A PROJECT REPORT On Construction of Balanced Portfolio Comprising of Equity and Debt at SCM

Construction of Balanced Portfolio comprising of Equity and Debt
EXECUTIVE SUMMARY
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A stock market is a market for the trading of publicly held company stock and associated
financial instruments.
The stock market in India is very volatile and many investors are in a dilemma to invest in the
securities. Not surprisingly, recent market developments have once more focused attention on
the volatility that has come to characterise Indias stock markets. In volatile markets, domestic
speculators too attempt to manipulate markets in periods of unusually high prices.
Keeping in view the above observation about the Indian stock market, a project Construction
of Balanced Portfolio of Equity and Debt, with the problem statement being To test the
significance of excess return to beta and find out whether one can construct a portfolio whose
beta is equal to market beta (beta =1), with returns greater than market returns..
Ten sectors were picked randomly consisting of 6 companies I Cement and 4 Companies in
each sector. Also the 10 corporate bonds along with 5 govt. securities are taken. With the help
of all, the statistical measures were calculated and a TRI was constructed. Then again another
portfolio was constructed using a particular sector stocks and this portfolio was compared with
the returns on the index to look at the performance at different combinations.
The Project was carried out at SMC Solutions, stock broking firm situated in Hubli.
Analysis of cement sector and steel sector give an immense insight to invest in these these
stocks. The Report describes the analysis being carried out in project and results obtained.
At the last, the portfolio was constructed with higher returns than
index returns with systematic risk of 1
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THEORETICAL BACKGROUND
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Fundamental Analysis
The earnings of the company, the growth rate, and risk exposure of the company have a direct
bearing on the price of the share. These factors in turn rely on the host of other factors like
economic environment in which they function, the industry which they belong to, and finally
the companies own performance. The fundamental analysis school of thought appraises the
intrinsic value of shares through:
Economic Analysis
Industry Analysis
Company Analysis
Economic Analysis
The level of economic activity has an impact on investment in many ways. If the economy
grows rapidly, the industry can also be expected to show rapid growth and vice-versa. When the
level of economic activity is low, stock prices are low, and when the level of economic activity
is high, stock prices are high reflecting the prosperous outlook for sales and profits of the firms.
The analysis of macro economic environment is essential to understand the behaviour of the
stock prices. The commonly analyzed macro economic factors are as follows:
Gross Domestic Product: GDP indicates the rate of growth of the economy. GDP
represents the aggregate value of the goods and services produced in the economy. GDP
consists of personal consumption expenditure, gross private domestic investment and
government expenditure on goods and services and net export of goods and services.
The growth rate of economy points out the prospects for the industrial sector and return
investors can expect from investment in shares. The higher growth rate is more
favourable to the stock market.
Savings and investment: It is obvious that growth requires investment which in turn
requires substantial amount of domestic savings. Stock market is a channel through
which the savings of the investors are made available to corporate bodies. Savings are
distributed over various assets like equity shares, deposits,
mutual fund units, real estate and bullion. The saving and investment patterns of the public
affect the stock to a great extent.
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Inflation: Along with the growth of GDP, if inflation also increases, then the real rate of
growth would be very little. The demand in the consumer product industry is
significantly affected. If there is a mid level of inflation, it is good to the stock market
but high rate of inflation is harmful to the stock market.
Interest rates: The interest rate affects the cost of financing to the firms. A decrease in
interest rate implies lower cost of finance for firms and more profitability. More money
is available at a lower interest rate for the brokers who are doing business with
borrowed money. Availability of cheap fund, encourages speculation and rise in price of
shares.
Budget: The budget draft provides an elaborate account of the government revenues
and expenditures. A deficit budget may lead to high rate of inflation and adversely affect
the cost of production. Surplus budget may result in deflation. Hence, balanced budget
is highly favorable to the stock market.
The tax structure: Concessions and incentives given to a certain industry encourages
investment in that particular industry. Tax reliefs given to savings encourage savings.
The type of tax exemption has an impact on the profitability of the industries.
The Balance of payment: The balance of payment is the record of a countrys money
receipts from and payments abroad. The difference between receipts and payments may
be surplus or deficit. BOP is the measure of the strength of rupee on external account. If
the deficit increases, the rupee may depreciate against other currencies, thereby,
affecting the cost of imports. The volatility of the foreign exchange rate affects the
investment of the foreign institutional investors in the Indian Stock Market. A favorable
balance of payment renders a positive effect on the stock market.
Infrastructure facilities: Infrastructure facilities are essential for the growth of

industrial and agricultural sector. A wide network of communication system is a must
for the growth of the economy. Regular supply of power without any power cut would
boost the production. Banking and financial sectors should also be sound enough to
provide adequate support to industry and agriculture.
Demographic factors: The demographic data provides details about the population by
age, occupation, literacy and geographic location. This is needed to forecast the demand
for the consumer goods. The population by age indicates the availability of able work
force. Population, by providing labour and demand for products, affects the industry and
stock market.
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Industry analysis
Industry analysis is a type of business research that focuses on the status of an industry or an
industrial sector (a broad industry classification, like "manufacturing"). A complete industrial
analysis usually includes a review of an industry's recent performance, its current status, and the
outlook for the future. Many analyses include a combination of text and statistical data.
Five Forces Affecting Competitive Strategy
Porter identifies five forces that drive competition within an industry:
The threat of entry by new competitors.
The intensity of rivalry among existing competitors.
Pressure from substitute products.
The bargaining power of buyers.
The bargaining power of suppliers.
Industry Life Cycle Model
This model is a useful tool for analyzing the effects of an industry's evolution on competitive
forces. Using the industry life cycle model, we can identify five industry environments, each
linked to a distinct stage of an industry's evolution:
An embryonic industry environment
A growth industry environment
A shakeout industry environment
A mature industry environment
A declining industry environment
Company Analysis
In the company analysis the investor assimilates the several bit of information related to the
company and evaluates the present and future value of stock. The risk and return associated
with the purchase of the stock is analyzed to take better investment decision.
The present and future are affected by a number of factors. They are:-
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Factors
Share values
Competitive edge
Historic price of stock
Earnings
P/E ratio
Capital structure
Economic condition
Management
Stock market condition
Operating efficiency
Financial performance
Future price
Present price
The competitive edge of the company:- The competitive edge of the company can be studied
with the help of: The market share
The growth of annual sales
The stability of annual sales
The market shares:- The market share of the annual sales helps to determine a companys
relative competitive position within the industry. If the market share is high the company would
be able to meet the competition successfully.
Growth of sales:- The company would be the leading company, but if the growth of sales is
comparatively lower than another company, it indicates the possibility of the company losing
the leadership. The rapid growth in sales would keep the shareholder in a better position than
one with a stagnant rapid growth.
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Stability of sales: - If a firm has stable sales revenue, other things being remaining constant
will have more stable earnings. Wide variation in sales leads to variation incapacity
utilization, financial planning and dividend.
Earnings of the company:- Sales alone do not increase the sales the earnings but the costs and
expenses of the company also influence the earnings of the company. Further, earnings do
not always increase with the increase in sales. The companys sales might have increased
but its per share may decline due to the rise in costs.
Capital structure: - The equity holders return can be increased manifold with the help of
financial leverage, i.e. using debt financing along with equity financing. The effect of financial
leverage is measured by computing leverage ratios. The debt ratio indicates the positions of
long term and short terms debts in the company finance. The debt may be in the form of
debentures and term loans from financial institutions.
Management: - Good and capable management generates profit to the investors. The
management of the firm should efficiently plan, organize, actuate and control the activities of
the company. The basic objective of management is to attain the stated objectives of the
company for the good of the equity share holders, the public and the employers. The good
management depends on the quality of the manager.
The following are special traits of an able manager: Ability to get along with people
Leadership
Analytical competence
Industry
Judgment
Ability to get things done
Operating efficiency: - The operating efficiency of a company directly affects the earnings of a
company. An expanding company that maintains high operating efficiency with a low breakeven point earns more than the company with high break-even points. If a firm has stable
operating ratio, the revenue will also be stable. Efficient use of fixed assets with a raw
materials, labour and management would lead to more income from sales. This leads to internal
fund generation for the expansion of the firm. A growing company should have low operating
ratio to meet the growing demand for its product.
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Financial analysis:- the best source of financial information about a company is its own
financial statements. This is a primary source of information for evaluating the investments
prospect in the particular companys stock. Financial statement analysis is the study of a
companys financial statement from various viewpoints. The statement gives the historical and
current information about the companys operations. Historical financial statements help to
predict the future. The current information aids to analyse the present status of the company.
The two main statements used in analysis are: Balance sheet
Profit and loss account
Debt valuation techniques and concepts
In their simplest form bonds are pretty straightforward. After all, just about anybody can
comprehend the borrowing and lending of money. However, like many securities, bonds
involve some more complicated underlying concepts as they are traded and analyzed in the
market.
Bond Pricing
It is important for prospective bond buyers to know how to determine the price of a bond
because it will indicate the yield received should the bond be purchased. Bonds can be priced at
a premium, discount, or at par. If the bonds price is higher than its par value, it would sell at a
premium because its interest rate is higher than current prevailing rates. If the bonds price is
lower than its par value, the bond would sell at a discount because its interest rate is lower than
current prevailing.
Bondholder's Expected Rate of Return (Yield to Maturity)
The bondholder's expected rate of return is the rate the investor will earn if the bond is held to
maturity, provided, of course, that the company issuing the bond does not default on the
payments.
Computing Yield-to-Maturity on a Bond (YTM)
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1
1
MP C
r
1 r n
Solving the equation for r gives the YTM.

1) If the investor's required return is greater than the YTM, the investor should not buy the bond
2) If the investor's required return is less than the YTM, the investor should buy the bond
Three Important Relationships
First relationship
A decrease in interest rates (required rates of return) will cause the value of a bond to increase;
an interest rate increase will cause a decrease in value. The change in value caused by changing
interest rates is called interest rate risk.
Second relationship
1. If the bondholder's required rate of return (current interest rate) equals the coupon interest
rate, the bond will sell at par, or maturity value.
2. If the current interest rate exceeds the bond's coupon rate, the bond will sell below par value
or at a "discount."
3. If the current interest rate is less than the bond's coupon rate, the bond will sell above par
value or at a "premium."
Third relationship
A bondholder owning a long-term bond is exposed to greater interest rate risk than when
owning a short-term bonds.
Relationships on the YTM
Since the bond's coupon rate, kc, is fixed for the life of bond, the following
YTM/bond price relationship is created:
If YTM is > r, the bond sells at Discount.
If YTM is < r, the bond sells at Premium
If YTM is = r, the bond sells at par.
The Term Structure of Interest Rates
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The term structure of interest rates, also known as the yield curve, is a very common
bond valuation method. Constructed by graphing the yield to maturities and the
respective maturity dates of benchmark fixed-income securities, the yield curve is a
measure of the market's expectations of future interest rates given the current market
conditions. Treasuries, issued by the central government, are considered risk-free, and as
such, their yields are often used as the benchmarks for fixed-income securities with the
same maturities. The term structure of interest rates is graphed as though each coupon
payment of a non-callable fixed-income security were a zero-coupon bond that
matures on the coupon payment date. The exact shape of the curve can be different at
any point in time. So if the normal yield curve changes shape, it tells investors that they
may need to change their outlook on the economy.
Duration
The term duration, having a special meaning in the context of bonds, is a measurement of
how long in years it takes for the price of a bond to be repaid by its internal cash flows. It is an
important measure for investors to consider, as bonds with higher durations are more risky and
have higher price volatility than bonds with lower durations.
Factors affecting Duration
Besides the movement of time and the payment of coupons, there are other factors that affect a
bond's duration: the coupon rate and its yield. Bonds with high coupon rates and in turn high
yields will tend to have lower durations than bonds that pay low coupon rates, or offer a low
yield. This makes empirical sense, since when a bond pays a higher coupon rate, or has a high
yield, the holder of the security receives repayment for the security at a faster rate. The diagram
below summarizes how duration changes with coupon rate and yield.
Types of Duration
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There are four main types of duration calculations, each of which differ in the way they account
for factors such as interest rate changes and the bond's embedded options or redemption
features. The four types of durations are Macaulay duration, modified duration, effective
duration, and key-rate duration.
Macaulay Duration
Macaulay duration is calculated by adding the results of multiplying the present value of each
cash flow by the time it is received, and dividing by the total price of the security. The formula
for Macaulay duration is as follows:
n
t *c
(1 i)
t 1
Mac Dur
n*M
(1 i ) n
n = number of cash flows

t = time to maturity
C = cash flow
i = required yield
M = maturity (par) value
P = bond price
1
1 1 r n
MP C
r
1 r
So the following is an expanded version of Macaulay duration:

n
Mac
t *c
n*M
(1 i ) n
1

(1 i ) n
M
i
(1 i ) n
(1 i )
t 1
Dur
C*
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Modified Duration
Modified duration is a modified version of the Macaulay model that accounts for changing
interest rates. Because they affect yield, fluctuating interest rates will affect duration, so this
modified formula shows how much the duration changes for each percentage change in yield.
For bonds without any embedded features, bond price and interest rate move in opposite
directions, so there is an inverse relationship between modified duration and an approximate
one-percentage change in yield. Because the modified duration formula shows how a bond's
duration changes in relation to interest rate movements, the formula is appropriate for investors
wishing to measure the volatility of a particular bond. Modified duration is calculated as the
following:
Modified
Duraton
macaulaydurartion
YTM
1
No of
Cpn Periods
Total Return Index
Nifty is a price index and hence reflects the returns one would earn if investment is made in the inde
portfolio. However, a price index does not consider the returns arising from dividend receipts. Onl
capital gains arising due to price movements of constituent stocks are indicated in a price index
Therefore, to get a true picture of returns, the dividends received from the constituent stocks also need t
be factored in the index values. Such an index, which includes the dividends received, is called the Tota
Returns Index.
Total Returns Index reflects the returns on the index arising from (a) constituent stock price movement
and (b) dividend receipts from constituent index stocks.
Methodology for Total Returns Index (TR) is as follows:
The following information is a prerequisite for calculation of TR Index:
1. Price Index close
2. Price Index returns
3. Dividend payouts in Rupees
4. Index Base capitalisation on ex-dividend date
Dividend payouts as they occur are indexed on ex-date.
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IndexedDividend
DividendPayout (rs )
1000
BaseCapofindex(rs )
Indexed dividends are then reinvested in the index to give TR Index.

Total Return Index = [Prev. TR Index + (Prev. TR Index * Index returns)] +
[Indexed dividends + (Indexed dividends * Index returns)]
The base for both the Price index close and TR index close will be the same.
An investor in index stocks should benchmark his investments against the Total Returns index
instead of the price index to determine the actual returns vis--vis the index.
Operational Definitions
Bond: A debt instrument sold by a company or government to raise money. One who buys a
bond is a creditor of the company, but not an owner, as a stockholder would be.
Par: The value of a bond assigned by the issuer; also called face value.
Original issue discount: A bond with an offering price that is below par value.
Coupon: A bond's interest rate.
Premium: The amount by which a security sells above its par value.
Maturity: The length of time before the principal amount of a bond is due to the bondholders.
It is the time until a bond may be surrendered to its issuer, called as term-to-maturity.
Maturity date: The date on which a bond is to be redeemed and its principal and interest
returned to the owner.
Callability: The feature of some bonds whereby the issuer can redeem it before it matures.
Issuers often call their bonds when interest rates are falling and they want to replace high-
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yielding bonds with lower-yielding bonds. Call provisions must be made clear before a bond is
sold. A bond with this feature is a callable bond.
Debenture: A bond backed by the issuer's general credit and ability to repay and not by an asset
or collateral.
Investment-grade: A classification of the ability of a bond issuer to repay a bond.
Discount bond: A bond that sells at a discounted value of its face value. If a bond has a Rs
1000 par value but sells for Rs 900, it is "sold at a discount" of Rs100. Adverse market
conditions and reductions in interest rates can convince sellers to discount the bonds they sell.
Premium bond: A bond selling for more than its stated value. If a bond is Rs1000 par but sells
for Rs1100, it is "sold at a premium" of Rs100. Market conditions and increases in interest rates
can convince sellers to raise the prices of the bonds they sell.
Yield: The rate of return on an investment, described as a percentage of the amount of the
investment. For example, a bond purchased for Rs1,000 with a 7% yield would pay out 7% of
Rs1,000, or Rs70.
Yield to maturity: The fully compounded annual rate of return paid out over a bond's life, from
purchase date to maturity, including appreciation/depreciation and earnings. It is the most
comprehensive measure of yield.
Accrued interest: The interest that has been accumulating on a bond since the last time interest
was paid on it.
Current yield: The expected rate of return calculated by dividing the most recent annualized
distribution by the selling price. For example, a Rs.2,000 par bond that pays Rs140 but is
bought for Rs1600 has a current yield of 8 3/4 percent. The formula for deriving current yield is
annual income divided by current price.
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Coupon rate: The interest as a percent of par paid by a bond. It is called a coupon rate because
historically bonds included attached coupons that were clipped and surrendered for cash. Today,
most bonds come without the attached coupons.
Duration: The change in value of a bond (expressed in years) caused by a change in the
prevailing interest rates.
Floating-interest rate: A variable interest rate, one that changes periodically.
Floating-interest bond. A bond with an interest rate that changes each quarter to reflect
economic conditions.
Fixed-interest bond. A bond with an interest rate that stays the same over its life span is
corporate bond. A bond issued by a corporation and backed by the company's credit and/or its
assets.
Mortgage bond. A secured corporate bond that is backed by real estate. Because mortgage
bond collateral provides a clear claim on a company's assets, these bonds are considered secure
and high-grade.
Junk bond. Refers to the quality of bond that is a speculative, high yielding, and issued by a
company that typically finances its growth and operations with debt. Ratings companies usually
assign low grades to these bonds.
Revenue bond. A bond sold by a municipality to finance projects such as bridges, hospitals,
power plants and other local services. Also called limited obligation bonds, revenue bonds are
secured by the revenue generated by those projects.
Government bond. A bond sold by the. Government. Government bonds are rated the highest
of all bonds. They are used to finance federal projects.
Treasury bond (T-bond). A bond issued by the Treasury to meet the government's financial
needs. Treasury bonds are considered the safest bonds and are very popular with investors.
They have maturities lasting from ten to thirty years.
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Treasury note (T-note). An intermediate-term federal government debt, similar to a T-bond but
maturing in one to ten years.
Zero-coupon bond. A bond sold at discount and paying no interest, but instead paying the
holder the face value at maturity. A zero-coupon bond stated at 1000 but sold for 600 would
yield the holder a total of 1000 at maturity. The extra 400 the investor makes would be treated
as interest.
Fundamental Analysis: A method of evaluating a stock by attempting to measure its intrinsic
value. Fundamental analysts study everything from the overall economy and industry
conditions, to the financial condition and management of companies.
Intrinsic value: the economic value of a company or its common stock based on internallygenerated cash returns. Intrinsic value can be thought of as the discounted stream of net cash
flows attributable to an investment asset.
Terminal value: Terminal value refers to the value of the firm (or equity) at the end of the high
growth period. Terminal Value in year n= Cash Flow in year n+1/(r - g) .This approach requires
the assumption that growth is constant forever, and that the cost of capital will not change over
time.
Total Return Index: An index that calculates the performance of a group of stocks assuming
that all dividends and distributions are reinvested. This method is usually considered a more
accurate measure of actual performance than if dividends and distributions were ignored.
Beta: Statistically, beta is the measure of systematic risk in the CAPM and is the ratio of two co
variances: the individual security divided by a proxy for the market as a whole or the so-called
market portfolio. The beta factor is the expected change in the security's rate of return divided
by the accompanying change in the rate of return to the market portfolio.
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DESIGN OF THE STUDY
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Title :
Statement of Problem:
To test the significance of excess return to beta and find out whether one can construct a
portfolio whose beta is equal to market beta (beta =1), with returns greater than market returns.
Objectives of the research:
To analyze the performance of the shares of cos in the steel and cement sector in
Indian stock market in light of the growth in infrastructure in India.
To study the factors influencing the share price of the company.
To analyze the companies based on Fundamental Analysis and TRI model
To construct a Portfolio (Balanced Fund) of Equities and Debt. The construction

