., in the assets with relatively high returns].
Efficient market hypothesis can broadly be classified into
3 categories. They are
a. Weak form and the random walk
It holds that present stock market prices reflects all known
information with respect to past stock prices, trends and volumes.
Thus, it is asserted, such past data cannot be used to predict future
stock prices.
In other words, the stock prices approximate a random walk. As
time passes, prices wander or walk more or less randomly across the
charts. Since the walk is random, a knowledge of past price changes
does nothing to inform the analyst about whether the prices tomorrow,
next year will be higher or lower than today’s price.
According to Adam smith: “Prices have no memory, and
yesterday has nothing to do with tomorrow”. Thus, if the random walk
hypothesis is empherically confirmed, we may not assert that the
stock market is weak form efficient. In this case any work done by
chartists based on past patterns is worthless.
Thus reflecting the historical development, the weak form
implies that the knowledge of the past patterns of stock prices does
not aid investors to attain improved performance. Random walk
theorists view stock prices as moving randomly about a trend line,
which is based on anticipated earning power. Hence they consider that

49
1. Analysing past data does not permit the technician to forecast
the movement of price about the trend line and
2. New information affecting stock prices enters the market in
random fashion i.e., tomorrow’s news cannot be predicted nor
can future stock price movements be attributable to that news.
b. Semi – strong form
This form centers on how rapidly and efficiently market prices
adjust to new publicity available information. Research effort
on market efficiency has mainly turned to an examination of the
effect of the release of public information on share prices. The
studies of the semi – strong form of market efficiencies have
involved different methods that used to test week form of
efficiency. The tests have typically been based on the use of the
capital assets pricing model or variation of it.
The semi strong form of the efficient market hypothesis
maintains that as soon as information becomes publicly
available, it is absorbed and reflected in stock prices. So efforts
by analysts and investors to acquire and analyse public
information will not yield consistently superior returns to
analyst.
c. Strong form
The strong form of efficient market hypothesis maintains
that not only is publicly available information useless to the
investor or analyst but all information is useless specifically, no
information that is available, be it public or inside, can be used
to consistently earn superior investment returns.

50
This implies that not even securities analysts and
portfolio managers who have access to information more
quickly than the general investing public are able to use this
information to earn superior returns.
Portfolio Management
Portfolio Theory:
Portfolio management has assumed importance with the
increasing array of the instrument of finance, growing complexities of
the securities market and the volatility of the investment transaction.
Portfolio Management refers to managing efficiently the
investment in the securities by professionals for both small investors
and corporate investors who may not have the time and skills to arrive
at sound investment decisions.
A portfolio is a collection of securities. Since it is rarely
desirable to invest the entire funds of an individual or an institution in
a single security, it is essential that every security be viewed in a
portfolio context. Thus it seems logical that the expected return of a
portfolio should depend on the expected return of each of the security
in the portfolio. It also seems logical that the amounts invested in each
security should be important. Since portfolio expected return is a
weighted average of the expected returns of its securities, the
contribution of each security to the portfolio’s expected returns
depends on its expected returns and its proportionate share of the
initial portfolio’s market value.
The basic objectives of portfolio Management are:
• Safely of fund or capital.
• Minimum commitment and risk.

51
• Reasonable return on investment or minimum appreciation.
• Liquidity of portfolio.
Portfolio Investment Process
Since it is rarely desirable to invest the entire funds of an
individual or an institution in a single security, it is essential that
every security be viewed in a portfolio context. The basic problem of
portfolio management is to establish an investment goal or objective
and then decide how best to reach that goal with the securities
available.
Contain basic principles should be applied to all portfolio
decisions:
1. It is the portfolio that matters:
Individual securities are important only to the extent that they
affect the aggregate portfolio. All decisions should focus on the
impact the decision will have on the aggregate portfolio of all assets
held.
2. Larger expected returns come only with larger portfolio
risk:
The most important portfolio decision is the amount of risk,
which is acceptable, which is determined by the asset allocation
within the security portfolio.
3. The risk associated with a security type depends on when
the investment will be liquidation:
A person who plans to sell in one year will find equity returns to
be more risky than a person who plans to sell in 10 years.
Alternatively, the person who plans to sell in 10 years will find one
year maturity bonds to be more risky than the person who plans to sell