would be based on Fundamental Analysis Model.
Research Methodology
Type of research
The study is a descriptive research, describing the construction of portfolios.
Tools for data collection:
The study involves collection of data from secondary sources and collected from internet,
magazines, news paper, and research reports.
Sampling:
Type of sampling: Non-probabilistic judgment sampling.
Sample size: Four stocks from the steel sector and six stocks from the cement sector; 10
companys Corporate debt; ten Government securities; and 364 day-T-bills
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Plan Of Analysis
After collecting financial data related to the entities, i.e. the sample selected from the selected
sectors, the various valuation ratios and other financial calculations which will help in the
company valuation will be calculated. A portfolio will be constructed on the basis of
fundamental analysis and on the basis of risk-return analysis with different combinations of
debt and equity to maximize the returns and minimize the risk (beta).
Limitations of the Study
The study was confined only to the selected sectors.
The study was more confined with secondary data.
The study assumes no changes in the tax rates in the country.
As the scope is defined by the researcher, it restricts the number of variables which
influence the industry.
Sales growth were assumed on the basis of change in sales of yr 2007 and 2006
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EIC ANALYSIS
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ECONOMY ANALYSIS
Economic growth includes a raft of supply side policies that have helped to increase
competitiveness and productivity. For example financial markets have become more
deregulated, allowing more flexible loans. These have helped to increase investment
which has led to increased capacity and competitiveness. There has also been increased
focus put on training and education of at least part of the population. Despite the rapid
economic growth so far the Indian economy has managed to maintain relatively stable
prices, with inflationary pressures remaining subdued.
The success of the Indian economy shares several parallels with the Chinese economy. Like
China the Indian economy has a plentiful supply of cheap labour. This has enabled low labour
costs for firms which have made them particularly competitive in labour intensive industries.
This has often been at the expense of Western manufacturing sectors. For example recently
Dysons announced it would switch production of vacuum cleaners from the UK to Indian
where labour costs are cheaper.
The Indian economy has also benefited from the process of globalisation and improved
technology. A good example of this is in call centres, which benefit from the low labour costs.
Due to the internet and cheap telephone calls many Western companies have found it profitable
to switch their call centres to places in India where labour costs are significantly lower. India is
at a particular advantage for this growing market because compared to other developing
countries English is spoken to a reasonable standard by a high share of the population. The
Indian economy has also been able to diversify from its primarily agricultural roots. Mumbai
has emerged as one of the leading financial centres in Asia. India is also increasingly benefiting
from foreign investment into a variety of industries.
Strengths of Indian Economy.
After several decades of sluggish growth the Indian economy is now amongst the fastest
growing economy in the world. Economic growth is currently 8-9%, second only to China.
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Despite several problems facing the Indian economy many economists point to potential
strengths of the Indian economy which could enable it to continue to benefit from high levels of
economic growth in the future.
1. Demographics of India are favourable.
India still has a positive birth rate meaning that the size of the workforce will continue to
grow for the foreseeable future. (unlike India) A rising workforce helps to increase saving
and investment. It also enables increased productivity.
2. There is much scope for increases in efficiency.
The infrastructure of India is so bad in places that even moderate improvements could lead
to significant improvements in the productive capacity of the economy.
3. India is well placed to benefit from globalization and outsourcing.
A legacy of the British Empire is that India has one of the largest English speaking
populations in the world. For labour intensive industries like call centres India is an obvious
target for outsourcing. This is an economic development likely to continue in the future.
4. Positive Growth Forecasts
A recent study from Goldman Sachs, forecast that India could growth at a sustainable rate of
8% growth until 2020.However it is worth noting that this assumed Indian would make
several supply side policies such as labour market deregulation and improvements in
education and training.
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Problems Facing Indian Economy
1. Inflation.
Fuelled by rising wages, property prices and food prices inflation in India is an increasing
problem. Inflation is currently between 6-7%. A record 98% of Indian firms report operating
close to full capacity .With economic growth of 9.2% per annum inflationary pressures are
likely to increase, especially with supply side constraints such as infrastructure. The wholesaleprice index (WPI), rose to an annualized 6.6% in Janu 2007
2. Poor educational standards.
Although India has benefited from a high % of English speakers. (important for call centre
industry) there is still high levels of illiteracy amongst the population. It is worse in rural areas
and amongst women. Over 50% of Indian women are illiterate
3. Poor Infrastructure.
Many Indians lack basic amenities lack access to running water. Indian public services are
creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before
it reaches the market; this is one example of the supply constraints and inefficiencys facing the
Indian economy.
4. Balance of Payments deterioration.
Although India has built up large amounts of foreign currency reserves the current account
deficit has deteriorate in recent months. This deterioration is a result of the overheating of the
economy. Aggregate Supply cannot meet Aggregate demand so consumers are sucking in
imports. Excluding workers remittances Indias current account deficit is approaching 5% of
GD
5. High levels of debt.
Buoyed by a property boom the amount of lending in India has grown by 30% in the past year.
However there are concerns about the risk of such loans. If they are dependent on rising
property prices it could be problematic. Furthermore if inflation increases further it may force
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the RBI to increase interest rates. If interest rates rise substantially it will leave those indebted
facing rising interest payments and potentially reducing consumer spending in the future
6. Inequality has risen rather than decreased.
It is hoped that economic growth would help drag the Indian poor above the poverty line.
However so far economic growth has been highly uneven benefiting the skilled and wealthy
disproportionately. Many of Indias rural poor are yet to receive any tangible benefit from the
Indias economic growth. More than 78 million homes do not have electricity. 33%
(268million) of the population live on less than $1 per day. Furthermore with the spread of
television in Indian villages the poor are increasingly aware of the disparity between rich and
poor.
7. Large Budget Deficit.
India has one of the largest budget deficits in the developing world. Excluding subsidies it
amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little
scope for increasing investment in public services like health and education.
8. Rigid labour Laws.
As an example Firms employing more than 100 people cannot fire workers without government
permission. The effect of this is to discourage firms from expanding to over 100 people. It also
discourages foreign investment. Trades Unions have an important political power base and
governments often shy away from tackling potentially politically sensitive labour laws.
CURRENT STATE OF AN INDIAN ECONOMY
The economy of India, when measured in USD exchange-rate terms, is the tenth largest in the
world, with a GDP of US $1.50 trillion (2008). It is the third largest in terms of purchasing
power parity. India is the second fastest growing major economy in the world, with a GDP
growth rate of 9.4% for the fiscal year 20062007. However, India's huge population has a per
capita income of $4,542 at PPP and $1,089 in nominal terms (revised 2007 estimate). The
World Bank classifies India as a low-income economy.
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India's economy is diverse, encompassing agriculture, handicrafts, textile, manufacturing, and a
multitude of services. Although two-thirds of the Indian workforce still earn their livelihood
directly or indirectly through agriculture, services are a growing sector and play an increasingly
important role of India's economy. The advent of the digital age, and the large number of young
and educated populace fluent in English, is gradually transforming India as an important 'back
office' destination for global outsourcing of customer services and technical support. India is a
major exporter of highly-skilled workers in software and financial services, and software
engineering.
Other
sectors
like
manufacturing,
pharmaceuticals,
biotechnology,
nanotechnology, telecommunication, shipbuilding, aviation , tourism and retailing are showing

strong potentials with higher growth rates.
India followed a socialist-inspired approach for most of its independent history, with strict
government control over private sector participation, foreign trade, and foreign direct
investment. However, since the early 1990s, India has gradually opened up its markets through
economic reforms by reducing government controls on foreign trade and investment. The
privatisation of publicly owned industries and the opening up of certain sectors to private and
foreign interests has proceeded slowly amid political debate.
India faces a fast-growing population and the challenge of reducing economic and social
inequality. Poverty remains a serious problem, although it has declined significantly since
independence. Official surveys estimated that in the year 2004-2005, 27% of Indians were poor.
SOME IMPORTANT FACTS ABOUT INDIAN ECONOMY
Public expenditure
India's public expenditure is classified as development expenditure, comprising central plan
expenditure and central assistance and non-development expenditures; these categories can
each be divided into capital expenditure and revenue expenditure. Central plan expenditure is
allocated to development schemes outlined in the plans of the central government and public
sector undertakings; central assistance refers to financial assistance and developmental loans
given for plans of the state governments and union territories. Non-development capital
expenditure comprises capital defense expenditure, loans to public enterprises, states and union
territories and foreign governments, while non-development revenue expenditure comprises
26

revenue defence expenditure, administrative expenditure, subsidies, debt relief to farmers,
postal deficit, pensions, social and economic services (education, health, agriculture, science
and technology), grants to states and union territories and foreign governments.
Headquarters of India's central bank, the Reserve Bank of India, in Mumbai (It's the tall
building in the background. The building in the foreground is the Asiatic Library)
India's non-development revenue expenditure has increased nearly fivefold in 200304 since
199091 and more than tenfold since 19851986. Interest payments are the single largest item
of expenditure and accounted for more than 40% of the total non development expenditure in
the 200304 budget. Defence expenditure increased fourfold during the same period and has
been increasing due to growing tensions in the region, the expensive dispute with Pakistan over
Jammu and Kashmir and an effort to modernise the military. Administrative expenses are
compounded by a large salary and pension bill, which rises periodically due to revisions in
wages, dearness allowance etc. subsidies on food, fertilizers, education and petroleum and other
merit and non-merit subsidies account are not only continuously rising, especially because of
rising crude oil and food prices, but are also harder to rein in, because of political compulsions.
Public receipts
India has a three-tier tax structure, wherein the constitution empowers the union government to
levy income tax, tax on capital transactions (wealth tax, inheritance tax), sales tax, service tax,
customs and excise duties and the state governments to levy sales tax on intrastate sale of
goods, tax on entertainment and professions, excise duties on manufacture of alcohol, stamp
duties on transfer of property and collect land revenue (levy on land owned). The local
governments are empowered by the state government to levy property tax, Octroi and charge
users for public utilities like water supply, sewage etc. More than half of the revenues of the
union and state governments come from taxes, of which half come from Indirect taxes. More
than a quarter of the union government's tax revenues is shared with the state governments.
27

The tax reforms, initiated in 1991, have sought to rationalise the tax structure and increase
compliance by taking steps in the following directions:
Reducing the rates of individual and corporate income taxes, excises, customs and making it
more progressive
Reducing exemptions and concessions
Simplification of laws and procedures
Introduction of Permanent account number to track monetary transactions
21 of the 29 states introduced Value added tax (VAT) on April 1, 2005 to replace the
complex and multiple sales tax system.
The non-tax revenues of the central government come from fiscal services, interest receipts,
public sector dividends, etc., while the non-tax revenues of the States are grants from the central
government, interest receipts, dividends and income from general, economic and social
services.
General budget
The Finance minister of India presents the annual union budget in the Parliament on the last
working day of February. The budget has to be passed by the Lok Sabha before it can come into
effect on April 1, the start of India's fiscal year. The Union budget is preceded by an economic
survey which outlines the broad direction of the budget and the economic performance of the
country for the outgoing financial year. This economic survey involves all the various NGOs,
women organizations, business people, old people associations etc.
Labour
The large population puts further pressure on infrastructure and social services. A positive
factor has been the large working-age population, which forms 45.33% of the population and is
expected to increase substantially, because of the decreasing dependency ratio. The national
labour market has been tightly regulated by successive governments ever since the Workmen's
Compensation Act was passed in 1923.
28

Natural resources
India's total cultivable area is 1,269,219 km (56.78% of total land area), which is decreasing
due to constant pressure from an ever growing population and increased urbanisation.
India has a total water surface area of 314,400 km and receives an average annual rainfall of
1,100 mm. Irrigation accounts for 92% of the water utilisation, and comprised 380 km in 1974,
and is expected to rise to 1,050 km by 2025, with the balance accounted for by industrial and
domestic consumers. India's inland water resources comprising rivers, canals, ponds and lakes
and marine resources comprising the east and west coasts of the Indian ocean and other gulfs
and bays provide employment to nearly 6 million people in the fisheries sector. India is the
sixth largest producer of fish in the world and second largest in inland fish production.
India's major mineral resources include Coal (fourth-largest reserves in the world), Iron ore,
Manganese, Mica, Bauxite, Titanium ore, Chromite, Natural gas, Diamonds, Petroleum,
Limestone and Thorium (world's largest along Kerala's shores). India's oil reserves, found in
Bombay High off the coast of Maharashtra, Gujarat, and in eastern Assam meet 25% of the
country's demand.
Rising energy demand concomitant with economic growth has created a perpetual state of
energy crunch in India. India is poor in oil resources and is currently heavily dependent on coal
and foreign oil imports for its energy needs. Though India is rich in Thorium, but not in
Uranium, which it might get access to if a nuclear deal with US comes to fruition. India is rich
in certain energy resources which promise significant future potential - clean / renewable
energy resources like solar, wind, biofuels (jatropha, sugarcane).
Physical infrastructure
Mumbai Airport
29

Development of infrastructure was completely in the hands of the public sector and was
plagued by corruption, bureaucratic inefficiencies, urban-bias and an inability to scale
investment.
Infosys Software Development Center in Pune.