52
in one year. Risk is reduced by selecting securities with a payoff close
to when the portfolio is to be liquidated
4. Diversification works:
Diversification across various securities may reduced
portfolio’s risk. If such a broad diversification results in an expected
portfolio return or risk level, which is lower [or higher] than
described, then borrowing [or lending] can be used to achieve the
desired level.
5. Each portfolio should be tailored to the particular needs
of its owner:
People having varying tax rates, knowledge, and transaction
costs etc. portfolio strategy should be molded to the unique needs and
characteristics of the portfolio’s owner.
6. Competition for abnormal returns is extensive:
A large number of people are continuously using a large variety
of techniques in an attempt to obtain abnormal returns. If the actions
of these speculators are truly effective, security prices will adjust
instantaneously to new information.
The process used to manage a security portfolio is conceptually
the same as that used in any managerial decision. One should
1. Plan;
2. Implement the plan; and
3. Monitor the results.
The steps involved in the portfolio investment process are:
Planning
• Investor Conditions.
• Market conditions.

53
• Investments or speculative policies.
• Statement of investment policy.
• Strategic asset allocation.
Implementation
• Rebalance strategic asset allocation.
• Tactical asset allocation.
• Security selection.
• Evaluate statement of investment policy.
• Evaluate investment performance.
Diversification of Portfolio
One of the essential characteristics of a good portfolio is that it
should be well diversified. Investing all investor’s funds in just one or
two stocks may not be desirable because of the risks involved. It is
necessary to spread the investment over a few selected securities.
Following guidelines should be kept in mind:
• “Don’t put all your eggs in one basket”. The risk in doing so
simply too high. Diversification of your portfolio is essential.
• “Do not over diversify”, you do not gain much by having a
portfolio with more than ten to twenty different stocks, your
portfolio risk does not significantly come down by over
diversification.
Significance of Portfolio
Individual securities have risk return characteristics of their
own. Portfolio’s, which are combination of securities, may or may not
take on the aggregate characteristics of their individual parts.

54
Portfolio analysis considered the determination of future risk
and return in holding various blends of individual securities.
Traditional security analysis recognizes the key importance of risk
and return to the investor.
Risk is defined as the standard deviation around the expected
return. Effect we have to equate a security’s risk with variability of its
return. More dispersion of variability about a security’s expected
return meant the security will have riskier than one will less
dispersion.
As the securities carry differing degrees of expected risk leads
most of the investors to the notion of holding more than one security
at a time, in an attention to spread risks by not putting all their eggs
into one basket.
Diversification of one’s holding is intended to reduce risk in an
economy in which every asset returns are subject to some degree of
uncertainty. Even value of cash suffers from in roads of inflation.
Most investors hope that if they hold several assets, even if one
goes better the other will provide some protection from an extreme
loss.
Approaches of portfolio Diversification
Markowitz: Portfolio selection model
According to Dr.Harry. M. Markowitz, a portfolio is efficient
when it is expected to yield the highest return for the level of risk
accepted, or alternatively, the smallest portfolio risk for a specified
level of expected return. To build an efficient portfolio an expected
return level is chosen, and assets are substituted until the portfolio
combination with the smallest variance at the return level is found. As

55
this process is repeated for other expected returns, set of efficient
portfolio is generated.
Assumptions:
1. Investors consider each investment alternative as being
represented by a probability distribution of expected returns
over some holding period.
2. Investors Maximise on period expected utility and possess
utility curve, which demonstrates diminishing marginal
utility of wealth.
3. Individuals estimate risk on the basis of the variability of
expected returns.
4. Investors base decisions solely on expected return and
variance [or standard deviation] of returns only.
5. For a given risk level, investors prefer high returns to lower
returns.
Similarly, for a given level of expected return, investor prefer
less risk to more risk.
Under these assumptions, a single asset or portfolio of assets is
considered to be “efficient” if on other asset or portfolio of assets
offers higher expected return with the same [or lower] risk or lower
risk with the same[or higher] expected return.
Data needed for each stock
Under Markowitz’s system of portfolio analysis we need three
bits of information for each stock:
• Expected return for the holding period.
• Expected risk for the holding period.

56
• Expected co-variance for each pair of stocks.
SHARPE: The Single index model
William. F. Sharpe published a model simplifying the
mathematical calculations required by the Markowitz model. Sharpe
assumed that, for the sake of simplicity, the return on a security could
be regarded as being linearly related to a single index like the market
index should consist of all securities trading on the market.
Acceptance of the idea of a market index, Sharpe argued, would
obviate the need for calculating thousands of con or variances
between individual securities, because any movement in securities
could be attributed to movements in the single underlying factor being
measured by the market index.
In his terms, it is possible to consider the return for each
security to be represented by the following equation.
Ri = α i + β i I + ei
Where,
Ri = Expected return on security ‘i’.
α i = intercept of a straight line or alpha coefficient.
β i = Slope of a straight line or Beta coefficient.
I = Expected return on index.
ei = error term with a mean of Zero and a standard
Deviation which is a constant.
Data needed for each stock
• Expected return for the holding period.
• Expected risk for the holding period.

57
• Covariance estimates for each stock relative to the market
index.
In addition, in Sharpe’s model we need to estimate the return
and variance on the index for the holding period.
Capital Asset Pricing Model
Capital market theory is a major extension of the portfolio
theory of Markowitz. Portfolio theory is really a description of how
rational investors should build efficient portfolios. Capital market
theory tells us how assets should be priced in the capital market.
The specific assumptions underlying capital market theory are:
1. Investors make decisions based solely upon risk and return
assessments, i.e., expected returns and standard deviation
measures.
2. The purchase or sale of a security can be undertaken in
infinitely divisible units.
3. Investors can short sell any amount of shares with out limit.
4. Purchases and sales by a single investor can’t affect prices.
This means that there is perfect competition.
5. There are no transaction costs.
6. The purchase or sale of securities is done in the absence of

personal income taxes.


7. The investors can barrow or lend any amount of funds
desired at an identical risk less rate.
8. Investors share identical expectations with regard to the
relevant decision period, the necessary decision inputs, their
form and size. Thus investors are presumed to have identical
planning horizons.

58
Many or the assumptions no doubt seem objectionable.
However, despite the strict assumptions, the model we will view does
a very good job of describing prices in the capital markets. Reality is
not materially distorted by making these assumptions.
Combines risk return measures for the mixed portfolio is given
by the following formula
Rp = X RM + (1-X) RF
Where,
Rp = Expected return on portfolio
X =Percentage of funds invested in risky portfolio.
(1-X) = Percentage of funds invested in risk less asset.
RM = Expected return on risky portfolio.
RF = Expected return on risk less portfolio.
And
σ p = Xσ m

where,
σ p = Expected standard deviation of the portfolio.
X = Percent of funds invested in risky portfolio.
σ m = Expected standard deviation on risky portfolio.
The key insights of the CAPM are:
1. A security’s risk is measured by its beta value.
2. The required rate of return on a security depends on the risk
less rate of interest, the market risk premium and the
security’s beta.
3. Investors should own risky securities only as part of a highly
diversified portfolio of such securities.

59
4. The only way to increase the expected rate of return from
investment is to take an additional risk.
Arbitrage Pricing Theory
The Arbitrage pricing theory introduced by Ross providers
another model for explaining the relationship between risk and return.
The theory relates the expected return of an asset to the return from
the risk free asset and a series of other common factors that
systematically enhance or detract from that expected return.
Of the assumptions made by the CAMP, only certain aspects
are considered under Arbitrage pricing theory:
1. Investors seek return tempered by risk. They are risk average

and seek to maximise their terminal wealth.


2. Investors can borrow and lend at the risk free rate.
3. There are no market frictions such as transactions costs, taxes
or restriction of short selling.
Arbitrage pricing theory, does have two other assumption that
are peculiar to it:
1. The first of the unique APT assumptions suggests that asset
returns are determined by many factors, not just “the market”.
2. The second describes investor’s behaviour in the market place:

they seek arbitrage opportunities and though strategies designed


to capture the risk less profit.
The core of arbitrage pricing theory is that several systematic
factors [anticipated or unanticipated] affect the security returns.
Empirical work has shown 3 to 4 factors adequately capture the
influence of systematic factors on market returns. These factors are
incorporated in APT as shown below:

60
R = E + (b1) (f1) + (b2)(f2) + (b3)(t3) + (b4)(f4) + e
Where,
E = Expected return on security.
b1, b2, b3 = Security sensitivity to the change in systematic factor.
f1, f2, f3 = Anticipated or unanticipated return on the systematic
factors.
e = unexplained variance or unsystematic risk.
The problems with this theory are factor identification and
separating unanticipated from anticipated factor movements in the
measurement of sensitivities and on stock is so influenced by some
peculiar forces that it is very difficult to determine the precise
relationship between its return and a given factor.