India's low spending on power, construction, transportation, telecommunications and real estate,
at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates.
This had prompted the government to partially open up infrastructure to the private sector
allowing foreign investment which has helped in a sustained growth rate of close to 9% for the
past six quarters. India holds second position in the world in roadways' construction, more than
twice that of China. As of 2005 the electricity production was at 661.6 billion kWh with oil
production standing at 785,000 bbl/day. India's prime import partners are : China 8.7%, US 6%,
Germany 4.6%, Singapore 4.6%, Australia 4% as of 2006 CIA FactBook As of 15 January
2007, there were 2.10 million broadband lines in India. Low tele-density is the major hurdle for
slow pickup in broadband services. Over 76% of the broadband lines were via DSL and the rest
via cable modems.
Financial institutions
30

India has set up Special Economic Zones and software parks that offer tax benefits and better
infrastructure to set up business. Pictured here is the Infosys headquarters in Bangalore, one of
the largest software companies in India.
India inherited several institutions, such as the civil services, Reserve Bank of India, railways,
etc., from its British rulers. Mumbai serves as the nation's commercial capital, with the Reserve
Bank of India (RBI), Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)
located here. The headquarters of many financial institutions are also located in the city.
Cyber Greens Office Complex. Containing offices like ABN Amro, Microsoft.
The RBI, the country's central bank was established on 1 April 1935. It serves as the nation's
monetary authority, regulator and supervisor of the financial system, manager of exchange
control and as an issuer of currency. The RBI is governed by a central board, headed by a
governor who is appointed by the Central government of India.
Cuffe Parade is an important business district in Mumbai, home to the World Trade Center as
well as other important financial institutions
The BSE Sensex or the BSE Sensitive Index is a value-weighted index composed of 30
companies with April 1979 as the base year (100). These companies have the largest and most
actively traded stocks and are representative of various sectors, on the Exchange. They account
31

for around one-fifth of the market capitalisation of the BSE. The Sensex is generally regarded
as the most popular and precise barometer of the Indian stock markets. Incorporated in 1992,
the National Stock Exchange is one of the largest and most advanced stock markets in India.
The NSE is the world's third largest stock exchange in terms of transactions. There are a total of
23 stock exchanges in India, but the BSE and NSE comprise 83% of the volumes.The Securities
and Exchange Board of India (SEBI), established in 1992, regulates the stock markets and other
securities markets of the country.
SECTORS
Agriculture
Composition of India's total production (million tonnes) of foodgrains and commercial crops, in
200304. India ranks second worldwide in farm output. Agriculture and allied sectors like
forestry, logging and fishing accounted for 18.6% of the GDP in 2005, employed 60% of the
total workforce[4] and despite a steady decline of its share in the GDP, is still the largest
economic sector and plays a significant role in the overall socio-economic development of
India. Yields per unit area of all crops have grown since 1950, due to the special emphasis
placed on agriculture in the five-year plans and steady improvements in irrigation, technology,
application of modern agricultural practices and provision of agricultural credit and subsidies
since Green revolution in India. However, international comparisons reveal that the average
yield in India is generally 30% to 50% of the highest average yield in the world.
The low productivity in India is a result of the following factors:
Illiteracy, general socio-economic backwardness, slow progress in implementing land

reforms and inadequate or inefficient finance and marketing services for farm produce.
The average size of land holdings is very small (less than 20,000 m) and is subject to
fragmentation, due to land ceiling acts and in some cases, family disputes. Such small
holdings are often over-manned, resulting in disguised unemployment and low productivity
of labour.
Adoption of modern agricultural practices and use of technology is inadequate, hampered

by ignorance of such practices, high costs and impracticality in the case of small land
holdings.
32

Irrigation facilities are inadequate, as revealed by the fact that only 53.6% of the land was
irrigated in 200001, which result in farmers still being dependent on rainfall, specifically
the Monsoon season. A good monsoon results in a robust growth for the economy as a
whole, while a poor monsoon leads to a sluggish growth. Farm credit is regulated by
NABARD, which is the statutory apex agent for rural development in the subcontinent.
Industry
India is fourteenth in the world in factory output. They together account for 27.6% of the GDP
and employ 17% of the total workforce.However, about one-third of the industrial labour force
is engaged in simple household manufacturing only.
Economic reforms brought foreign competition, led to privatisation of certain public sector
industries, opened up sectors hitherto reserved for the public sector and led to an expansion in
the production of fast-moving consumer goods.
Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family
firms and required political connections to prosper was faced with foreign competition,
including the threat of cheaper Chinese imports. It has since handled the change by squeezing
costs, revamping management, focusing on designing new products and relying on low labour
costs and technology.
34 Indian companies have been listed in the Forbes Global 2000 ranking for 2008.
33

The 10 leading companies are:
World
Rank
193
198
219
303
Revenue Profits Assets

Company
Logo
Industry
(billion (billion (billion

$)
Reliance
Oil & Gas
Industries
Oil and Natural
Operations
Oil & Gas
Gas Corporation
State Bank of
Operations
India
Indian Oil
Banking
Oil & Gas
$)
$)
Market
Value
(billion
$)
26.07
2.79
30.67
89.29
18.90
4.11
33.79
54.11
15.77
1.47 188.56
33.29
42.68
1.82
25.39
16.36
9.84
7.84
0.64
1.60
91.07
20.34
29.85
41.57
Corporation
374 ICICI Bank
411 NTPC
Steel Authority
647
of India Limited
Operations
Banking
Utilities
Materials
7.88
1.45
8.05
26.37
738 Tata Steel
Materials
5.83
0.97
11.48
14.63
4.26
0.94
6.61
39.16
3.13
0.65
13.08
29.63
826 Bharti Airtel

846
Telecommunications
Reliance
Services
Telecommunications
Communications
Services
Services
India is fifteenth in services output. It provides employment to 23% of work force, and it is
growing fast, growth rate 7.5% in 19912000 up from 4.5% in 195180. It has the largest share
in the GDP, accounting for 53.8% in 2005 up from 15% in 1950. Business services (information
technology, information technology enabled services, business process outsourcing) are among
the fastest growing sectors contributing to one third of the total output of services in 2000. The
growth in the IT sector is attributed to increased specialisation, availability of a large pool of
low cost, but highly skilled, educated and fluent English-speaking workers. On the supply side
and on the demand side, increased demand from foreign consumers interested in India's service
exports or those looking to outsource their operations. India's IT industry, despite contributing
34

significantly to its balance of payments, accounted for only about 1% of the total GDP or 1/50th
of the total services.
Banking and finance
The Indian money market is classified into: the organised sector (comprising private, public and
foreign owned commercial banks and cooperative banks, together known as scheduled banks);
and the unorganised sector (comprising individual or family owned indigenous bankers or
money lenders and non-banking financial companies (NBFCs)). The unorganised sector and
microcredit are still preferred over traditional banks in rural and sub-urban areas, especially for
non-productive purposes, like ceremonies and short duration loans.
Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980,
and made it mandatory for banks to provide 40% of their net credit to priority sectors like
agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks
fulfill their social and developmental goals. Since then, the number of bank branches has
increased from 10,120 in 1969 to 98,910 in 2003 and the population covered by a branch
decreased from 63,800 to 15,000 during the same period. The total deposits increased 32.6
times between 1971 to 1991 compared to 7 times between 1951 to 1971. Despite an increase of
rural branches, from 1,860 or 22% of the total number of branches in 1969 to 32,270 or 48%,
only 32,270 out of 5 lakh (500,000) villages are covered by a scheduled bank.
Since liberalisation, the government has approved significant banking reforms. While some of
these relate to nationalised banks (like encouraging mergers, reducing government interference
and increasing profitability and competitiveness), other reforms have opened up the banking
and insurance sectors to private and foreign players.
Socio-economic characteristics
Poverty
35

Large numbers of India's people live in abject poverty. Wealth distribution in India is improving
since the liberalization and with the end of the socialist rule termed as the license raj. While
poverty in India has reduced significantly, official figures estimate that 27.5% of Indians still
lived below the national poverty line in 2004-2005. A 2007 report by the state-run National
Commission for Enterprises in the Unorganised Sector (NCEUS) found that 70% of Indians, or
800 million people, lived on less than 20 rupees per day with most working in "informal labour
sector with no job or social security, living in abject poverty."
Since the early 1950s, successive governments have implemented various schemes, under
planning, to alleviate poverty, that have met with partial success. All these programmes have
relied upon the strategies of the Food for work programme and National Rural Employment
Programme of the 1980s, which attempted to use the unemployed to generate productive assets
and build rural infrastructure. In August 2005, the Indian parliament passed the Rural
Employment Guarantee Bill, the largest programme of this type in terms of cost and coverage,
which promises 100 days of minimum wage employment to every rural household in 200 of
India's 600 districts. The question of whether economic reforms have reduced poverty or not
has fuelled debates without generating any clear cut answers and has also put political pressure
on further economic reforms, especially those involving the downsizing of labour and cutting
agricultural subsidies.
Occupations and unemployment
Agricultural and allied sectors accounted for about 57% of the total workforce in 19992000,
down from 60% in 199394. While agriculture has faced stagnation in growth, services have
seen a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which
are in the public sector. The NSSO survey estimated that in 19992000, 106 million, nearly
10% of the population were unemployed and the overall unemployment rate was 7.32%, with
rural areas doing marginally better (7.21%) than urban areas (7.65%).
Unemployment in India is characterised by chronic underemployment or disguised
unemployment. Government schemes that target eradication of both poverty and
unemployment, (Which in recent decades has sent millions of poor and unskilled people into
urban areas in search of livelihoods.) attempt to solve the problem, by providing financial
assistance for setting up businesses, skill honing, setting up public sector enterprises,
36

reservations in governments, etc. The decreased role of the public sector after liberalisation has
further underlined the need for focusing on better education and has also put political pressure
on further reforms.
Regional imbalance
One of the critical problems facing India's economy is the sharp and growing regional
variations among India's different states and territories in terms of per capita income, poverty,
availability of infrastructure and socio-economic development.
The five-year plans have attempted to reduce regional disparities by encouraging industrial
development in the interior regions, but industries still tend to concentrate around urban areas
and port cities. After liberalization, the more advanced states are better placed to benefit from
them, with infrastructure like well developed ports, urbanisation and an educated and skilled
workforce which attract manufacturing and service sectors. The union and state governments of
backward regions are trying to reduce the disparities by offering tax holidays, cheap land, etc.,
and focusing more on sectors like tourism, which although being geographically and
historically determined, can become a source of growth and is faster to develop than other
sectors.
External trade and investment
Global trade relations
Until the liberalization of 1991, India was largely and intentionally isolated from the world
markets, to protect its fledging economy and to achieve self-reliance. Foreign trade was subject
to import tariffs, export taxes and quantitative restrictions, while foreign direct investment was
restricted by upper-limit equity participation, restrictions on technology transfer, export
obligations and government approvals; these approvals were needed for nearly 60% of new FDI
in the industrial sector. The restrictions ensured that FDI averaged only around $200M annually
between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid,
commercial borrowing and deposits of non-resident Indians.
Share of top five investing countries in FDI inflows. (20002007)[79]
Inflows
Rank
Country
Inflows (%)
(Million USD)
1
Mauritius
85,178
44.24%[80]
2
United States
18,040
9.37%
3
United Kingdom
15,363
7.98%
4
Netherlands
11,177
5.81%
5
Singapore
9,742
5.06%
37
Indian exports in 2006

India's exports were stagnant for the first 15 years after independence, due to the predominance
of tea, jute and cotton manufactures, demand for which was generally inelastic. Imports in the
same period consisted predominantly of machinery, equipment and raw materials, due to
nascent industrialisation. Since liberalisation, the value of India's international trade has become
more broad-based and has risen to Rs. 63,080,109 crores in 200304 from Rs.1,250 crores in
195051. India's major trading partners are China, the US, the UAE, the UK, Japan and the EU.
The exports during April 2007 were $12.31 billion up by 16% and import were $17.68 billion
with an increase of 18.06% over the previous year.
India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and
its successor, the World Trade Organization. While participating actively in its general council
meetings, India has been crucial in voicing the concerns of the developing world. For instance,
India has continued its opposition to the inclusion of such matters as labour and environment
issues and other non-tariff barriers into the WTO policies.
Balance of payments
Since independence, India's balance of payments on its current account has been negative.
Since liberalisation in the 1990s (precipitated by a balance of payment crisis), India's exports
have been consistently rising, covering 80.3% of its imports in 200203, up from 66.2% in
199091. Although India is still a net importer, since 199697, its overall balance of payments
(i.e., including the capital account balance), has been positive, largely on account of increased
38

foreign direct investment and deposits from non-resident Indians; until this time, the overall
balance was only occasionally positive on account of external assistance and commercial
borrowings. As a result, India's foreign currency reserves stood at $285 billion in 2008, which
could be used in infrastructural development of the country if used effectively.
India is a net importer: Per the CIA factbook in 2007, imports were $224bn and exports $140bn.
India's reliance on external assistance and commercial borrowings has decreased since 1991
92, and since 200203, it has gradually been repaying these debts. Declining interest rates and
reduced borrowings decreased India's debt service ratio to 4.5% in 2007. In India, External
Commercial Borrowings (ECBs) are being permitted by the Government for providing an
additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates
these borrowings (ECBs) through ECB policy guidelines.
Foreign direct investment in India

As the third-largest economy in the world in PPP terms, India is a preferred destination for
foreign direct investments (FDI); India has strengths in information technology and other
significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery.
India has always held promise for global investors, but its rigid FDI policies were a significant
hindrance in this regard. However, as a result of a series of ambitious and positive economic
reforms aimed at deregulating the economy and stimulating foreign investment, India has
positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India
has a large pool of skilled managerial and technical expertise. The size of the middle-class
39

population at 300 million exceeds the population of both the US and the EU, and represents a
powerful consumer market.
India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.
Industrial policy reforms have substantially reduced industrial licensing requirements, removed
restrictions on expansion and facilitated easy access to foreign technology and foreign direct
investment FDI. The upward moving growth curve of the real-estate sector owes some credit to
a booming economy and liberalized FDI regime. In March 2005, the government amended the
rules to allow 100 per cent FDI in the construction business. This automatic route has been
permitted in townships, housing, built-up infrastructure and construction development projects
including housing, commercial premises, hotels, resorts, hospitals, educational institutions,
recreational facilities, and city- and regional-level infrastructure.
A number of changes were approved on the FDI policy to remove the caps in most sectors.
Restrictions will be relaxed in sectors as diverse as civil aviation, construction development,
industrial parks, petroleum and natural gas, commodity exchanges, credit-information services
and mining. But this still leaves an unfinished agenda of permitting greater foreign investment
in politically sensitive areas such as insurance and retailing.
FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March),
according to the government's Secretariat for Industrial Assistance. This was more than double
the total of US$7.8bn in the previous fiscal year. Between April and September 2007, FDI
inflows were US$8.2bn.
I N D U S T R Y AN A LYS I S
Indian Money Market
Whenever a bear market comes along, investors realize that the stock market is a risky place for
their savings, a fact we tend to forget while enjoying the returns of a bull market! This,
unfortunately, is part of the risk/return tradeoff. That is, to get higher returns, you have to take
on a higher level of risk. But for many investors, a volatile market is too much to stomach - an
alternative is the money market. The money market is better known as a place for large
institutions and government to manage their short-term cash needs. However, individual
investors have access to the market through a variety of different securities.
40

The money market is a subsection of the fixed income market. Many people think of the term
"fixed income" as synonymous with bonds, but technically, a bond is just one type of fixed
income security. The difference between the money market and the bond market is that the
money market specializes in very short term debt securities (debt that matures in less than one
year). Money market investments are also called cash investments because of their short
maturities. Money market securities are essentially bonds issued by governments, financial
institutions, and large corporations. These instruments are very liquid, and considered very safe.
Because they are so conservative, money market securities offer a lower return than most other
securities. One of the main differences between the money market and the stock market is that
most money market securities trade in very high denominations and so individual investors
have limited access to them. Also, the money market is a dealer market, which means that firms
buy and sell securities in their own accounts, at their own risk. Compare this to the stock market
where brokers usually act as agents, making money on commissions, while investors takes the
risk of holding the stock. One other characteristic of a dealer market is there is no central
trading floor or exchange. Deals are transacted over the phone or through electronic systems .
The easiest way for us to gain access to the money market is with a money market
mutual funds, or sometimes a money market bank account. Although, some money market
instruments like treasury bills may be purchased directly or through other large financial
institutions with direct access to these markets. There are several different instruments in the
money market, offering different returns and different risks. Let's take a look at the major ones.
Treasury Bills
Treasury Bills (T-bills) are the most marketable money market security. Their popularity is
mainly due to their simplicity. T-bills are basically a way for the government uses to raise
money from the public. T-bills are short-term securities that mature in one year or less from
their issue date. T-bills are issued with 3 month, 6 month, and 1 year maturities.
Certificate of Deposit (CD)
A certificate of deposit (CD) is a time deposit with a bank. Time deposits may not be withdrawn
on demand like a check account. CDs are generally issued by commercial banks but they can be
bought through brokerages. They bear a specific maturity date (from 3 months to 5 years), a
specified interest rate, and can be issued in any denomination, very similar to bonds.
Commercial Paper
For many corporations, borrowing short-term money from banks is often a labored and
annoying task. Their desire to avoid banks as much as possible has led to the Commercial paper
41

is an unsecured, short-term loan issued by a corporation, typically for financing accounts
receivable and inventories.
Debentures
These are the normal types of bonds. It is unsecured debt, backed only by the name and
goodwill of the corporation. In the event of the liquidation of the corporation, holders of
debentures are repaid before stockholders, but after holders of mortgage bonds.
42

INDIAN CEMENT INDUSTRY
Background
The Indian cement industry (120 million tons per annum) is the fourth largest in he world after
China, Japan and USA. However, per capita consumption in the country is only around 80-90
kg compared to the world average of approximately 250 kg.
Historically, the Indian cement sector has been highly fragmented comprising 54 players that
operate 124 plants. The majority of the plants are small-sized and well spread through out the
country. The cement industry is cyclical and capital intensive. A new plant typically has a
gestation period of 3-4 years.
Overview of The Indian cement industry

The Indian cement industry with a total capacity of 144 m tonnes (including mini plants) in
FY07, has surpassed developed nations like USA and Japan and has emerged as the second
largest market after China. Although consolidation has taken place in the Indian cement industry
with the top six players controlling almost 60% of the capacity, the remaining 40% of the
capacity remains pretty fragmented with around 40 players in the fray.
Despite the fact that Indian cement industry has clocked a production of more than 100 m
tonnes for the second year in succession, the per capita consumption of 110 kgs compares
poorly with the world average of 260 kgs. This, more than anything underlines the
tremendous scope for growth in the Indian cement industry in the long term.
Cement, being a bulk commodity, is a freight intensive industry and transporting cement
over long distances can prove to be uneconomical. This has resulted in cement being
largely a regional play with the industry divided into five main regions viz. north, south,
west, east and the central region. While the southern region is excess is capacity owing to
the availability of limestone, the western and northern region are the most lucrative
markets. Therefore, players like Grasim, L&T and Gujarat Ambuja enjoy high price
realisations compared to the all India average.
Although the government has reduced the import duty on cement, imports do not pose a
threat since prices of cement in India are lower than those prevailing in the international
43

markets. Moreover, the storage facilities on the Indian ports are inadequate for largescale imports.
Key points about the cement industry
Supply : There is an oversupply situation in the industry due to capacity additions by

the major players in the industry. The situation is likely to improve, as there is no major
Greenfield expansion in sight.
Demand : Housing sector acts as the principal growth driver for cement. However, in
recent times, industrial and infrastructure sector have also emerged as demand drivers
for cement.
Barriers to entry: High capital costs and long gestation periods. Access to limestone
reserves (principal raw material for the manufacture of cement) also acts as a significant
entry barrier.
Bargaining power of suppliers:Licensing of coal and limestone reserves, supply of

power from the state grid and availability of railways for transport are all controlled by a
single entity, which is the government.
Bargaining power of customers: Cement is a commodity business and sales volumes

mostly depend upon the distribution reach of the company. However, things are
changing and few brands such as Gujarat Ambuja and L&T have started commanding a
premium on account of better quality perception.
Competition:Due to large number of players in the industry and very little brand
differentiation to speak of, the competition is intense with players resorting to frequent
price cuts in order to gain market share.
Key Stages In Cement Production