61
Tools of analysis
Before calculating beta and correlation coefficient for each of
the securities we have to calculate the returns and standard deviation
i.e., the risk factors for the individual securities.
The following tables show the returns and standard deviation
for each of the securities based on the total observations and matched
observations with S&P Cnx Nifty Index. Here the N values differ
because we are calculating risk and return based on the weekly
closing share prices of individual securities and there is a change that
certain securities might not have been traded for some weeks.
Table No 4.13: Showing returns of different securities of
automobile industry and returns with S & P Cnx Nifty as a market
index.
Returns of automobile companies
Company With S&P Cnx
Total
Name Nifty
N Returns N Returns
A.L 261 0.0021 261 0.0012
B.A 261 -0.0010 261 -0.0004
HHL 261 0.0033 261 0.0017
HM 261 -0.0029 261 -0.0013
LML 261 -0.0049 261 -0.0024
M&M 261 -0.0060 261 -0.0029
TATA 261 -0.0017 261 -0.0008
TVS 261 0.0072 261 0.0037
TABLE NO 4.14: Showing Standard deviation of different
securities of automobile industry and Standard deviation with
S&P Cnx Nifty as a market index

62
Standard deviation of automobile companies
Company With S&P
Total
Name Cnx Nifty
N Returns N Returns
A.L 261 0.0832 261 0.0640
B.A 261 0.0527 261 0.0450
HHL 261 0.0647 261 0.0523
HM 261 0.1159 261 0.0857
LML 261 0.0795 261 0.0617
M&M 261 0.0768 261 0.0599
TATA 261 0.0794 261 0.0615
TVS 261 0.0831 261 0.0636

BETA
An important measure of risk, the beta coefficient or simply
‘beta’ measure the sensitivity of a stock price relative to the
fluctuations of a particular stock market index. Risk and return are the
two sides of the investment coin. Many investors are familiar with
techniques to calculate returns of investment; but they are not familiar
with the measure of risk of an investment. Beta is calculated by
relating the relevant returns on a security with the returns for the
market. Market return is measured by the average returns of a large
sample of stocks such as BSE Sensex, S&P Cnx Nifty etc., beta can
be positive or negative.
The risk in a share can be divided into two part; one is market
risk and other is company specific risk. The market risk is also called
systematic risk; affect all the stocks in the market. Eg., a change of
government policy, revision of interest rates, exim policy etc., will
affect all the stocks in the market. The company specific risk is also

63
known as unsystematic risk and affects the specific company or
industry.
The systematic portion of risk is practically impossible to
reduce. So it is important to quantity this market risk. This risk can be
measured by the scrips betas. If a stock moves exactly in tandem with
a market index such as the S&P Cnx Nifty, it is said to have a beta of
1. A stock with a beta higher than one is called a risky stock and its
market price may move faster than the market. If beta is less than one,
the stock is called a defensive stock.
The concept of beta for measuring the riskiness of a stock is
ideal for constructing a balanced portfolio. If an investor selects
stocks with low betas [i.e., less than 1], investor’s portfolio will suffer
less in a falling market. Of course, at the same time investor will also
stand to gain less than the market average in rising market. In case an
investor is prepared to take greater risk an investor can choose stocks
with higher betas [beta>1] in order to gain more than the market
average in a rising market. At the same time the investor should be
prepared to lose more than the market average, in case the market
crashes. However, it is desirable to have a mix of stocks in a portfolio
with betas varying between 0.5 and 1.5.
We have the following points about beta as a measure of risk:
• The value of a diversified portfolio moves with the market as a
whole [up and down together].
• Beta measures how sharply and closely a security’s price moves
on average with the market, and therefore beta measures how
closely a security’s price moves with the returns from a
diversified portfolio.

64
• Adding a high beta [beta>1.0] security to a diversified portfolio
increases the portfolio’s risk, and adding a low beta [beta<1.0]
or negative beta [beta<0.0] security to a diversified portfolio
reduces the portfolio’s risk.
Beta Analysis
TABLE NO 4.15: Showing Standard deviation of different
securities of automobile industry and Standard deviation with
S&P Cnx Nifty as a market index
Standard deviation of automobile companies
Company Name With S&P Cnx Nifty
N Returns
A.L 261 0.9000
B.A 261 0.5351
HHL 261 0.4661
HM 261 0.9183
LML 261 1.0415
M&M 261 1.2513
TATA 261 1.2824
TVS 261 0.5655

TABLE NO 4.16: Given below indicates the break up of beta of


companies taking S&P Cnx Nifty as a market index

Beta No. of co’s with


values S&P Cnx Nifty
0.0 to 0.5 2
0.5 to 1.0 3
1.0 To 1.5 3
Total 8

Compared with S&P Cnx Nifty TATA motors ltd with beta of
1.2824 leading the beta and Hero Honda lt., with 0.4661 least among
the list.

65
2 companies are having beta in the range of 0.0 to 0.5. When
the market moves up by 10 percent, the stocks of these companies will
move up by 0 to 5 and if the market declines by 10 percent, the stock
price will decline an average by 0 to 5 percent.
Betas of 6 companies are in the range of 0.5 to 1.5 percent. This
shows that the stock prices of most of the companies moves upwards
and falls depending on the movement of the S7p Cnx Nifty index. If
the index moves up by 10 percent, the stock price of these companies
also move up on an average by 5 to 15 percent and vice versa.
For the above study, we have taken into consideration the
weekly opening and closing value of each automobile security as per
the National stock Exchange.
The following graph indicates the break up beta of companies.

Graph No 4.5 Break-up value of beta.


Break-up value of Beta

3
2.5
No. of Companies

2
1.5
No. of co’s w ith
1 S&P Cnx Nifty
0.5
0
0.0 to 0.5 0.5 to 1.0 1.0 To 1.5

Beta values

66
TABLE NO 4.17: Showing correlation values of different securities
of automobile taking S&P Cnx Nifty as a market index
Correlation coefficient of automobile companies
Company With S&P Cnx
Name Nifty
N Returns
A.L 261 0.3853
B.A 261 0.3615
HHL 261 0.2564
HM 261 0.2822
LML 261 0.4662
M&M 261 0.5804
TATA 261 0.5749
TVS 261 0.2497

67
TABLE NO 4.18: Given below indicates the break up of Correlation coefficient
of companies taking S&P Cnx Nifty as a market index

No. of co’s with


Beta values
S&P Cnx Nifty
0.0 to 0.2 0
0.2 to 0.4 5
0.4to 0.6 3

0.6 to 0.8 0

0.8 to 1.0 0

Total 8

All the companies fall between the range of 0.2 to 0.6, that
means though the company share prices of these companies move in
the same direction as compared with the index, perfect forecast is not
possible.
Thus our study reveals that all the companies are positively
correlated with NSE index to show that there is a direct relationship
between the share price of a company and index.
Correlation between the companies
In order to minimize the risk it is always advised that you have
to diversify your investment. So in order to know in which company
you have to invest, correlation coefficient has to be found out to know
the nature.
When diversification does not help:
• Perfectly positively correlated returns.
When two securities returns are perfectly positively
correlated, the risk of a combination or diversification does not
provide risk reduction but only risk averaging.

68
When diversification can eliminate risk:
• Perfectly negative correlated return
When two securities returns are perfectly negatively correlated, it is
possible to combine them in a manner that will eliminate all risk. This
principle motivates all hedging strategies. This object is to take
position that will off set each other with regard to certain kind of risk,
reducing or completely eliminating such sources of uncertainty.
The Insurance Principle:
[Uncorrelated returns]
Some risk can be substantially reduced by pooling. This has
crucial implications or investment management. Diversification
provides substantial risk reduction if the components of a portfolio are
uncorrelated. In fact, if enough securities are included, the overall risk
on the portfolio will be almost zero. This is why, insurance companies
attempt to write many individual policies and spread their coverage so
as to minimize overall risk. The following table No. reveals the
correlation coefficient between the automobile company’s.

69
Correlation among automobile company’s
Table No 4.19: Reveals the correlation co-efficient between the
automobile Companies
Compan
AL B.A HHL HM LML M&M TATA TVS
y Name
0.273 0.220 0.277 0.394 0.328 0.436
AL - 0.1804
0 8 6 9 9 3
0.273 0.253 0.140 0.346 0.298 0.324
BA - 0.2457
0 6 2 7 4 6
0.220 0.253 0.084 0.137 0.250 0.153
HHL - 0.1299
8 6 7 3 9 5
0.277 0.140 0.084 0.229 0.219 0.180
HM - 0.1137
6 2 7 4 5 6
0.394 0.346 0.137 0.229 0.378 0.434
LML - 0.2286
9 7 3 4 4 3
0.328 0.298 0.250 0.219 0.378 0.470
M&M - 0.2001
9 4 9 5 5 9
0.436 0.324 0.153 0.180 0.434 0.470
TATA - 0.1630
3 6 5 6 3 9
0.180 0.245 0.129 0.113 0.228 0.200 0.163
TVS -
4 7 9 7 6 1 0

According to table all the companies show positive correlation


between them.
Among them Hero Honda shows the least correlation 0.0847
with HM and the second least being 0.1137 of HM with TVS.
The highest correlation is 0.4709 of TATA Motors with M&M
and second highest being 0.4363 of TATA Motors with Ashok
Leyland.