Cement production is one of the worlds most energy intensive industries. Key production
stages can be summarized as:
1.Raw materials
44

These are generally combinations of limestone, shells or chalk, and shale, clay, sand or iron ore,
usually mined from a quarry close to the plant where they undergo reduction using primary and
secondary crushers. When the reduced materials reach the cement plant they are proportioned to
create a cement of specific chemical composition. Much work is being done on the use of
alternative raw materials often the by-products of other industrial processes. These can
minimize the effects of quarrying, reduce the impact of the cement plant on the local
environment and enable the cement industry to become a major player in materials recycling.
There are two basic methods used in Portland cement production wet and dry. In the dry
process dry materials are proportioned, ground to a powder, blended and fed into the kiln dry.
The wet process involves adding water to the proportioned raw materials and completing the
grinding and blending operations in slurry form.
2. Pre-heater
To conserve energy, most modern cement plants pre-heat raw materials before they enter the
kiln,
using
the
hot
exhaust
gases
from
the
kiln
itself.
3. Kiln
The mixture of raw materials is fed into the upper end of a rotating, cylindrical kiln, which
achieves temperatures in excess of 1000C. It passes through at a rate controlled by the slope
and rotational speed of the kiln. Chemical reaction inside the kiln leads to the fusion of the raw
materials to produce clinker. Traditionally kiln fuels have been powdered coal or natural gas,
but increasingly alternative fuels are being used. These include materials such as scrap tyres,
processed sewage sludge and packaging waste.
4. Cooling/finish grinding
Clinker is discharged from the lower end of the kiln and transferred to various types of coolers.
Total production
The cement industry comprises of 125 large cement plants with an installed capacity of 148.28
million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10
million tonnes per annum. The Cement Corporation of India, which is a Central Public Sector
Undertaking, has 10 units. There are 10 large cement plants owned by various State
45

Governments. The total installed capacity in the country as a whole is 159.38 million tonnes.
Actual cement production in 2006-07 was 116.35 million tonnes as against a production of
106.90 million tonnes in 2004-05, registering a growth rate of 8.84%. Major players in cement
production are Ambuja cement, Aditya Cement, J K Cement and L & T cement.
Apart from meeting the entire domestic demand, the industry is also exporting cement
and clinker. The export of cement during 2004-05 and 2006-07 was 5.14 million tonnes and
6.92 million tonnes respectively. Export during April-May, 2007 was 1.35 million tonnes. Major
exporters were Gujarat Ambuja Cements Ltd. and L&T
Ltd.
The Planning Commission for the formulation of X Five Year Plan constituted a 'Working
Group on Cement Industry' for the development of cement industry. The Working Group has
identified following thrust areas for improving demand for cement;
i.
Further push to housing development programmes;
ii.
Promotion of concrete Highways and roads; and
iii.
Use of ready-mix concrete in large infrastructure projects.
Further, in order to improve global competitiveness of the Indian Cement Industry, the
Department of Industrial Policy & Promotion commissioned a study on the global
competitiveness of the Indian Industry through an organization of international repute, viz.
KPMG Consultancy Pvt. Ltd. The report submitted by the organization has made several
recommendations for making the Indian Cement Industry more competitive in the international
market.
The
recommendations
are
under
consideration.
Cement industry has been decontrolled from price and distribution on 1st March 1989 and delicensed on 25th July 1991. However, the performance of the industry and prices of cement are
monitored regularly. Being a key infrastructure industry, the constraints faced by the industry
are reviewed in the Infrastructure Coordination Committee meetings held in the Cabinet
Secretariat under the Chairmanship of Secretary (Coordination). The Committee on
Infrastructure also reviews its performance.
Technological change
Continuous technological upgrading and assimilation of latest technology has been going on in
the cement industry. Presently 93 per cent of the total capacity in the industry is based on
modern and environment-friendly dry process technology and only 7 per cent of the capacity is
46

based on old wet and semi-dry process technology. There is tremendous scope for waste heat
recovery in cement plants and thereby reduction in emission level. One project for cogeneration of power utilizing waste heat in an Indian cement plant is being implemented with
Japanese assistance under Green Aid Plan. The induction of advanced technology has helped
the industry immensely to conserve energy and fuel and to save materials substantially. India is
also producing different varieties of cement like Ordinary Portland Cement (OPC), Portland
Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement,
Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement etc.
Production of these varieties of cement conform to the BIS Specifications. Also, some cement
plants have set up dedicated jetties for promoting bulk transportation and export.
Future Prospects about the Cement industry
The industry is likely to maintain its growth momentum and continue growing at around 8% in
the medium to long term. Government initiatives in the infrastructure sector (such as the
commencement of second phase of NHDP, rural roads, 10,000 kms of additional highways as
announced in Finance Budget) and the housing sector are likely to be the main drivers of
growth for the industry.
The acquisition of L&T's cement division by Grasim has changed the landscape of the
entire cement industry and in one fell swoop has catapulted Grasim to the leadership
position. This is a healthy sign for the industry, as this would result in consolidation and
would give significant pricing power to the bigger players. With consolidation taking
place at the lower end also, the unviable units will be forced to shut down thus
benefiting the long-term interests of the industry.
With no major capacity expansion in the pipeline, the demand supply level is expected
to achieve parity on a macro level by FY08 and this will help in the improvement of
prices. However, since the level of demand supply mismatch is higher in the southern
region, it will take longer to achieve demand supply parity. We expect cement price to
increase by around 6% in FY08 owing to fundamental reasons.
The industry worked at estimated 84% capacity in FY08 and given the current growth
rates and also assuming no major capacity expansion in the near future, the capacity
47

utilisation is likely to go up significantly in the future. This will help in improving the
margins of all the major players and will lead to higher profitability.
Despite these positives, the possibility of interest rates heading north and the consequent impact
on housing demand remains to be seen. While infrastructure spending was a boon, there was a
strong cushion from the steady growth of the construction sector. If this support wanes, it could
take even longer for demand-supply balance to reach parity. Also, the hike in prices of coal and
petroleum products could impact cement companies margins (account for around 40% of sales).
Though the pricing cushion exists, the margin rise will be mitigated to this extent.
INDIAN STEEL INDUSTRY
INTRODUCTION
Steel is a basic industrial metal because of its high specific strength and relatively low cost per
unit. India is one of the major producers of steel in the world (10th largest) while Steel Authority
of India (a PSU) is the 11th largest steel making company in the world. The per capita
consumption of steel in India is 20 kgs compared to 20 kgs in Africa, 340 kgs in Europe, 420
kgs in North America and 635 kgs in Japan.
India has rich deposits of iron ore, ferrous ores, manganese ore, and chromate ore. India exports
iron ores to various countries. The major steel products are flat products such as HR-coils, CRcoils, Galvanised coils/sheets and Long products and steel alloys. The long products find use in
the construction business. HR coils form the raw material for the CR industry. They are used for
LPG cylinders, tubes, pipes, drums, automobile components, boilers, etc. CR coil, which is a
thin sheet, forms the raw material for the galvanised sheets/coils. Alloy steel is high value
added steel for specific application.
The Indian steel industry is plagued by over-capacity, high capital cost, inefficiency and labour
problems. After liberalisation, heavy investments were made in the steel sector. The steel
market was expected to do well. But the fall of Russia, the Asian crisis, and overcapacity world
wide, led to a supply glut resulting in a fall in steel prices. Many developed countries started
protecting the domestic companies by imposing heavy duties on the imported steel products.
48

The Indian steel industry is showing some signs of revival. The steel consumption in India grew
at a good 11% in the first half of the current financial year while finished steel production was
up by 13%. The Indian industry is currently concentrating on the domestic market. Most of the
companies have recorded an increase in the sales in the first quarter of this year. The export
market is currently very dull. The prices of the HR coils and CR coils have dropped drastically.
The government had introduced floor prices to protect the Indian industry.
INDUSTRY STRUCTURE
The steel industry worldwide produces over 750 mn tonnes of crude steel each year. The largest
steel-producing countries are China, Japan and the United States. The integrated steel plants
(ISPs) - Steel Authority of India (SAIL), Tata Steel (TISCO) and Rashtriya Ispat Nigam (RINL)
dominate the Indian steel market. The major ISPs in India are SAIL, TISCO and RINL. They
account for almost 75% of the steel production. SAIL is the 11th largest producer of steel in the
world while TISCO ranks 59th. TISCO is also one of the lowest cost producer of steel in the
world.
Steel plants can be classified into integrated steel plant (ISP), mini steel plants (MSP) and rerolling plants. There are nine integrated steel plants operating in India. There are more than
2,500 MSPs spread across the country. The re-rolling plants process the semi-finished and
intermediate products into finished products. With the liberalization of the steel sector new
private companies have started using of state of the art technology like COREX and CONARC
for production of liquid steel and value added steel respectively. Mini steel producers in India
employ either Electric Arc Furnace [EAF] or Induction Furnace [IF] for steel production.
The steel industry with an estimated turnover of Rs 75,819 crores in the year-end March 2004
comprises of two distinct producer groups.
Major producers: Also known as Integrated Steel Producers (ISPs), this group includes large
steel producers with high levels of backward integration. Steel Authority of India Limited
(SAIL), Tata Steel, Rashtriya Ispat Nigam Limited (RINL), Jindal Vijayanagar Steel Limited
(JVSL), Essar Steel and Ispat Industries form this group. SAIL, TISCO and RINL produce steel
using the blast furnace/basic oxygen furnace (BF/BOF) route that uses iron ore, coal/coke as the
49

basic input mix for producing finished steel.
Other major producers such as Essar Steel, Ispat Industries and JVSL use routes other than
BF/BOF for producing steel. . While Essar Steel and Ispat Industries employ Electric Arc
Furnace (EAF) route that uses sponge iron, melting scrap or a mix of both as input, JVSL uses
COREX, a revolutionary technology for making steel using basically iron-ore and coal.
Other producers: This group consists of smaller stand-alone steel plants that include producers
and processors of steel.
Processors/Rerollers: Units producing small quantities of steel (flat/long products) from
materials procured from the market or through their own backward integration system
-
Stand alone units making pig iron and sponge iron.
Small producers using scrap-sponge iron-pig iron combination produce steel ingots (for
long products) using Electric Arc Furnace (EAF) or Induction Arc Furnace (IAF) route
The Major producers are strategic in nature and account for most of the mild steel production
in the country. The group produces most of the flat steel products in the country including Hot
Rolled, Cold Rolled and Galvanized steel. The majors also produce a small proportion of Long
products and other special steel being produced in the country. While the Other producers
account for a majority of long products being produced in the country and some of the value
added flat steel products like cold rolled steel and galvanized steel.
Types of products
Iron ore National Mineral Development Corporation (NMDC), Kudremukh Iron Ore Co
(KIOCL) and Sesa Goa (Sesa) are the major merchant producers of iron ore. SAIL and Tata
Steel have their captive iron ore mines.
Pig Iron KIOCL, Sesa Goa and Usha Ispat. Apart from them there are many mini blast
furnace (MBF) pig iron producers and even integrated steel plants like SAIL and RINL
produce a significant amount of pig iron.
Sponge Iron Essar Steel, Ispat Industries, Vikram Ispat (a division of Grasim) are the
major producers of gas based sponge iron.
50

Flat steel products - SAIL, Tata Steel, Essar Steel, Ispat Industries and Jindal Vijaynagar
(JVSL) are the major producers of hot rolled coils (HRC). SAIL, Tata Steel, Ispat
Industries, Jindal group of companies, Uttam Steel and Bhushan Steel are the big producers
of cold rolled coils/ sheets (CRC) and galvanized sheets (GP/ GC).
Long products RINL, SAIL and Tata Steel are the major producers of long products like
rods, pipes, bars, wires etc.
Alloy Steel products - Mukand, Mahindra Ugine (Musco) and Kalyani Carpenter are some
of the largest producers of alloy steel in the country, which is primarily used, in automotive
and engineering applications.
PROCESS OF PRODUCTION
Basic Oxygen Furnace and Electric Arc Furnace: Players in the steel industry can be
classified either as integrated steel plants (ISPs) or secondary producers / mini-steel mills,
based on their process of manufacture. The ISPs use the blast furnace (BF) to reduce iron
ore to form hot metal, which is then converted into steel in a basic oxygen furnace (BOF).
The basic open hearth (BOH) was in use before the advent of the BOF and has gradually
been phased out because of its inefficiency with respect to furnace productivity, energy and
refractory consumption. The BOF process is not very power intensive as the entire power
requirement is met through generation within the process itself. The secondary producers,
unlike the ISPs, melt the steel scrap / pellets using electricity in the power intensive electric
arc furnaces (EAFs) / induction furnaces (IFs).
Rolling Mills
The re-rollers vary in size, product mix and technology. Most of these mills are equipped
with re-heating furnaces to roll long products, hoops and strips from billets / ingots or from
re-rollable scrap. ISPs and some large plants using the EAF route have set up captive rolling
mills, after the restrictions on setting up downstream production facilities were removed.
With expectations of a shift in demand tow ards high value-added products, larger players
like TISCO, SAIL and Essar are expected to benefit more than the stand-alone rolling mills
because of their cost advantage.
Raw Materials
51

Important raw materials required by the iron and steel industry include iron ore, sponge iron,
ferro alloys, coal, refractories, manganese ore and chromite ore.
Iron ore - India has an estimated 10,052 mn tonne of recoverable reserves of heamatite and
3,408 mn tonne of magnetite. Bihar and Orissa are the largest heamatite ore-bearing zones in
the country with reserves consisting of mainly medium grade & low-grade iron ore. Madhya
Pradesh has the largest quantity of high grade ore reserves (iron content is more than 65 %) in
the country while Karnataka has the highest reserves of magnetite.
Sponge Iron - Sponge iron is a reduced form of iron ore, having iron content of 85-92%.
Sponge iron is made by mixing iron ore and coal to make it easy for feeding into furnaces for
making steel. It is a substitute for steel melting scrap used for steel making through EAF and
BOF processes. It can be used in induction as well as arc furnaces for better results. India is the
second largest producer of sponge iron.
Ferro Alloys - They are added to liquid steel to achieve a specified chemical composition and
provide properties needed to make particular products. They are in fact used in all steels e.g.,
plain carbon, stainless, alloy, electrical, etc. Ferroalloys are prepared from charges of the
nonferrous metal ore, iron or iron ore, coke or coal, and flux by treatment at high temperature in
submerged-arc electric furnaces. The bulk ferro alloys are ferro manganese, ferro chromium
and ferro silicon which is mainly produced in India. Production of noble ferro alloys such as
ferro molybdenum, ferro titanium and ferro vanadium is negligible.
Manganese and Chromite ores-The main manganese reserves found in India are of the blast
furnace grade while only 12% (approximately) are of the ferro-manganese grade. Orissa (33%),
Madhya Pradesh (21%), Maharashtra (21%) and Karnataka (18%) are the major producers of
the ore. Orissa is the prime chromite ore producing state accounting for almost 99% of the total
production of 86 mn tonnes in FY99. There are export restrictions on both manganese and
chromite ores.
GOVERNMENT REGULATIONS
Governments attitude towards this industry in the form of imposing customs and excise duty
does play an important role in increasing/decreasing the competition in terms of price. The
customs duty for most of the products in this sector is reduced to 5%. For instance, The customs
52

duty on primary steel and ferroalloys stainless steel has been reduced from 7.5% to 5 % in FY
2007 to 5% as on 2007-08 budget. Similarly there was a periodic reduction in duties of nickel,
coaking coal (with ash content less than 12 percent) is fully exempted now. The periodic
decrease in this duty has reduced the landed cost. In the recent budget Excise duty is increased
from 12% to 16%. The customs duty on coaking coal is fully exempted. The budget impact is
neutral to the industry. The hike in excise duty will be passed on to the customers and is already
reflected in the recent hike of steel prices.
Demand Drivers and Profitability
The demand driver for Steel Industry is intrinsically related to the overall development of the
economy. This overall development is basically led by industries like infrastructure,
constructions, automobiles, power, consumer durables etc. Growth in these sectors will lead to
high demand in Steel. The driver for domestic Steel Industry, apart from domestic sales, is
exports. For the past few years exports have driven the overall growth of the industry.
53

MAJOR PLAYERS
Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a
fully integrated iron and steel maker, producing both basic and special steels for domestic
construction, engineering, power, railway, automotive and defence industries and for sale in
export markets. The Government of India owns about 86% of SAIL's equity and retains
voting control of the Company. However, SAIL, by virtue of its "Navratna" status, enjoys
significant operational and financial autonomy.
Others major steel producers are
Tisco ( Tata Iron and Steel Corporation ltd)
Essar Steel
Jindal Vijaynagar Steels Ltd
Jindal Strips Ltd
JISCO
Saw Pipes
Uttam Steels Ltd
Ispat Industries Ltd
Mukand Ltd
Mahindra Ugine Steel Company Ltd
Tata SSL Ltd
Usha Ispat Ltd
Kalyani Steel Ltd
Electro Steel Castings Ltd
Sesa Goa Ltd
NMDC
Lloyds SteeI Industries Ltd
54

STEPS TAKEN TO BOOST STEEL INDUSTRY
Budget 2008-09
1. Customs duty on steel scrap and aluminum scrap has been cut to 0% versus 5%
2. Export duty on chrome ore from the current INR 2,000 per tonne to INR 3,000 per/ton
What the budget does