70
71
Survey
Survey has been done covering 50 share holders holding auto
mobile securities.
1. Classification of respondents on the basis of Sex.
Type of respondents Number of respondents Percentage (%)
Male 38 76
Female 12 24
Total 50 100

Above table shows the classification of respondents on


the basis of Sex. The respondents who come under male is 76% and
that of female is 25%.

2. Classification of respondents on the basis of qualification.


Qualification of Number of Percentage
respondents respondents (%)
S.S.L.C 06 12
P.U.C 14 28
Graduate 22 44
P.G 8 16
Total 50 100
Above table shows the classification of respondents on
the basis of qualification 12% have done SSLC, 28% of them have
done PUC, 44% of them have done Graduation and 16% of them have
done P.G.

72
3. Classification on the basis of occupation
Occupation of
Number of respondents Percentage (%)
respondents
Govt. Service 10 20
Student 2 4
Business 22 44
Profession 16 32
Total 50 100
Above table shows the classification of the respondents
on the basis of occupation. 20% are government Servants, 4% are
students, 44% are carrying on business and 32% are professionals.

4. Classification of respondents on the basis of marital status.


Marital Status Number of respondents Percentage (%)
Married 28 56
Unmarried 22 44
Total 50 100
Above table shows the classification of the respondents
on the basis of marital status. 56% of the investors are married and
44% of them are unmarried.
5. Classification on the basis of preference in investment in
companies.
Companies Number of respondents Percentage (%)
New company’s 22 44
Pre-existing Company’s 28 56
Total 50 100
Above table shows the classification of the respondents
on the basis of reference in investment in company’s and 56% of them
have invested in pre-existing company’s.
6. Classification on the basis on period of investment.
Period of Investment Number of respondents Percentage (%)

73
Long term 35 70
Short term 15 30
Total 50 100
Above table shows the classification of respondents on
the basis on period of investment. 70% of them have invested for long
term and 30% have invested in short term.
7. Classification on the basis of source of information about
Karvy.
Medias Number of respondents Percentage (%)
Friends and relatives 8 16
News Papers 20 40
Advertisement 6 12
Business Magazine 15 30
Others 1 2
Total 50 100
Above table shows the classification of investors on the
basis of source of information about Karvy. 16% from friends and
relatives, 40$ form news papers, 12% from advertisements, 30% from
business magazines and 2% by other.

74
8. Classification of the respondents on the basis of preference
to invest in automobile companies.
Automobile
Number of respondents Percentage (%)
Companies
MUL 10 20
AL 13 26
HHL 9 18
BAJAJ 6 12
TATA 4 8
M&M 6 12
Others 2 4
Total 50 100
Above table shows the classification of investors on the
basis of preference to invest in automobile companies. 20% on
MUL, 26% on Ashok Leyland, 18% on HHL, 12% on Bajaj,
8% on TATA motors, 12% on M&M and only.
9. Classification of respondents based on consideration for
investment.
Consideration for Number of Percentage
Investment respondents (%)
Owned by Govt. 5 10
Popularity of Co. 15 30
High rate of earnings 15 30
Liberal dividend payment 10 20
High demand in Market 5 10
Others 0 0
Total 50 100
Above table shows the classification of respondents
based on consideration for investment 10% for companies are
owned by the Government, 30% for popularity of the company,
30% on high rate of earnings, 20% on liberal dividend payout
policy of the company and 10% on high demand in the market.

75
10.Classification of respondents on the basis of investment in
auto ancillary company’s
Auto ancillary Number of
Percentage (%)
companies respondents
Sona Steering 8 16
Bharath Gears 6 12
Munjal Showa 12 24
Shanty gas 10 20
Mother-son suni
12 24
system
Others 2 4
Total 50 100

Above table shows the classification of respondents


based on investment in auto ancillary company’s 16% for Sona
steering gears, 24% on Mother-Son Suni system and only 4%
on others.

76
Summery of findings [Primary Data Survey]
1. Survey showed that Male participation in stock exchange is

more than females i.e., the ratio is nearly 3 : 1.