- Steel melting scrap will be exempt from customs duty.
- Aluminium metal scrap to be exempt from customs duty.
- Export duty rate on chromium ores and concentrates has been increased.
Impact on sector
Reduction in customs duty on scrap will help steel manufacturers that use the electric arc
furnace route for steel manufacturing lower their costs. On the other hand, it will be a negative
for manufacturers that use the blast furnace route. If auto manufacturers pass on the reduced
excise benefits in the form of lower prices, it will help spur demand for automobiles, which in
turn will drive steel demand.
While reduction in customs duty on aluminium metal scrap is positive for certain secondary
aluminium manufacturers, it is negative for ingot manufacturers like Nalco and Hindalco.
Increased investments in T&D will help boost demand for aluminium as the electrical sector is
the major consumer of aluminium in the country.
Impact on companies
Reduction in excise duties on automobiles will help companies (such as Tata Steel) that supply
steel to auto makers. Players that supply steel to the power equipment companies like SAIL and
JSW Steel will benefit from increased investments in the power sector.
55

Nalco and Hindalco will be positively impacted due to greater demand from sectors like auto
and power.
Customs duty exemption on aluminium metal scrap is likely to make its cost more competitive
vis--vis the ingots being manufactured by Nalco and Hindalco.
KEY POINTS
Supply
With trade barriers having been lowered over the years, imports play
an important role in the domestic markets.
Demand
The demand is derived from sectors that include infrastructure,

consumer durables and automobiles.
Barriers to entry
High capital costs, technology.
Bargaining power of The government's move on railway freight costs and grid power costs
suppliers
would determine the final price of the metal.
Bargaining power of High, presence of a large number of suppliers and access to global
customers
markets.
Competition
High, presence of a large number of players in the unorganized sector.
PROSPECTS
After an impressive 7% growth in global steel production and a 7.3% rise in steel
consumption in 2007, this trend is likely to continue well into 2008 with global
production and consumption both estimated to increase by about 6%. This would take
the total world steel consumption to over 900 MTPA from the current 860 MTPA. While
the current world steel capacity is in the vicinity of about a 1,050 MTPA, the year 2008
is likely to witness the global steel production crossing the 1-bn ton mark for the first
time
56

However, the concern here is the new steel capacities cropping up across the globe,
which may increase the pressure on steel prices going forward. Further, the biggest
disruption in the growth pattern could be higher than expected slowdown in Chinese
steel consumption, which could make available a good amount of excess steel for world
consumption.
The steel sector continues to face threat from cheap imports. With the customs duties on
various steel imports already having been reduced in the region of 15%-20%, import
pressures could consequently lead to pressure on margins of the domestic companies
Steel companies are however, expected to continue to perform well in FY08 largely due
to the continuation in infrastructure spending (including housing). Auto sector has also
been showing strong growth, which could help in driving demand for value added steel
products like CR (cold roll) steel. Exports remain a lucrative avenue for domestic steel.
The Steel Industry looks strong with good potential exports and backing higher domestic
demand from various user industries. This is backed by the robust economic growth in India.
Companies are expanding their capacities visualizing the extent of demand they may have to
meet locally and globally in the years to come. Indian companies are also working to ensure that
the basic raw materials are available adequately.
Companies with lower financial risk; higher operational efficiency and high utilization and cost
reduction will perform better than the others. Though fundamentally things look good, the price
of steel is expected to increase. With the supply constraints in raw materials expected to further
increase, reduction in the rate of increase in prices of steel and other value added products,
companies have to improve their productivity and become global in terms of their capacity,
productivity and have brand strategies for various value added products to reduce the cyclical
nature of this business.
Companies, which have high vertical integration, high operating efficiency, low financial
leverage, thrust on value added products with brand will have lesser negative impact on
their performance considering the cyclical nature of this industry.
57

STEEL SECTOR FINANCIALS
SALES
SALES GROWTH
GROSS PROFIT MARGIN
PAT
PAT GROWTH
WORKING CAPITAL TO
SALES
ROCE
RONW
DEBT TO EQUITY RATIO
MKT CAP
MKT CAP / SALES
ENTERPRISE VALUE
P/E RATIO
PRICE/BOOK VALUE RATIO
31/03/2005
12
31/03/2006
12
31/03/2007
12
Rs m
%
%
Rs m
%
235,527
6.3
-9,958
-
296,152
25.7
15.2
7,206
-175.6
369,811
24.9
23.6
43,571
378.5
7.0
3.7
-1.3
%
%
x
Rs m
x
Rs m
X
x
4.9
-19.8
3.1
21,020
0.4
235,661
-6.3
1.3
12.3
13.6
2.6
28,165
0.4
253,113
11.7
1.6
27.4
46.8
1.1
83,015
1.1
518,551
5.7
2.7
C O M PAN Y AN A LYS I S
ACC CEMENTS LTD
ACC Limited is Indias foremost manufacturer of cement and ready mix concrete with a
countrywide network of factories and marketing offices.Established in 1936, ACC has been a
58

pioneer and trend-setter in cement and concrete technology. ACCs brand name is synonymous
with cement and enjoys a high level of equity in the Indian market. It is the only cement
company that figures in the list of Consumer SuperBrands of India. Among the first companies
in India to include commitment to environment protection as a corporate objective, ACC has
won several prizes and accolades for environment friendly measures taken at its plants and
mines. The company has also been felicitated for its acts of good corporate citizenship.
PEFORMANCE EVALUATION
Company strengthened several organizational processes across a wide range of functions with a
view to enhance its business capabilities. Production and sale of cement touched an all-time
high of 19.92 million tonnes and 19.97 million tonnes respectively during the year 2007,
growth of 6.4% and 6.1% respectively as compared to the corresponding previous year
Profit after Tax for the year ended December 31, 2007 for the group was Rs 1427 crore against
Rs 1240 crore in the corresponding previous year.Total group income for the year 2007 at Rs
7189 crore, up 20% over the corresponding previous year
Cement grinding capacities were enhanced at Tikaria, Kymore, Wadi and Sindri
Project for setting up of a new 7000 TPD clinker line at Chanda along with 25 MW additional
captive power plant was approved by the Board
Cement Business
2007 2006 Change %
Production-Million tonnes 19.92 18.73
6.4%
Sales volume-Million tonnes* 19.97 18.83 6.1%

Sales value - Rs crore ** 6639.93 5503.76 20.6%
EBITDA - 31% 32%
Operational Performance 2007 2006
59

Capacity utilization - % 91 95 Blended cement - % 90 87 Fuel consumption (Kcal/Kg of
clinker) 752 736 Power consumption (Process) Kwh/T 89 88 Man hours per tonne of cement
1.14 1.36
Production and sales of RMX stood at 1.11 million cubic meters and 1.23 million cubic metres
which was higher by 4.7% and 9.8% respectively as compared to the previous year. Sales value
stood at Rs 367.02 crore which is 22.4% higher than that in the previous year. Profitability of
RMX operations was adversely affected due to higher cost of input mix and higher overhead
costs.
Ready Mixed Concrete business holds huge potential and is poised for significant growth in
coming years. In view of this, your Company sees this business as a key channel for delivery of
cement to customers of tomorrow.
Expansion Projects
Company continued to pursue the policy of strengthening its presence in its strategic markets by
judicious brownfield expansion of its existing cement plants.
The project for expansion of Bargarh Work's capacity to 2.14 million tonnes per annum together
with 30 MW captive power plant is underway and scheduled to be completed by early 2009.
The implementation of the projects for augmenting grinding capacity at Madukkarai by 0.22
million tonnes per annum and New Wadi by 0.60 million tonnes per annum are also expected to
materialize this year.
During the year, work was commenced on the expansion of New Wadi Plant in Karnataka
which together with two grinding plants will augment our cement capacity in the state of
Karnataka by 3 million tonnes per annum. These projects will go on stream in middle of 2009.
ACQUISITIONS / DIVESTMENTS
With the view to further improve its market share and presence in Orissa market, company
acquired 14.3% equity stake in Shiva Cement Limited (SCL), Rourkela. SCL has an integrated
cement plant with a clinker capacity of 350 tonnes per day and cement grinding capacity of
60

100,000 tonnes per annum. Company has entered into a marketing agreement through which
the entire production of SCL is marketed by ACC.
In order to augment limestone reserves of Lakheri Works, company has acquired 100% of the
equity stake of Lucky Minmat Private Limited for Rs 35 crore. Company holds lime stone
mines in the Sikar District of Rajasthan.
The Company divested its entire stake in its engineering subsidiary ACC Nihon Castings Ltd.
during the year under review. Company also divested its entire equity stake in Almatis ACC
Limited to the Almatis group during the year.
FINANCIAL ANALYSIS
ACC CEMENTS
1
2
3
4
5
6
7
8
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
Inventory Turnover Ratio
Interest Cover Ratio
GPM Ratio
Debt/Equity Ratio
2007
20.44
29.16
76.67
1.74
2.99
28.21
23.72
0.07
2006
21.16
33.64
65.78
1.65
2.83
23.43
24.73
0.24
2005
9.59
21.58
21.19
1.35
3.16
7.44
12.23
0.88
2004
5.93
11.61
11.3
1.32
3.17
4.7
7.87
0.98
2003
3.52
4.48
6.08
1.17
3.1
2.86
6.05
1.3
61
Leverage Ratios :
Debt-Equity- We can see that Acc cements has been consistently reducing the portion of debt
from year on year which tells that, company is focused on the protection of its creditors.
Interest Coverage As we can see that, firms interest coverage capacity has gone up tells that
the firm can easily meet its current burden even if PBIT suffer a considerable decline.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been quite consistant
over the years although It had declined little in year 2006 and 2007. This shows that company
has been quite efficient in converting its inventory into sales quite efficiently.
FATO As we can see, the portion of fixed assets have almost remained unchanged, we can
tell that the firm ahs been using assets quite conservatively but they have been in line with the
firms requirements.
Profitability Ratios :
NPM From the trend, we can see that portion of net profit has been increasing quite
consistently over year by year. It shows that company has been performing quite efficiently and
earnings have been distributed to shareholders very well.
62

GPM From the table we can see that company has been very efficient in using its production
capacity. Its portion of gross profit has been increasing considerable over the years, which is
also good sign for the company in the future.
ROE From the table, we can see that over the years, companys return on equity have been
increasing quite consistantly, which shows that profits have been made by firm consistently on
the equity funds invested.
EPS From the table, we can see that, eps portion of the company has been increasing over the
year from 2003 till date. I tells that, on very share held by share holders, they have been able to
earn efficient earnings.
INDIA CEMENTS LTD

The India Cements Ltd was established in 1946 and the first plant was setup at Sankarnagar in
Tamilnadu in 1949 . Since then it has grown in stature to seven plants spread over Tamilnadu
and Andhra Pradesh . The capacities as on March 2002 have increased multifold to 9 million
tons per annum.
63

Company Highlights
The Company is the largest producer of cement in South India.
The Company's plants are well spread with three in Tamilnadu and four in Andhra
Pradesh which cater to all major markets in South India and Maharashtra.
The Company is the market leader with a market share of 28% in the South. It aims to
achieve a 35% market share in the near future. The Company has access to huge
limestone resources and plans to expand capacity by de-bottlenecking and optimisation
of existing plants as well as by acquisitions.
The Company has a strong distribution network with over 10,000 stockists of whom
25% are dedicated.
The Company has well established brands- Sankar Super Power, Coromandel Super
Power and Raasi Super Power.
Regional offices in all southern states and Maharasthra offices/representative in every

district.
CURRENT PERFORMANCE
The country witnessed further growth in demand during April and May 2007 with the domestic
consumption going up by 10% over and above the double digit growth registered in the
previous year. South was even better with a growth of 12.4% in the first two months of this
year.
The clinker production of company during the first quarter was at 17.33 lakh tonnes (15.01 lakh
tonnes), the cement production at 22.90 lakh tonnes (19.04 lakh tonnes) and cement sales at
23.06 lakh tonnes (18.52 lakh tonnes). As earlier mentioned, the previous period figures are not
strictly comparable as Visaka Cement Industry Ltd was merged with company with effect from
1s July 2006. Company has achieved a gross turnover of Rs.841 Crores (Rs.567 Crores) and a
net profit before tax of Rs.215 Crores (unaudited) (Rs.113 Crores). With the continued
buoyancy in demand and further improvement in prices, the year 2007-08 could be a record
year for company in terms of volume and profitability.
EXPANSION/MODERNISATION
64

As earlier mentioned, the Company has taken up various projects on hand for
upgradation/expansion of its cement capacity and also to optimise energy consumption levels.
The conversion of Sankaridurg Plant from wet process to dry process is expected to be
completed during the II quarter of this financial year and the expansion of capacity at
Vishnupuram through upgrading Kiln I is expected to be completed by the IV quarter of current
year. The Company has also taken up replicating the production capacity at Malkapur Plant
through one more line of a capacity of 1.2 million tonnes which is expected to be commissioned
during the III quarter of FY 09. The company is also setting up grinding plants at Chennai
(Tamil Nadu) and at Parli (Maharashtra), each with a capacity of 1 million tonnes. Work is
apace on both these projects which are expected to be completed over next 9/12 months. All
these capital expenditure proposals will be funded out of the proceeds of Foreign Currency
Convertible Bonds (FCCB) and internal generation. Your Company is also actively pursuing its
proposals for setting up a cement plant in Himachal Pradesh and also on the look out for
establishing capacities in Rajasthan and Madhya Pradesh.
CORPORATE DEBT RESTRUCTURING
As reported in the last year, the company has been in negotiations with all the remaining lenders
for revision in the terms of assistance/for settlement. Presently, the company is left with only
few lenders with whom settlement is to be reached. During the current year the company is
likely to approach the lenders for exiting from the CDR arrangement.
The company has prematurely repaid all the debts arranged by the foreign investor, which was
availed by the company during the year 2005 for refinancing part of the restructured debt.
FINANCIAL ANALYSIS
INDIA
CEMENTS
1
2
3
4
5
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
Inventory Turnover
2007
21.2
34.91
21.73
1.05
1.3
2006
2.92
4.37
2.38
1.23
0.97
2005
0.39
-19.97
0.32
0.9
0.75
2004
-9.39
-34.17
-6.87
0.75
0.67
2003
-22.52
-51.28
-13.84
0.63
0.56
65

Ratio
6 Interest Cover Ratio
5
1.84
1.16
7 GPM Ratio
28.49
12.18
5.46
8 Debt/Equity Ratio
1.48
1.8
5.95
0.76
3.75
5.88
0.17
-4.87
4.58
Leverage Ratios :
Debt-Equity- We can see that India cements has reduced the portion of the debt in yr 2006-07
drastically compared to year 200-2005 which tells that company is focused on the protection of
its creditors.
Interest Coverage As we can see at the starting years, company was not doing well to meet
its current obligations from the year 2003-2005. But in the year 2007, firms interest coverage
portion has gone up realy well. So the firm is in better position to cover its obligations in future
as well.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been quite low over the
years. This shows that company has been little inefficient in converting its inventory into sales
66

quite effectively. Company needs to convert its inventory into sales quickly in the coming
years.
tell that the firm ahs been using assets quite conservatively but they have been in line with the
firms requirements.
NPM From the trend, we can see in year 2003-2005, company has not done well in terms
profits as there has been loss. From the year 2006-07, portion of net profit has been increasing
quite nicely. It shows that company has been performing quite efficiently in last 2 year and
earnings have been distributed to shareholders very well in future as well..
GPM Except in the year 2003, we can see that company has been very efficient in using its
production capacity. Its portion of gross profit has been increasing considerable over the years,
which is also good sign for the company in the future.
ROE From the table, we can see that in period of 2003-05, company has not performed well,
but companys return on equity in yr 2006-07 have gone up , which shows that profits have
been made and distributed by firm and it needs to that consistently well in coming years.
EPS From the table, we can see that, EPS was not quite well in yr 2003-05. But the year
2007, company has done quite well to earn earning per share. Company is expected to do well
in the future as well.
ULTRATECH CEMENT LTD
UltraTech Cement Limited, a Grasim subsidiary has an annual capacity of 17 million tonnes. It
manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and
Portland Pozzolana Cement.
UltraTech has five integrated plants, five grinding units and three terminals two in India and
one in Sri Lanka. These include an integrated plant and two grinding units of the erstwhile
Narmada Cement Company Limited, a subsidiary, which has been amalgamated with the
company in May 2006.
67

UltraTech is the country's largest exporter of cement clinker. The company exports over 2.5
million tonnes per annum, which is about 30 per cent of the country's total exports. The export
markets span countries around the Indian Ocean, Africa, Europe and the Middle East.
The cement division of L&T was demerged in 2004 after Grasim made the 30 per cent open
offer for equity shares, gaining control over the new company, christened UltraTech. Besides
the long term strategic value in the wake of rising demand for cement, with the growth of
housing and infrastructure sectors in the country, the acquisition brings significant synergy
gains
to
the
parent
company.
Ready Mix Concrete is likely to see substantial growth in the coming years. Recognising the
opportunities that this business will offer, UltraTech has commenced setting up of Ready Mix
Concrete
plants
at
various
places
in
the
country.
UltraTech's subsidiaries are: Dakshin Cements Limited and UltraTech Ceylinco (Private)
Limited
The year under review witnessed improved performance, driven by higher market realisation,
enhanced capacity utilisation and greater volumes.
Average realisation improved by 29% from Rs.2,122 per MT in FY06 to Rs.2,735 per MT in
FY07. Cement production was 14.64 MMT as compared to 13.33 MMT in the previous year.
Effective capacity utilisation (cement produced + clinker sold) was 101% compared to 89 %
during the previous year. Aggregate sales volume at 17.67 MMT (15.55 MMT) was higher by
13.63%. Domestic sales volume which constituted around 80 % of the aggregate sales volume
rose from 12.97 MMT in FY06 to 14.21 MMT in FY07, while aggregate exports grew from
2.58 MMT in FY06 to 3.46 MMT in FY07.
CAPITAL EXPENDITURE
The Company is setting up captive power plants at its Units in Andhra Pradesh, Chattisgarh and
Gujarat. The power plant in Andhra Pradesh will be commissioned in the last quarter of FY08
and the one in Chattisgarh in the first quarter of FY09. The power plant in Gujarat will be
commissioned in a phased manner, commencing from the last quarter of FY08 and ending in
68

the second quarter of FY09. These power plants will meet around 80% of company's power
requirement. It will also reduce company's dependence on the State Grid, supply power at
economical rates, thereby reducing the cost of power.
The capacity at company's Unit in Andhra Pradesh is being augmented by 4 mtpa together with
a grinding Unit in Karnataka. Expected to be commissioned in March, 2008, this will help
company cater to the growing demand in the markets of South India.
FINANCIAL ANALYSIS
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
Inventory Turnover
Ratio
GPM Ratio
Debt/Equity Ratio
2007
15.75
44.13
62.84
1.53
2006
6.91
20.79
18.47
1.23
2005
0.1
7.45
0.22
1.03
2004
1.69
1.18
3.12
0.82
2003
0
0
0
0
5.05
15.99
24.39
0.89
4.22
6.03
10.47
1.4
3.15
3.07
5.57
1.44
3.04
2.71
6.36
1.45
0
0
0
0
Leverage Ratios :
69