2. The percentage of participation of graduates and post
graduates is more compared to SSLC and PUC participants.
3. Business men and professionals take part in higher
percentage in stock exchange.
4. There is not much gap between the married and unmarried
respondents who take part in stock exchange.
5. Investment in pre-existing company’s is generally preferred

by long term investors but more investors want to buy new


company’s shares for speculative profits where more number of
shares are sold or purchased at lower prices.
6. Investors give more preference in investing in MUL and

Ashok Leyland company’s shares because of the popularity of


the company’s
7. High rate of earnings and popularity of the company have
gained same amount of percentage preference by the investors.
8. More speculative transactions take place in ancillary units
shares.
Summery of findings [Secondary Data]
Since both returns and risk are important in the evaluation of a
portfolio we are confronted with the problem if how to combine these
factors into an index for the evaluation of a portfolio. Initially
investors evaluated portfolios almost entirely on the basis of the rate
of return. They were clearly aware of the motion of risk and
uncertainly, but did not know how to quantity risk. So, following

77
analysis are developed to quantify risk in terms of variability of
returns.
BETA ANALYSIS
For the purpose of analyzing beta value we have taken into
account the returns on share prices of automobiles company’s as the
scrip return and S&P Cnx Nifty as market returns.
The study shows the positive beta values for all the company’s,
which was ranked in the table.
The TATA motors is having highest beta of 1.2824, which
indicates that, the company’s systematic price risk is high.
The HERO HONDA motors is having lowest beta of 0.4661,
which indicates that, the company’s systematic price risk is low.
The reason might be some other factors, which were not
captured by market index, resulting in such wide variations.
Since most betas range between 0.5 to 1.5, it is better to have a
mix of stocks which are falling in this range. The share prices of the
company moves upwards and downwards along with the market
movement.
Correlation analysis
The general observation of our study shows that, there is direct
correlation relationship between the market index and the share prices
at the company’s, the reason being all the company’s are positively
correlated with the index.
It is rather difficult to assess all the factors which influence the
share prices of a particular company’s unless detailed analyses of
factors affecting the company are captured.

78
As far as, arbitrage pricing theory is concerned, the returns on
securities are generated by a factor model. But arbitrage pricing
theory does not identify these factors. In other words, the returns on
security are related to the unknown numbers of unknown factors.
Since, these factors are difficult to estimate, it is not easy to calculate
returns on securities on that basis.
To conclude, we can say that diversifying the portfolio is a
must in order to reduce the risk for the same or increased level of
returns. Although Markowitz and sharpe’s approach to portfolio
diversification have their own limitation, the present study has shown
that they are useful tools to assess risk and returns for portfolio
diversifications.

79
Suggestions from Survey
1. As the stock market trading techniques are not properly known
to the people, it was suggested by the respondents to educate
the people in stock market trading.
2. Due to low level of advertisement form Karvy, people are not
aware of the multifarious service rendered by the Karvy
consultancy. Hence, it is suggested that more advertisement
should come from Karvy abut is activities and operations to
enhance its image in the minds of the investors.
3. It is also suggested that even the educated class especially
Commerce and Management students should be educated
properly in the field of stock market activities.
4. On line information had not been supplied properly to the
investors. So they have to make proper use of on-line to serve
the investors properly.
Investment analysis to potential investors
Table no 6.1: Showing the investment analysis for potential
Investors

Company name BETA CPM ROCE ROWN


Hero Honda 0.4661 12.52 99.82 75.09
Bajaj Auto 0.5351 14.86 20.91 17.63
TVS Motors 0.5655 5.34 18.59 15.84
Ashok Leyland 0.9000 7.14 14.99 12.37
Hindustan Motors 0.9183 1.39 0 0
LML Motors 1.0415 -3.91 0 0
Mahindra & Mahindra 1.2513 5.92 9.15 6.63
TATA Motors 1.2824 6.18 18.77 11.86
GRAPH NO 6.1 Investment Analysis

80
Investment Analysis
100

80

comparision
60

40
BETA
CPM
20
ROCE
0 ROWN

-20
Hero Honda Bajaj Auto TVS Motors Ashok Hindustan LML Motors Mahindra & TATA
Leyland Motors Mahindra Motors
companies

According to the Beta Analysis one can invest in the above top 4
company’s, as the beta is lower than 1 and they are less risky stocks and are
defensive stocks. They will definitely provide no losses or no risk by
investing in those companies. The portfolio consisting of those stocks will
suffer less in a falling market.
And also by analyzing the above table and graph one can see that the
CPM [Cash Profit Margin], ROCE [Return On Capital Employed] and
RONW [Return On Net Worth] is better compared to the other company’s.
All these all are important while evaluating the company’s performances,
the analysis show the top 4 company’s are in a far better and safe position
when compared to other companies. These company’s show positive and
safe figures, those are required for the investor’s to be safe, but other
company’s are having negative figures and are not up to the mark. Hence
one can invest and can have the top 4 company’s in the table in their
portfolio to be in a safe and risk less position and can earn more profit in a
long run.
Other things being equal as a researcher. I would like to advise to
invest in low beta securities like Hero Honda, Bajaj Auto, TVS motors and
Ashok Leyland.

81
Questionnaire
Respected sir,
I am a student of final year BBM, ARG college of Arts and
Commerce Davangere. As a part of our curriculum I have taken up a project work
on “A Study on portfolio on automobile industries” (a case study conducted at
karvy consultancy, Shimoga branch”, I request you to fill the following questions
accurately as for as possible. The information provided by you will be used for
the academic purpose only. Please co-operate.

Thanking you, Yours sincerely

(PRADEEP.B.R)

1. Name :…………………………………………..

2. Address :………………………………………….
………………………………………….
…………………………………………..

3. Sex : Male[ ] Female[ ]

4. Qualification: SSLC [ ] Graduation [ ]


PUC [ ] PG [ ]

5. Occupation : Govt service [ ] Business [ ]


Student [ ] Profession [ ]

6. Marital status: Married [ ] Unmarried [ ]

7. Monthly income: <10000 [ ] <20000 [ ]


<30000 [ ] >30000 [ ]

8: On what types of company securities would you like to invest ?


a. New companies [ ] b.Pre-Existing companies [ ]
Reasons:…………………………………………………
…………………………………………………..

9. Have you invested in any of the automobile industrial securities ?


a. Yes [ ] b. No [ ]

82
10. In which automobile industry you have invested ?
a. Maruthi Udyog Ltd. [ ] b.Ashok Leyland [ ]
c. Hero Honda Ltd [ ] d.Bajaj Auto Ltd [ ]
e. TATA motors [ ] f.Mahindra & Mahindra Ltd [ ]
g.others (if any specify) [ ]………………………………………

11. Consideration for investment in above companies ?


a. Owned by the Government [ ] b. Popularity of the company [ ]
c. High rate of earnings [ ] d. Liberal dividend payment [ ]
e. High demand in the market [ ] f. Others (if any) [ ]
…………………………………………………………………………

12. Are you satisfied with the returns on your investment ?


a. Yes [ ] b. No [ ]

13. Have you invested in auto ancillary companies ?


a. Sona Steering [ ] b. Munjal Showa [ ]
c.Bharath Gears [ ] d. Shanti Gears [ ]
e. Mother- son Suni systems [ ] f. Others [ ]

14. How did you came to know about Karvy Consultancy ?


a. Friends and relatives [ ] b. News papers [ ]
c. Advertisements [ ] d. Business magazines [ ]
e. Others [ ]

15. Are you satisfied with the services of Karvy Consultancy ?


a. Yes [ ] b. No [ ]

16. Your opinion on Cost charged by Karvy Consultancy for services ?


a. Reasonable [ ] b. Costlier [ ]

17. Are you a long-term or short-term investor ?


a. Long term [ ] b. Short term [ ]

18. suggestions (if any)

……………………………………………………………………..
………………………………………………………………………

Date:
Place:
Signature

………...........
.

83
ANNEXURES

LCVs : Light Commercial Vehicles.

MCVs : Medium Commercial Vehicles.

HCVs : Heavy Commercial Vehicles.

MUVs : Multi Utility Vehicles.

SUVs : Sports Utility Vehicles.

SIAM : Society of Indian Automobile Manufacturers.

PBIDTM : Profit Before Interest Depreciation and Tax Margin.

PBITM : Profit Before Interest and Tax Margin.

PBDTM : Profit Before Depreciation and Tax Margin.

APATM : Annual Profit After Tax Margin.

ROCE : Return On Capital Employed.

RONW : Return On Net Worth.

84
BIBLOGRAPHY

Data Bank, Capitaline-2004 at Karvy Stock Exchange.

Web sites

WWW.SIAMINDIA.COM

WWW.ASHOK LEYLAND.COM

WWW.HINDUSTAN MOTORS.COM

WWW.HEROHONDA.COM

WWW.MAHINDRAWORLD.COM

WWW.TELCO INDIA.COM

WWW.BSEINDIA.COM

WWW.NSCINDIA.COM

Books

“Security Analysis and Portfolio Management”-Donald E Fischer


and Ronald J Jordan, Prentice Hall of India.

“Financial Management”-I.M.Pandey, Vikas publication house


pvt ltd.

“Investment Management”-V.A.Avadhani, Himalaya publishing


house.

“Investment Management”-Preeti Singh, Himalaya publishing


house.

MAGAZINES

Business World- September 2005

85