Debt-Equity- We can see that company has been consistently reducing the portion of debt from
year on year which tells that, company is focused on the protection of its creditors.
Interest Coverage As we can see that, firms interest coverage capacity has gone quite well
in year 2007, which tells that the firm can easily meet its current burden I future even if PBIT
suffer a considerable decline. In previous years, coverage was quite low.
Turnover Ratios :
ITO As we can see, the firms inventory portion has been increasing over the years. This
shows that company has been quite efficient in converting its inventory into sales very
efficiently and momentum will be sustained in coming years as well.
tell that the firm has been using assets quite conservatively but they have been in line with the
firms requirements. In the future, company will have increase its fixed assets portion to gain
more profits.
NPM From the trend, we can see that portion of net profit has been increased in last 3 years.
It shows that company has been performing quite efficiently in last 3 year and earnings have
been distributed to shareholders very well.
increasing quite consistantly, which shows that profits have been made by firm consistently on
the equity funds invested.
70

EPS From the table, we can see that EPS has gone up quite well fro yr 2005-07. It tells that,
on very share held by share holders, they have been able to earn more profits.
MANGALAM CEMENTS LTD.
Mangalam Cement Limited was promoted in the year 1978 by the famed House of Shri
B.K.Birla, the most eminent and illustrious industrialist of the country. It is a professionally
managed and well established cement manufacturing company enjoying the confidence of
consumers because of its superior quality product and excellent customer service.
The company has recently commissioned its state-of-the-art new cement plant with German
technology for producing 7 lakh tonnes per annum at its existing site at Morak, Distt. Kota in
Rajasthan under the name of Neer Shree Cement.
FINANCIAL ANALYSIS
MANGALAM CEMENTS
1
2
3
4
5
6
7
8
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
GPM Ratio
Debt/Equity Ratio
2007
20.9
33.7
17.01
1.21
2.01
10.76
27.02
0.48
2006
15.97
63.8
24.44
3.49
4.61
12.37
21.29
0.33
2005
5.49
37.48
5.94
2.83
5.06
3.42
7.57
2.53
2004
5.59
131.75
8.4
2.38
6.27
3.04
9.51
10.27
2003
-26.45
0
-30.31
1.66
4.4
-0.09
-8.35
0
71
Leverage Ratios :
Debt-Equity- In the 1st 3 yrs, company doesnt have good track record of debt. But, we can see
that company has been consistently reducing the portion of debt in coming years which tells
that, company is focused on the protection of its creditors.
Interest Coverage As we can see that, firms interest coverage capacity has gone quite well
in year 2006-07, which tells that the firm can easily meet its current burden I future even if
PBIT suffer a considerable decline. In previous years, coverage was quite low. It tells that firm
is in position to pay of its interest part quite well.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been decreasing over the
years. This shows that company has been quite inefficient in converting its inventory into sales
very effectively. Company should concentrate on pushing the sales more often.
FATO As we can see, the portion of fixed assets have decrraesed with marginal improvement
in year 2006 only. Company has been using fixed assets quite conservatively. In the future,
company will have to increase its fixed assets portion to gain more profits.
NPM Except in yr 2003, we can see that portion of net profit has been increased in
subsequent years. It shows that company has been performing quite efficiently in last 3 years
and earnings have been distributed to shareholders very well.
72

increasing quite consistently, which shows that profits have been made by firm consistently on
the equity funds invested. I had given huge return in year 2004.
EPS From the table, we can see that EPS has gone up quite well from yr 2005-07. It tells that,
on very share held by share holders, they have been able to earn more profits. Earnings to the
share holders have increased quite well in the last 2 years which tells that company has been
performing well.
PRISM CEMENTS LTD

Prism Cement Limited is an ISO 9001:2000 certified company promoted by the Rajan Raheja
Group. It operates one of the largest single kiln cement plants in the country at Satna, Madhya
Pradesh. Equipped with state-of-the-art machinery and technical support from F.L Smidth & Co
A.S Denmark, the world leaders in cement technology, Prism Cement has successfully created a
niche for itself in the Indian cement industry.
During the year, the Company produced 21.69 lakh tonnes of clinker and 22.39 lakh tonnes of
cement.During the year ended June 30, 2007, as against 22.02 lakh tonnes of clinker and 21.60
lakh tonnes of cement produced during the year ended June 30, 2006. The growth in demand
for cement combined with efforts to maximize realizations has enabled the Company to earn a
profit after tax of Rs. 192.77 crores as against Rs. 62.08 crores in the previous year. This is
inspite of the uptrend in prices of inputs such as coal and freight and taxes. The Board of
Directors has recommended a maiden dividend of 10 % per share. The dividend is tax free in
the hands of the shareholders. While the demand for cement has shown a good growth, the
73

Company was successful in strategizing its market operations which substantially enhanced the
brand equity of PRISM CHAMPION. The Company increased its share of PPC production
from 72 % during the year 2005-06 to 87 % during the year under review.
Prudent finance management over the years has enabled the Company to repay its entire debt
and wipe off its losses during the year under review. The Company invested surplus funds in
liquid mutual fund schemes. The total amount of investments as at June 30, 2007 was Rs.
141.87 crores. The Companys products are well recognized in the markets of interest to be
among the best in terms of quality and standards. They enjoy a cost advantage given the
proximity to the markets. The costs of production are also kept under constant checks and
controls. The Company believes that it is well placed to take advantage of the opportunities that
the markets offer.
The progress made in the year 2006-07 has set the Company on a course to enhance growth in
subsequent years. With the Governments thrust on infrastructure and housing continuing its
momentum, the demand for cement will be sustained in the current year. With this perspective,
the Company has embarked upon augmenting its capacity through a brownfield expansion of 2
million tonnes of clinker at Satna, Madhya Pradesh and thereafter setting up a Greenfield
project of 2 to 3 million tonnes of clinker at Kurnool, Andhra Pradesh. It is expected that after
these expansions, the total cement capacity of the Company would increase to around 10
million tonnes by
2011-2012.
FINANCIAL ANALYSIS
Prism
1
3
4
5
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
Inventory Turnover
6
7
8
9
Ratio
GPM Ratio
Debt/Equity Ratio
2007
25.02
46.66
6.46
2.12
2006
10.83
25.98
2.08
1.61
2005
5.84
11.53
0.86
1.16
2004
-1.54
-3.66
-0.19
0.98
2003
-9.58
-20.9
-1.05
0.78
5.27
50.5
39.02
0
2.69
6.01
21.16
0.42
2.05
3.28
16.1
1.22
1.85
1.98
12.93
1.73
1.57
0.93
6.7
1.87
74
Leverage Ratios :
Debt-Equity- In the 1st 4 yrs, company has sufficient portion amount of debt financing. But in
the year company has become totally debt free, which puts further pressure on its equity share
holders and firm cannot take advantage of leveraged position.
Interest Coverage As we can see that, firms interest coverage capacity has gone up really
well in year 2007, which supports zero debt for firm in yr 2007. In previous years, coverage
was quite low. It tells that firm is in position to pay of its interest part quite well if it takes any
debt in the future.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been increasing over the
years. This shows that company has been quite efficient in converting its inventory into sales
very effectively. Consistancy for the company will be key for the future growth.
FATO As we can see, the portion of fixed assets have been quite low along all the years.
Company has been using fixed assets quite conservatively. In the future, company will have to
increase its fixed assets portion to gain more profits.
75

NPM Except in yr 2003-04, we can see that portion of net profit has been increased in
subsequent years. It shows that company has been performing quite efficiently in last 3 years
and earnings have been distributed to shareholders very well.
GPM Companies, GPM has increased quite well in the last 3 years.From the table we can see
that company has been very efficient in using its production capacity. Its portion of gross profit
has been increasing considerable over the years, which is also good sign for the company in the
future.
increasing quite consistently in last 3 years, which shows that profits have been made by firm
consistently on the equity funds invested.
EPS From the table, we can see that EPS has gone up quite well in yr 2007. It tells that, on
very share held by share holders, they have been able to earn more profits in future. Company
has not given much returns to the share holders in the last 4 years which calls for the
improvement in the sales.
DALMIA CEMENTS
Founded in 1935 by Jaidayal Dalmia; the cement division was established in 1939 and enjoys a
heritage of 70 years of expertise and experience. The company is headquartered in New Delhi
with cement, sugar, travel agency, magnesite, refractory and electronic operations spread across
the country.
Dalmia Cements has leveraged additional capacities and generated greater efficiencies to
produce excellent results. Companys additional 2 million MT capacity at Dalmiapuram fully
came on stream in the first quarter of 2006-07. The 27 MW thermal power plant that was
commissioned in 2005-06 provided assured, cost effective electric supply. There were further
improvements in manufacturing efficiencies. New capacity ramp up encountered a few
challenges in the first half of the year but the plant stabilised well in the second half. Our last
76

quarter capacity utilisation was close to 95%. These factors led to a 74 per cent volume growth
of your Companys cement sales from 1.58 million MT in 2005-06 to 2.71 million MT in 200607.
Operational performance
The Companys cement operations, located in Dalmiapuram, Tamil Nadu, saw a significant
ramp-up during 2006-07. The Company completed execution of its 2 million MTs per annum
brownfield expansion. Its brands such as Dalmia Superoof and Vajram continue to remain the
preferred brands in the market and command premium over other brands. The Company also
has a significant presence in select niche segmentsincluding high-value special cement for
construction of oil wells, railway sleepers and air strips. It is a market leader in the manufacture
of cement for construction of walls of on-shore and off-shore oil wells. In fact, oil well cement
manufactured by Dalmia Cement was the first in India to receive the prestigious American
Petroleum Institute (API) certification. Dalmia Cement also continues to maintain its leadership
position in the manufacture of high grade cement for railway sleepers. Introduced in India by
the Company, this cement is widely used to replace wooden railway sleepers for high speed
trains, and is supplied to all major railway sleeper manufacturers in India. The Company
continued to work ceaselessly to improve efficiency and manage costs. Dalmia Cement is one
of Indias most efficient companies in cement manufacturing. Not only did the Company
continue to hold to that standard, but also worked to create new efficiency benchmarks.
FINANCIAL ANALYSIS
DALMIA CEMENTS
1
2
3
4
5
6
7
8
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
GPM Ratio
Debt/Equity Ratio
2007
22.77
14.81
53.58
0.78
1.45
5.12
20.34
1.5
2006
14.43
7.78
22.18
0.82
1.25
4.35
10.39
2
2005
6.63
11.14
40.34
0.86
1.23
3.43
9.48
1.88
2004
6.67
4.21
33.16
1.41
1.35
2.34
9.1
1.14
2003
4.98
2.93
26
1.44
1.71
2.18
7.54
1.21
77
Leverage Ratios :
Debt-Equity- company has been keeping the debt-equity portion quite well in the last 5 years
except in the year 2006 where is touched its peak. So it tells that company has been using
sufficient amount of debt to take advantage of low interest payment
well in last 5 years, which supports debt paying capacity for firm all through the years. It tells
that firm is performing quite well to cover its obligations.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been quite low over the
years. This shows that company has been quite inefficient in converting its inventory into sales
very effectively. Company will have to increase its sales converting capacity.
increase its fixed assets portion to gain more profits.
NPM We can see that portion of net profit has been increasing in over the years. It shows that
company has been performing quite very efficiently in all the 5 years and earnings have been
distributed to shareholders very well.
78

GPM Companies, GPM has increased quite well in the last 3 years. From the table we can see
that company has been very efficient in using its production capacity. Its portion of gross profit
has been increasing considerable over the years, which is also good sign for the company in the
future.
increasing quite consistently in last 3 years with fluctuations in between , which shows that
profits have been made by firm efficiently on the equity funds invested.
EPS From the table, we can see that EPS has gone up quite well in from year to year. It tells
that, on very share held by share holders. Company is in very good position to give out more
dividends and returns to its share holders.
LLOYDS STEEL INDUSTRIES LTD

The USD 850 Million LLOYDS has expanded and diversified into core business areas,
ensuring synergy amongst its business ventures spreading over 4 plants, at 3 pivotal locations in
India. The focus in manufacturing is, Steel & related products, including upstream (Coal
Based DRI) & Downstream (like Pipes, Tubes, Engineering Products) LLOYDS
plants/divisions are equipped with the state of art technology, equipments and excellent
infrastructure like water, power, rail link, and townships. LLOYDS Dedication towards
Customer Service has ensured the group Consolidation in the worst times & Growth in the
Booming Business Cycles.
The Steel demand has grown steadily during last three years which resulted in elevating the
Indias rank among the top steel producers of the world from 9* position in 2004 to 7" position
in the year under review. In tendem the price of Flat Steel with an exception of previous year
has also shown a upswing trend. However, the cost of raw materials particularly zinc prices
which has shown a jump of over 100% and energy during the year under review has kept
margins under constant pressure. The Company achieved a Turnover of Rs.1932.05 crores as
against Rs. 1586.48 crores in the previous year, showing a remarkable increase of 21.78%
79

The Company incurred a Loss, before exceptional items, of Rs. 67.78 crores during the year as
compared with previous year loss of Rs. 121.88 crores after providing depreciation of
Rs.112.51 crores (Previous year Rs. 109.07 crores).
DEBT RESTRUCTURING
On the restructuring/settlement of debts with the Financial Institutions and Banks, the
Restructuring proposals are under various stages of discussion with the lenders. In accordance
with the restructured terms, the Company has paid off Rs. 70.45 crores during the year towards
past Debt liabilities.
During the year, company has issued Redeemable Preference Shares at par of Rs. 1.29 Crores
against part conversion of its debt to IDBI as per the approval of Members at the last Annual
General Meeting. These Preference Shares will be redeemed with a premium of 11.5%
commencing from Financial year 2016.
Sales
Steel Products Sales during the year under review has seen an improvement of 23% over the
previous year and has reached a figure of Rs.1870.64 crores as against the previous year figure
of Rs. 1526.50 crores. The exports of steel has shown a quantum jump and has almost doubled.
The Export during the year was at Rs.276.19 Crores as against Rs. 127.28 crores recorded
during the previous year.
Engineering Products
The Engineering Products, during the year under review has recorded sales at Rs. 61.41 crores
as compared to the previous year of Rs. 127.87 crores. The Company during the year has
successfully executed jobs for reputed public and private sector companies. The setting up of
Pelletization Plant at Orissa for a client is almost in the completion stages. The Company
continue to support in supply of spares and services to Navy, Coast Guard, Mumbai Port Trust,
GRSE and major Oil and Gas sector companies.
80
FINANCIAL ANALYSIS
LLYODS STEEL
1
2
3
4
5
6
7
8
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
GPM Ratio
Debt/Equity Ratio
2007
-3.83
0
-3.55
1.52
2.8
2.08
-3.44
0
2006
-4.48
0
-3.29
1.14
3.08
0.74
-6.31
0
2005
8.7
0
6.35
1.1
3.19
7.54
5.5
0
2004
-0.13
0
-0.05
0.57
1.44
1.88
-10.59
0
2003
-39.25
0
-12.18
0.4
1.09
0
-19.29
0
Leverage Ratios :
Debt-Equity- Company doesnt have any debt portion all over the 5 years. Company has to put
sum amount debt to take advantage of leveraged position in the future.
81

Interest Coverage As we can see that, firms interest coverage capacity has been quite low all
over the years. In previous years, coverage was quite low. It tells that firm is in position to pay
of its interest part quite well if it takes any debt in the future.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been decreasing over the
last 3 years. This shows that company has been quite inefficient in converting its inventory into
sales very effectively. Consistancy for the company will be the key for future growth.
increase its fixed assets portion to gain more profits and for further investment avenues.
NPM Except in yr 2005, we can see that portion of net profit has been decreased in
subsequent years. It shows that company has not been performing quite efficiently in last 3
years and earnings have not been distributed to shareholders.
GPM Except in the year 2005, company had margin has been in negative which tells that cost
of production has been running quite high for the company. Firm will have to increase its
production efficiency so that operating expenses can be covered efficiently.
ROE From the table, we can see that over the years, companys return on equity has been nil
supporting the fact that company is not earning well all over the year as its been into loss.
Company has to get sum amount debt financing to improve the returns to equity share holders
in the future.
EPS Except in the year 2005, company has failed to get any earnings on the shares supporting
the nil return on equity situation. So the company will have to make use of debt and equity in
the future really well to get good returns on equity.
82
JSW STEELS LTD

JSW Steel Ltd is today a fully integrated steel plant having units across Karnataka and
Maharashtra producing from pellets to colour coated steel .
JSW's history can be traced back to 1982, when the Jindal Group acquired Piramal Steel Ltd
which operated a mini steel mill at Tarapur in Maharashtra. The Jindals, who had wide
experience in the steel industry, renamed it as Jindal Iron and Steel Co Ltd (JISCO) now known
as JSW Steel Limited (Downstream)
PERFRMANCE EVALUATION
Operational Performance
The Company has successfully commissioned 1.3 MTPA crude steel capacity expansion,
modernization of Hot Strip Mill increasing the capacity from 2 to 2.5 MTPA, expanding the
capacity of pellet plant from 4.2 MTPA to 5 MTPA during the financial year under review
which contributed to achieve a Crude Steel production of 2.652 million tonnes showing a
growth of 18%. The cost reduction initiatives namely increasing the proportion of captive coke
and power, Coal Dust Injection (CDI) in the Blast Furnace, use of Sinter fines in Corex acted as
a mitigant against raising input costs. Higher volumes, improved realisations and cost savings
initiatives pushed the EBIDTA margin to 34%. The Company posted a net profit of Rs.1,292
crores on net sales of Rs.8594.44 crores for the year. The long term debt gearing has come
down to 0.75 from 0.96 in the previous year due to repayment of loans aggregating to Rs.1018
crores during the year.
They are at the verge of completing the 1.3 mtpa expansion project in the next couple of
months, the capacity expansion to 7mtpa is under-way and planned to be completed by March,
2009.Meticulous planning is being done to accomplish the vision of making company a 10
mtpa by 2010 at Vijayanagar. Company has also signed a Memorandum of Understanding with
the State Government of Jharkhand for setting up a 10 mtpa integrated steel plant (subject to
83

availability of inputs, land etc.) JSW Steel is therefore poised to be one of the dominant players
in the Indian steel industry with bright prospects.
FINANCIAL ANALYSIS
JSW STEELS
1
2
3
4
5
6
7
8
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
GPM Ratio
Debt/Equity Ratio
2007
14.98
23.1
77.09
0.84
3.46
6.99
24.56
0.84
2006
14.14
10.88
53.28
0.73
2.22
4.68
18.96
1.07
2005
13
32.25
65.27
1.04
3.52
4.93
32.6
1.43
2004
16.05
12.68
4.09
0.63
2.53
2.57
15.53
4.15
2003
-4.41
42.93
-0.85
0.44
2.13
1.26
5.17
8.59
Leverage Ratios :
year on year which tells that, company is focused on the protection of its creditors. Debt equity
portion been quite consistant over the years.
84

Interest Coverage As we can see that, firms interest coverage capacity has gone up tells that
the firm can easily meet its current burden even if PBIT suffer a considerable decline. Firm has
been efficient in increasing its debt paying capacity.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been quite consistent
over the years. This shows that company has been quite efficient in converting its inventory into
sales quite efficiently. Company will have to further improve its turnover as its puts more
investments in to the production.
FATO As we can see, the portion of fixed assets have almost remained unchanged and quite
low all over the years. We can tell that the firm has been using assets quite conservatively but
they have been in line with the firms requirements.
NPM From the trend, we can see that portion of net profit has remained quite stable over year
by year except in the 2003. It shows that company has been performing quite efficiently and
earnings have been distributed to shareholders very well.
increasing quite consistently except in the year 2006 and 2004, which shows that profits have
been made by firm on the equity funds invested. Company will have to be more consistant in
the future.
year from 2003 till date. It tells that, on very share held by share holders, they have been able to
85

earn efficient earnings. Company has been giving very good returns on amount invested to its
share holders
STEEL AUTHORITY OF INDIA LTD (SAIL)
Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a
fully integrated iron and steel maker, producing both basic and special steels for domestic
construction, engineering, power, railway, automotive and defence industries and for sale in
export markets.
SAIL manufactures and sells a broad range of steel products, including hot and cold rolled
sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates, bars
and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated
plants and three special steel plants, located principally in the eastern and central regions of
India and situated close to domestic sources of raw materials, including the Company's iron ore,
limestone and dolomite mines. The company has the distinction of being Indias largest
producer of iron ore and of having the countrys second largest mines network. This gives SAIL
a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which
are inputs for steel making.
PERFRMANCE EVALUATION
PRODUCTION REVIEW
Company achieved a new record in production of saleable steel at 12.6 million tonnes with
capacity utilization touching a new high of 114%, through improvements in operational
efficiencies. The finished steel component in total saleable steel was also highest ever at 10.3
million tonnes, a growth of 5% over previous year. Special thrust was given to orient the
companys product mix for more value added products and increasing share of special steels.
The production of value added items touched 3 million tonnes for the first time and recorded a
growth of 17% during the year over previous year. Substantial growth was achieved in
production of pipes (38%), TMT bars (12%) and CRNO steel (10%).
The company introduced several new products in the domestic market during the year. HCREQR TMT for earthquake resistant construction, rock bolt TMT for tunnel construction, EN
86

series HR coils for LPG cylinders, MC 12 HR coils for chains etc.. In addition, Bhilai Steel
Plant developed high strength vanadium rails, Durgapur Steel Plant produced S-profile loco
wheels for high speed locos and Rourkela Steel Plant rolled special plates which were used in
the indigenously built rocket PSLV C-7. Company takes pride in supplying steel for critical
usage in projects of national importance, such as those used in highest railway bridge in the
world built over river Chenab, new generation loco wheels, naval aircraft carrier and materials
for several products of defence usage.
The company continued to take measures for further improving techno-economic parameters,
achieving a record continuous cast production of 8.3 million tonnes (up by 5%), lowest ever
coke rate of 541 kg/thm, best ever blastfurnace productivity at 1.50t/ m3/day (up by 3%) and
lowest ever energy consumption at 7.16 Gcal/tonne (1% improvement). Bhilai Steel Plant
achieved the highest campaign life of 6252 heats in converter which is the best in country for
any top blown converter. Specific power consumption reduced by 4% as compared to previous
year to lowest ever level of 460 kwh/T of saleable steel.
Sales and Marketing Review
During the financial year 2006-07, company achieved highest ever sales of 11.9 million tonnes,
a growth of 5% over the corresponding period last year.
There was significant growth in sales of value added products during the year,viz. Pipes - 50%,
TMT bars - 25%, Medium Structurals - 16%, Plates over 20 mm -21%and HRCoils-12%.
Record supply of Rails, Wheel and Axles, Sheets, Plates and Structurals were made to the
Indian Railways. The supply of long rails from newly constructed rail mill at Bhilai, was
increased to 65,000 tonnes, higher by 36% over previous year.
The company has maintained its presence in neighbouring and traditional markets and exported
about 5 lakh tonnes of steel during the year. The products exported were primarily Billets, Wire
Rods, Plates, HR Coils and CRNO Coils. Exports were made to new markets namely Portugal,
Sudan, UAE, Bahrain, Oman, Argentina and Brazil. MG Diesel Loco Wheels from Durgapur
Steel Plant were supplied for the first time to Malaysia. High Tensile and Ship Building Plates
from Bhilai Steel Plant were exported to the European Union and Singapore.
87

Special thrust was given by the company to expand its distribution network to make its branded
products available across the country. SAIL appointed additional 453 dealers in 430 districts
during the year. Today, company has unique presence in as many as 597 districts in the country
with over 1000 dealers. In addition, 12 Customer Contact Offices and 16 additional Warehouses
were added during the year. For the first time e-booking and supply at door- step facility was
introduced for small consumers of TMT Bars in NCR Delhi and Kolkata. Towards increasing
customer satisfaction and greater logistics support, door delivery to customers was stepped up.
FINANCIAL ANALYSIS
SAIL
1
2
3
4
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
Inventory Turnover
5
6
7
8
Ratio
GPM Ratio
Debt/Equity Ratio
2007
17.38
35.34
15.02
2.67
2006
13.79
31.45
9.72
2.18
2005
23.19
66.48
16.5
2.23
2004
11.39
50.58
6.08
1.6
2003
-1.73
-23.61
-0.73
1.19
1.58
33.12
4.28
0.24
1.5
15.92
8.12
0.34
1.85
18.45
12.36
0.55
2.64
5.1
-29.63
1.72
2.34
1.73
18.98
5.14
Leverage Ratios :
Debt-Equity- Except in the year 2003 and 2004, we can see that company has been
consistently reducing the portion of debt from year on year which tells that, company is focused
on the protection of its creditors and company is using the amount of debt financing very
efficiently.
88

well in last 3 years except 2003-04. It tells that the firm can easily meet its current burden even
if PBIT suffer a considerable decline in the future looking at the increase.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has not been quite
consistant. It has declined gradually in the last 3 years. This shows that company has not been
quite efficient in converting its inventory into sales quite efficiently in last 3 years.
FATO As we can see, the portion of fixed assets have almost remained unchanged and quite
well. We can tell that the firm ahs been using assets quite conservatively but they have been in
line with the firms requirements.
NPM From the trend, we can see that portion of net profit has been quite consistent in last 3
years. It shows that company has been performing quite efficiently in last 3 years and earnings
have been distributed to shareholders very well.
GPM From the table we can see that company has been very inefficient in using its
production capacity. Its portion of gross profit has been increasing and decreased in between
very often, which is also not a good sign for the company in the future.
ROE From the table, we can see that over the years, companys return on equity has
decreased in the last 2 years. It has given very good returns in the year 2004 and 2005 It shows
that profits have been made by firm have been quite consistant on the equity funds invested.
year from 2004till date. It tells that, on very share held by share holders, they have been able to
earn efficient earnings. So its been very good returns for the share holders for the every one
share held by them.
89

TATA METALIKS LTD.
Tata Metaliks Limited was incorporated in 1990 under the Companies' Act, 1956 and began its
commercial production in 1994. TML is a public limited company. It was promoted by Tata
Steel Limited (formerly, The Tata Iron and Steel Company Limited) and assisted by The West
Bengal Industrial Development Corporation. The promoter company, Tata Steel, and resident
individuals each hold 47% of the shares, the balance being held by West Bengal Industrial
Development Corporation, corporate bodies and financial institutions (including Foreign
Institutional Investors). It was set up together with Tata Korf Engineering Services as the
technology consultant and KTS, Brazil as the technology supplier.
Tata Metaliks is engaged in the business of manufacturing and selling pig iron. Its plants,
located at Kharagpur (West Bengal) and Redi (Maharashtra), consists of five Mini Blast
Furnaces and related facilities including Captive Power Plants.
PLANT OPERATIONS
During the year ended 31st March, 2006, the Kharagpur plant produced 314,141 tonnes of hot
metal as against the production capacity of 3,25,000 tonnes hence, taking the blast furnace
productivity for the year to 2.27 tonnes/m3/day. This increase in production was due to the
higher production capacity created by the newly installed second mini blast furnace (MBF) at
the Kharagpur plant. The oxygen enrichment plant, commissioned in the Kharagpur premises
during 2005-06 also contributed to increase productivity and yield of the furnace.
The entire power requirement of the plant was fulfilled by its two captive power plants having a
capacity of 2.76 MW and 4 MW, respectively.
In the current financial year, the Company initiated the practice of importing coal and getting it
converted into coke at the domestic cokeries to save the expense of imported LAM Coal. This
converted coke is blended with indigenous coke, a practice that enables the Company to
maintain its competitiveness in the cost of coke and also allows enough flexibility to directly
source coke as and when required.
90

MARKETING PERFORMANCE
During the year under review, the Company sold 304,560 tonnes of pig iron compared to
1,63,483 tonnes in 2004-05. Although the net realization per tonne of pig iron wa slow, the
Company was able to improve upon its total revenue figures due to increased sales volumes in
2005-06. The low net realization, was caused by overall depression in the pig iron market.
However, exports almost doubled to 36217 M.T in 2005-06 compared to 18,455 M.T in 200405. The Company now has footprints in 16 countries including Japan, the south-east Asian
countries like Bangladesh, Thailand, Malaysia, Indonesia, among others, and the European
country of Spain.
As in the previous years, the Company appointed IMRB, an independent agency to conduct a
customer perception survey (CSS) to assess customer's perception about products and services
offered by TATA Metaliks Limited. The Customer Satisfaction Survey has yet again rated the
Company as an INDUSTRY LEADER in most of the attributes.
FINANCIAL ANALYSIS
TATA METALIKS
1
2
3
4
5
6
7
8
NPM Ratio
ROE/RONW Ratio
EPS
FATO Ratio
GPM Ratio
Debt/Equity Ratio
2007
4.23
21.65
11.67
2.59
3.68
3.68
6.24
0.8
2006
10.29
35.22
18.16
1.95
2.73
2.73
15.63
0.72
2005
22.37
64.88
25.31
2.66
3.03
3.03
35.97
0.19
2004
17.17
47
9.81
2.74
2.75
2.75
25.7
0
2003
12.44
37.7
5.78
3.13
2.35
2.35
17.41
0.03
91
Leverage Ratios :
year on year which tells that, company is focused on the protection of its creditors. It is using its
debt proportion to very good extent.
Interest Coverage As we can see that, firms interest coverage capacity has been quite
consistency and showing the signs of increase in the last 2 years, tells that the firm can easily
meet its current burden even if PBIT suffer a considerable decline.
Turnover Ratios :
Inventory T O Ratio As we can see, the firms inventory portion has been quite consistant
over the years. This shows that company has been quite efficient in converting its inventory into
sales quite efficiently and quickly.
FATO As we can see, the portion of fixed assets have almost remained consistant over all the
years, we can tell that the firm has been using assets quite conservatively but they have been in
line with the firms requirements.
NPM From the trend, we can see that portion of net profit has decreased in the year 2007 and
2006. Earnings have been decreased in year 2006 and 2007 and less shares have been
distributed to shareholders.
92

GPM From the table we can see that company has been very inefficient in using its
production capacity. Its portion of gross profit has decreased in the subsequent years, which
calls for the increase in its efficiency in the future.
decreasing over the years, which shows that profits have been decreasing on the equity funds
invested.
EPS From the table, we can see that, EPS portion of the company has been decreased over
the years supporting the fact low ROE.I tells that, on very share held by share holders, they
have been able to earn profits but in declining mode.
93
PORTFOLIO ANALYSIS
AND CONSTRUCTION
Calculation of Total Return on Index (TRI)

Total Return Index = ( Pre TR Index + Prev. TR Index
Returns
* Index Returns) + (Indexed Dvds + (Indexed Dvds *

index Returns) yrs
2003
16.18
94

2004
20.85
2005
29.59
2006
42.69
2007
59.38
Average Annualized returns
Annualized Market Returns (CAGR)
33.74 %
31.14 %
ACC CEMENTS
Capital Expenditure of 10 companies (in crores)
CAPEX = (increase in fixed assets) + (increase in Capital WIP) (increase in investments)
(increase in depcn)
Particulars
CAP WIP
Fixed assets
Investment
Depcn
Capex
2006
558.42
4,816.25
543.09
1,893.76
2937.57
2007
649.19
5,464.07
844.81
2,149.35
3119.1
Increase
90.77
647.82
301.72
255.59
181.28
We find fixed assets turnover ratio for previous years

We find weighted average of FATR
FATR
Year
FATR
Weights
2007
1.74
5
8.7
Avg FATR
4.63
2006
1.65
4
6.6
2005
1.35
3
4.05
2004
1.32
2
2.64
2003
1.17
1
1.17
95
SALES
2007
2006
2005
2004
2003
7,848.32
6,453.07
5,222.57
3,699.89
4,539.35
Sales
Assumed to be 17.68 % year on year ( i.e. average % sales change from
Growth
2003-07)
2007
7,848.32
2008
9235.9
2009
10868.8
2010
12790.4
2011
15051.74
2012
17712.88
In a similar way of methodology used for ACC cements, all the companies CAPEX and
expected sales have been calculated.
PRESENT CAPEX
CAPEX
Companies
1 PRISM
DALMIA
(crores)
-135.37
2 CEMENTS
3 INDIA CEMENTS
ULTRATECH
351.76
803.08
4 EMENTS
5 ACC CEMENTS
MANGALAM
224.97
181.28
748.59
6 CEMENTS
96

-84.66
7 LLYODS STEEL
8 JSW STEELS
1704.29
9 SAIL
-308.12
10 TATA METALIKS
35.76
AVERAGE FATR
1
2
3
4
5
6
7
8
9
10
Companies
PRISM
DALMIA CEMENTS
INDIA CEMENTS
ULTRATECH EMENTS
ACC CEMENTS
MANGALAM CEMENTS
LLYODS STEEL
JSW STEELS
SAIL
TATA METALIKS
Avg FATR (%)

4.65
2.8
3
7.65
4.63
6.98
3.34
4.2
6.63
7.46
Expected Future Sales (in crores)

Companies
1 PRISM
2 DALMIA CEMENTS
2007
883.48
1,117.5
9
2008
1081.29
2009
1323.39
2010
1619.69
2011
1982.34
2012
2426.18
1438
1850.27
2380.74
3063.29
3941.53
97

2,610.7
3 INDIA CEMENTS
5 3310.43 4197.62 5322.58
ULTRATECH
5,509.2
4 EMENTS
2 6930.59 8718.68 10968.1
7,848.3
5 ACC CEMENTS
2
9235.9 10868.8 12790.4
MANGALAM
6 CEMENTS
548.24
697.03
886.2
1,932.0
7 LLYODS STEEL
5 2588.93 3469.16
9,337.3 13,072.2 18301.1
8 JSW STEELS
4
7
8
40,291. 48382.1 58097.3
9 SAIL
75
9
3
10 TATA METALIKS
681.15 1076.21 1700.41
Portfolio Construction Based on Fundamental Analysis
6749.03
8557.77
13797.8
6
15051.7
4
17357.3
1
17712.8
8
1126.71
1432.5
1821.48
4648.67
25621.6
5
69763.2
7
2686.84
6229.21
35870.0
5
8347.14
50218.0
7
100592.
93
6707.24
83771.6
4245.09
On the basis of Excess returns to beta, the proportion of each stock to be included is determined
by assigning the weights to the expected future growth rates (sales growth) of companies.
Weights are used to calculate portfolio and Beta.
Sr. No
Company
1 PRISM
2 LLYODS
STEEL
3 DALMIA
CEMENTS
4 INDIA
CEMENTS
5 ULTRATECH
EMENTS
6 ACC
CEMENTS
7 JSW STEELS
8 MANGALAM
CEMENTS
9 SAIL
10 TATA
METALIKS
Expec. growth
rate
22.39%
33.96%
Weights
Prop
Returns
( exp GR
*W)
7.44%
1.67%
11.29%
3.83%
9.53%
2.73%
8.91%
2.39%
8.58%
2.21%
5.22%
0.92%
13.19%
9.02%
5.23%
2.45%
6.68%
19.47%
1.34%
11.40%
28.67%
26.80%
25.80%
17.68%
39.67%
27.14%
20.08%
58.55%
98

300 % 100.00%
34.18%
BETA OF THE PORTFOLIO

Company
Weights
Beta
PRISM
LLYODS STEEL
DALMIA CEMENTS
INDIA CEMENTS
ULTRATECH EMENTS
ACC CEMENTS
JSW STEELS
MANGALAM CEMENTS
SAIL
TATA METALIKS
7.44%
11.29%
9.53%
8.91%
8.58%
5.22%
13.19%
9.02%
6.68%
19.47%
Avg. Beta
1.1
1.02
0.91
1.25
1.36
0.92
0.97
1.14
1.06
1.48
0.81
of portfolio
DEBT PORTFOLIO
Step 1 : 10 top corporate debts were taken on random basis from the market
Step 2 : All the 10 debts are being given weights according to ratings given by the agencies
on basis of below mentioned scale
Debt Valuation
99

Includes research of different kinds of fixed income securities, like corporate debt, government
securities and treasury Bills.
Corporate Debt :
Step 1: The sample of 10 corporate debts is taken from the market on random basis
Step 2: All the securities are given weights according to ratings given by the agencies on the
basis of below mentioned scale.
RATING
AAA
AA+
AA
AA-
Weight
5
4
3
2
Step 3: All the 10 (debt) securities YTMs, Durations, and Modified Durations are taken from
market and assigned weights for YTM, assuming higher the YTM higher the returns.
YTM
12.42
3.42
5.67
7.92
10.17
YTM
3.42
5.67
7.92
10.17
12.42
Weight
1
2
3
4
5
Step 4: As the modified duration tells the sensitivity of the bond (Beta of the bonds ) to the
changes in the interest rates. We can say that, higher the modified duration higher the risk. On
this basis modified duration, is taken as percentage and reduced in the sum of all the weights.
(Rating + YTM (% MOD DUR))
Step 5: Proportion to be invested is calculated by keeping the returns as the base. And expected
returns are then calculated by multiplying the proportions with the returns.
100
Table 11: Corporate Debt Portfolio

ISIN Number
Issue Description
AYTM
Mod
Exp
Duration Weights
%
%
Returns
%
IDFC 9.10% 2018(SINE043D08862
PP342008O-II)
STATE BANK OF
9.6492
6.31
9.4
0.59314
9.5949
7.58
11.66
0.883828
9.53
5.79
8.9
0.51531
PATIALA 9.3 % LOA

INE652A09054
20DC22 FVRS10LAC
RECL 9.07% 2018
INE020B07DE1
(SERIES-83)
IDFC LTD 8.88 LOA
INE043D08813
07JN11 FVRS10LAC
HDFC 8.5 NCD 15OT08
9.6267
5.93
9.12
0.540816
INE001A07CW7
FVRS10LAC
EXIM BANK 9.1 BD
9.1845
6.46
9.93
0.641478
INE514E08423
18SP10 FVRS10LAC
IDBI LTD OMNI-1 6.75
9.08
6.39
9.78
0.624942
BD 18AG08 FV RS 1
INE008A08PR2
LAC
PGC 7.39% 2016 (S-
9.5356
6.67
10.26
0.684342
INE752E07AB5
XVIISTP-H)
STATE BANK OF
8.7508
7.11
10.88
0.773568
9.7517
6.67
10.26
0.684342
9.5342
Approx =
6.38
65
9.81
100
0.625878
6.567644
INDIA 10.1 BD 12SP22

INE062A09155
FVRS10LAC
IRFC 8.69 BD 07JN11
FVRS10LAC LOA
INE053F09FL9
Total
UPTO 01FB08
101

Government Securities:
Step 1 : The sample of ten government securities are taken from the market on random basis.
Step 2 : The data available was on daily price changes in the market of the underlying security.
Based on the available data from market, we calculate the average returns of the security.
Step 3 : Proportion to be invested in each security is then calculated.
Step 4 : Expected return are calculated
G-Sec portfolio
Symbol
0740E12
0939G11
1305D07
1200E08
1210F08
Cpn
Avg
Proportion
Exp
rate
7.4
9.39
13.05
12
12.1
Returns
10.32%
8.72%
8.55%
8.31%
8.19%
to invest
23.41%
19.79%
19.38%
18.85%
18.57%
Returns
2.42%
1.73%
1.66%
1.57%
1.52%
8.89%
Construction of portfolio of Debt and Equity

A portfolio that buys a combination of common stock, bonds, and short-term bonds, to provide
both income and capital appreciation while avoiding excessive risk. The purpose of balanced
portfolio (also sometimes called hybrid funds) is to provide investors with a single portfolio
that combines both growth and income objectives, by investing in both stocks (for growth) and
bonds (for income). Such diversified holdings ensure that these portfolios will manage
downturns in the stock market without too much of a loss; the flip side, of course, is that
balanced funds will usually increase less than an all-stock fund during a bull market.
Equity Portfolio:
102

Exp
Growth
Co Names
rate
PRISM
LLYODS STEEL
DALMIA
22.39%
33.96%
CEMENTS
INDIA CEMENTS
ULTRATECH
28.67%
26.80%
EMENTS
ACC CEMENTS
JSW STEELS
MANGALAM
25.80%
17.68%
39.67%
CEMENTS
SAIL
TATA METALIKS
Prop
Weights
7.44%
11.29%
9.53%
8.91%
8.58%
5.22%
13.19%
9.02%
returns
Port Beta
1.67%
3.83%
2.73%
1.02
0.91
1.25
1.36
2.39%
2.21%
0.92
0.97
1.14
0.92%
5.23%
2.45%
1.06
1.48
0.81
27.14%
20.08%
58.55%
6.68%
19.47%
Returns
1.34%
11.40%
34.18 %
1.1
Debt portfolio:
Avg
Prop
Composition of Funds
Returns
Invested
Corporate debt
G Sec
364 T-bill and cash
6.56%
8.89%
6.50%
50.00%
30.00%
20.00%
Prop Returns
3.28%
2.67%
1.30%
Annual Returns
100.00% 7.25%
Now based on the above tables we construct a balanced portfolio with different combinations of
debt and equity where we try to trace the one combination which gives the optimum returns
with least risk (beta).
Table showing different combinations of debt and equity
Different combinations of Debt and Equity.
Equity
1
0.9
0.8
Debt
0
0.1
0.2
Equity
Debt
Returns
34.18 %
30.76 %
27.34%
returns
0.00 %
.72 %
1.45 %
Beta
1.1
1
0.88
Total returns
34.18 %
31.48 %
50.25%
103

0.7
0.3
23.92%
2.17 %
0.77
44.87%
0.6
0.4
20.50%
2.9 %
0.66
39.5%
0.5
0.5
17.09 %
3.62 %
0.55
34.12%
0.4
0.6
13.67%
4.35 %
0.44
28.75%
0.3
0.7
10.25%
5.07 %
0.33
23.37%
0.2
0.8
6.83%
5.8 %
0.22
18.00%
0.1
0.9
3.41%
6.52 %
0.11
12.62%
0
1
0.00%
7.25 %
0
7.25%
By analyzing the table above, one with basic finance knowledge can easily identify the
optimum combination. The selected portfolio gives the returns of 31.48 % with beta of 1.
The most interesting part here is the beta = 1. As we know that market portfolio Nifty, optimum
portfolio with zero systematic risk has the beta of 1. So we can claim that constructed portfolio
is almost equal to Nifty and moves according to the market.
Annual Returns
Beta
Portfolio
34.18%
1
Nifty
31.48 %
1
The objective of any fund manager for any portfolio created by him/her is
Returns maximization at a fixed level of risk.
Risk minimization at a fixed level of returns.
In this case, researcher has achieved his objective hence forth.
104
FINDINGS
105
F u n d a m e n t a l An a l y s i s
STEEL SECTOR
1 India has a per capita consumption of steel of around 30 kgs as against 180 kgs in China and
an average of over 400 kgs in the developed countries. This wide gap in relative steel
consumption indicates that the potential ahead for India to raise its steel consumption is high.
2 Being a core sector, steel industry tracks the overall economic growth in the long-term. Also,
steel demand, being derived from other sectors like automobiles, consumer durables and
infrastructure, its fortune is dependent on the growth of these user industries.
3 The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap
labour. Iron ore is also available in abundant quantities. This provides major cost advantage to
106

the domestic steel industry, with companies like Tisco being one of the lowest cost producers in
the world.
4 However, Indian steel companies have to bear additional costs pertaining to capital
equipment, power and inefficiencies (low per employee productivity). This has resulted in the
erosion of the edge they would have otherwise enjoyed due to availability of cheap labour and
raw materials.
5 The basic import duty on steel has been consistently brought down. This has made the
industry vulnerable to international competition. On the positive side, domestic prices now
track the global prices more closely.
After many years, the forging industry performed extremely well in 2006-07. During this
period, overall production of the forging industry increased by about 25% to 5,50,000 tonne
(approximately). With the excellent performance of the automotive sector especially the
passenger car segment, the forging segment did exceedingly well both in the domestic market
as well as global market. On the export front the segment made commendable performance by
registering an export growth of almost 30% to Rs 750 crore. Indian forging products catered
mainly to USA, Europe, China etc.
However, the industry witnessed a steep and frequent increase of prices in major inputs like
steel coupled with acute shortage of the same. Also, the increasing cost of other inputs like
energy/power and fuel has intensified pressures on the players margins.
CEMENT SECTOR
1 With increasing demand due to increased infrastructure activities and limited growth in
capacity the demand supply gap would reduce. In the Apr- June 08 quarter we expect cement
demand to be robust on account of summer season and prices to remain firm
2 Cut down on coal supplies to cement companies by about 25% would put cost pressure on the
companies. Cement demand would slow down in the late June with the beginning of the
monsoon. With demand expected to grow at the rate of 8% p.a. we expect the capacity
utilization in the coming years to be above 85%. We are positive on the sector in the medium
and long term.
107

3 Indias per capita consumption is about 90 kg compared to the world average of 250 kg. This
implies great growth potential for the domestic industry. With 60% of the demand coming from
the housing sector, the fortunes of cement industry are closely linked to it
.
4 Greater thrust on continued investments in new infrastructure projects like ports, roads and
highways will power the demand growth for cement for next few years. With nearly Rs.
8,00,000 crore worth of investments likely in electricity generation in the coming decade, the
overall prospects of the growth in demand appears bright
PORTFOLIO FINDINGS
1
When the Equity portfolio was constructed using 10 sectors stocks, on the basis of annual
average growth rate 55 %, proportionate returns came about to be 34.18 %. .
The debt portfolio formed consisted together of corp. debt, G-Sec and 365 days T-Bills
gave annualized returns of 7.25 %
Total Return Index has been calculated which showed the annualized market returns of
31.14 %
The Equity portfolio consists of 6 stocks from cement sector and 4 from steel sector.
The average FATR of all the 10 equity stocks have been calculated which tells that
Mangalam, Ultratech cements, SAIL and Tata Metaliks have high FATO ratio which tells
that companies have fixed assets which have been used very efficiently. Where as all the
108

remaining companies have quite an average FATO of ratio, which calls for the better
utilization of fixed assets in the future.
6
When a new portfolio was constructed using different combinations od debt and equity,
combination of 90 % equity and 10 % debt gave annualized return of 31.48 % compared
to the total index returns 31.14 % at same level of Beta (systematic risk) i.e. 1
Optimum portfolio, was noticed when the combinations was .9 from equity part and .1
from debt portion with annualized return of 31.48 %
109
RECOMMENDATIONS
1 The most basic suggestion is that an investor in order to diversify risk, he must use
fundamental analysis and portfolio valuation.
2 The steel sector portfolio has a very high return and high risk, and this is a very common
situation, as in to higher the risk, higher will be the return.
3 It is also suggested that the investor must look into the fundamentals of the company
thoroughly since majority of stock price movements are result of investors price perception and
from insider news.
4 The expected return to beta statistical measure can be used for future diversification of the
stocks which have higher expected return to beta.
110

5 When the investor is an optimist, he will always go for minimum risk level, and according,
which shows the different combination of portfolios, it is clear that, he would opt for the last
combination, i.e., (0, 1) and the other sectors respectively, which has a risk of around less than .
55
6 In the same token, if an investor he is a risk lover, he would definitely select the last
combination i.e., (1
, 0) equity and debt respectively, which fetches him annualized expected
return of 34.18 % or combinations of (.9, .1) which fetches him annualized return of 31.48 %.
Portfolio evaluation
As the objective of project was construction of a portfolio based on fundamental analysis and
include debt to the portfolio so as to reduce the risk and make the portfolio yield regular returns
with stable capital appreciation, we have been successful in that. .
The research also tries to test the significance of excess return to beta, and find weather one can
construct a portfolio which beta is equal to market beta ( beta =1 ) and returns greater then
market returns.
111
Simple rules in stock selection for avoiding your risks

To realize your gains in the stock market, your stock selection is going to be the key
step. Diversification, or spreading your eggs in different baskets, is well known. But
which egg should qualify to be placed in your baskets does not get sufficient
attention.
While we are in the stock market to extract a decent return, we must not act like
compulsive gamblers. Even good gamblers have their risk reduction strategies.
Which risks are we most concerned with? The uncertainty of the stock market as a
whole, like the risk of a loss due to a crash following a war or a sudden catastrophe, is
not a concern to us once we have decided to enter the market. Our additional return
from the stock market will flow only because we have decided to pay the price of this
overall uncertainty.
Specifically, we can control the risks inherent in buying a particular stock. For
example, is it a stock with good liquidity? Suppose we wish to invest Rs 25,000 in a
particular stock and the daily transaction volumes are only in the region of a few
lakhs, then the liquidity in the stock is restricted. There are players who bet on stocks
with limited liquidity because it can also move up faster. But this upside has a big
downside, which is you may not be able to get out of the stock when you wish
because there may not be ready buyers to sell to.
Next important aspect is: whether the price at which you are entering a stock is a fair
price? Just because there has been a big increase in its price recently does not make it
fairly or unfairly priced. Players use various ratios, inside information, tips, and
educated guesses to resolve this issue. But if the company is shady, there may be
unseen risks, which you will discover only later. By courting a shady company, you
are unnecessarily meddling with something of suspect quality. It is better to be safe
than sorry. Therefore, it is better to do some homework on this aspect.
In your eagerness to hold on to some thing with a great upside potential, you may
forget to examine why the prevailing price of the stock is so low now or in the recent
past. Researching on this aspect will be very valuable especially if the particular
company's stock price is not in line with others in the same business or industry.
For lay investors, one simple rule to remember would be that high risks would
accompany high returns. In the risk-return scale the various types of company shares
in ascending order would be defensive stocks, established growth stocks, emerging
blue chips (now referred to as mid-caps), re-rating candidates like turnaround
companies, divestment of PSUs or companies benefiting from some expected
fundamental changes in economy, regulations, technology etc.
One more simple and practical way to broadly determine the risk-reward equation
would be a reference to the size of the company by market capitalization. Market
capitalization means the price at which 100% shares of the company can be purchased
at current market prices and would be equivalent to the amount you will obtain by
multiplying the current price by the total number of shares issued by the company.
Viewed by market capitalization, larger companies would have lower risks and return
potential but will involve lower unseen risks. In this way, you are using the judgments
of the entire market to your advantage. Let us consider an example. Infosys has a
large market cap. Polaris Software has a much smaller market cap. Profit potential and
risks will be lower in Infosys compared to Polaris Software. Similarly, for any
industry and also across industries normally.
Many people are unhappy that leading newspapers only carry prices of larger
companies' shares. Actually such smaller lists serve as lists of shares with limited
risks.
CONCLUSION
After analyzing the data in detail, it was found that, majority of the companies have
given good returns historically as well and they will continue to perform well in the
future also. it is a time and good opportunity for the investors to invest in the steel and
cement sector stocks as demand will only increase.
Whenever, an investor wants to construct portfolio, he should go for portfolio
consisting of equity and debt combinations, which will minimize risk and maximize
returns as we have found out from project.
Portfolio constructed has given higher returns than market
returns at same level of risk.

A PROJECT REPORT On Construction of Balanced Portfolio Comprising of Equity and Debt at SCM

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A PROJECT REPORT On Construction of Balanced Portfolio Comprising of Equity and Debt at SCM

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Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Infrastructure facilities: Infrastructure facilities are essential for the growth of

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Historic price of stock

Stock market condition

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Solving the equation for r gives the YTM.

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

n = number of cash flows

So the following is an expanded version of Macaulay duration:

Construction of Balanced Portfolio comprising of Equity and Debt

Total Return Index

Construction of Balanced Portfolio comprising of Equity and Debt

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

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

DESIGN OF THE STUDY

Construction of Balanced Portfolio comprising of Equity and Debt

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

To analyze the companies based on Fundamental Analysis and TRI model

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

Construction of Balanced Portfolio comprising of Equity and Debt

Limitations of the Study

The study was confined only to the selected sectors.

The study was more confined with secondary data.

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

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

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

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Reducing exemptions and concessions

Simplification of laws and procedures

Introduction of Permanent account number to track monetary transactions

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Infosys Software Development Center in Pune.

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

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

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

Construction of Balanced Portfolio comprising of Equity and Debt

Construction of Balanced Portfolio comprising of Equity and Debt

Revenue Profits Assets

(billion (billion (billion

Oil & Gas

738 Tata Steel

826 Bharti Airtel

Construction of Balanced Portfolio comprising of Equity and Debt