PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

1. EXECUTIVE SUMMARY
The project work entitled PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION was carried at INDBANK MERCHANT BANKING SERVICES LIMITED. The present study reveals that there are 1000s of equities, bonds, mutual funds and derivatives traded on major stock exchanges, selecting and creating right investment portfolio to meet investment objective is a difficult task. Most of the investors choose their investment based on the recommendations of equity brokers, friends, reports of newspapers, magazines, websites etc. To overcome the above problem different techniques such as Markowitz Portfolio Selection Model, Sharpes Optimal Portfolio Model, Portfolio Construction through Security Valuation etc., are available. Portfolio Construction through Security Valuation was opted because it was effective to the study. The study conducted, mainly focuses on constructing portfolios from 50 stocks (5 stocks from 10 different sectors) for various classes of investors based on relative valuation measures, absolute valuation measures, co-efficient of variation, beta and relative strength index by systematic analysis of the scrips to manage portfolio efficiently so as to meet investment objectives Finally with the use of security valuation measures various portfolios have been constructed for different risk class of investors. Thus the study provides a good basis for how to evaluate various securities and build winnable portfolio to reduce risk. It can be concluded that, in security valuation one should in addition to looking at intrinsic value of securities should also consider various valuation ration like price to sales (P/S), price earnings to growth (PEG), dividend yield (DYS), price to book value (PBV), book value per share (BVS). These are used as basis while picking securities in various portfolios in the project. This research work is therefore believed to provide guidance to those seeking to develop their own portfolios and provide basis to how to build winning portfolios.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

2. INDUSTRY PROFILE
The function of the financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sectors (borrowers). Normally, households have investible funds or savings, which they lend to borrowers in the corporate and public sectors whose requirement of funds far exceeds their savings. A financial market consists of investors or buyers of securities, borrowers or sellers of securities, intermediaries and regulatory bodies. Financial market does not refer to a physical location. Formal trading rules, relationships and communication networks for originating and trading financial securities link the participants in the market.

2.1 Indian financial system

Indian financial system consists of money market and capital market. The Money market is regulated and governed by RBI. The Capital market is regulated and governed by SEBI.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 2.1.1 The Money Market The money market has two components - the organized and the unorganized. 2.1.1.1 Organized money market The organized market is dominated by commercial banks. The other major participants are the Reserve Bank of India, Life Insurance Corporation, General Insurance Corporation, and Unit Trust of India, Securities Trading Corporation of India Ltd., Discount and Finance House of India, other primary dealers, commercial banks and mutual funds. The core of the money market is the inter-bank call money market whereby short-term money borrowing/lending is affected to manage temporary liquidity mismatches. The Reserve Bank of India occupies a strategic position of managing market liquidity through open market operations of government securities, access to its accommodation, cost (interest rates), availability of credit and other monetary management tools. Normally, monetary assets of short-term nature, generally less than one year, are dealt in this market. 2.1.1.2 Un-organized money market Despite rapid expansion of the organized money market through a large network of banking institutions that have extended their reach even to the rural areas, there is still an active unorganized market. It consists of indigenous bankers and moneylenders. In the unorganized market, there is no clear demarcation between short-term and long-term finance and even between the purposes of finance. The unorganized sector continues to provide finance for trade as well as personal consumption. The inability of the poor to meet the "creditworthiness" requirements of the banking sector make them take recourse to the institutions that still remain outside the regulatory framework of banking. But this market is shrinking. 2.1.2 The Capital market The capital market consists of Primary and Secondary (stock) markets. The primary market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares and debt instruments. Central and State governments, various public sector industrial units (PSUs), statutory and other authorities such as state electricity boards and port trusts also issue bonds/debt instruments.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. Offer for subscription to securities is made to investing community. The secondary market or stock exchange is a market for trading and settlement of securities that have already been issued. The investors holding securities sell securities through registered brokers/sub-brokers of the stock exchange. Investors who are desirous of buying securities purchase securities through registered broker/sub-broker of the stock exchange. It may have a physical location like a stock exchange or a trading floor. Since 1995, trading in securities is screen-based and Internet-based trading has also made an appearance in India. Earlier, the secondary market consists of 24 stock exchanges. Now, there are mainly two exchanges NSE and BSE. Others are demutualised with NSE. The secondary market provides a trading place for the securities already issued, to be bought and sold. It also provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at any price, if mutually accepted. An active secondary market actually promotes the growth of the primary market and capital formation because investors in the primary market are assured of a continuous market and they can liquidate their investments. 2.2 Capital Market Participants There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors. In the secondary market, there are the stock exchanges, stockbrokers (who are members of the stock exchanges), the mutual funds, financial institutions, foreign institutional investors (FIIs), and individual investors. Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries that provide important infrastructure services for both primary and secondary markets. 2.3 National Stock Exchange(NSE) The National Stock Exchange commenced its operations in 1994 as a first step in reforming the securities market through improved technology and introduction of best practices in management. It started with the concept of an independent governing body without any broker representation thus ensuring that the operators interests were not allowed to dominate the governance of the exchange.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION The NSE introduced screen-based trading system (SBTS) where a member can punch into the computer the quantities of shares and the prices at which he wants to transact. The transaction is executed as soon as the quote punched by a trading member finds a matching sale or buys quote from counter party. SBTS electronically matches the buyer and seller in an orderdriven system or finds the customer the best price available in a quote-driven system, and hence cuts down on time, cost and risk of error as well as on the chances of fraud. SBTS enables distant participants to trade with each other, improving the liquidity of the markets. The high speed with which trades are executed and the large number of participants who can trade simultaneously allows faster incorporation of price-sensitive information into prevailing prices. This increases the informational efficiency of markets. With SBTS, it becomes possible for market participants to see the full market, which helps to make the market more transparent, leading to increased investor confidence. The NSE started nation-wide SBTS, which have provided a completely transparent trading mechanism. Gala is a practice of extracting highest price of the day for "buy" transaction irrespective of the actual price at which the purchase was actually done and give lowest price of the day for "sell" transactions irrespective of the price at which sale was made. The clients did not have any method of verifying the actual price. The electronic and now fully online trading introduced by the NSE has made such manipulation difficult. It has also improved liquidity and made the entire operation more transparent and efficient. The NSE has set up a clearing corporation to provide legal counter party guarantee to each trade thereby eliminating counter party risk. The National Securities Clearing Corporation Ltd. (NSCCL) commenced operations in April 1996. Counter party risk is guaranteed through fine tuned risk management systems and an innovative method of on-line position monitoring and automatic disablement. Principle of "innovation" is implemented by NSE capital market segment. Under this principle, NSCCL is the counter party for every transaction and, therefore, default risk is minimized. To support the assured settlement, a "settlement guarantee fund" has been created. A large settlement guarantee fund provides a cushion for any residual risk. As a consequence, despite the fact that the daily traded volumes on the NSE run into thousands of Crores of rupees, credit risk no longer poses any problem in the marketplace.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 2.4 Capital Market Intermediaries There are several institutions, which facilitate the smooth functioning of the securities market. They enable the issuers of securities to interact with the investors in the primary as well as the secondary arena. 2.4.1 Merchant Bankers Among the important financial intermediaries are the merchant bankers. The services of merchant bankers have been identified in India with just issue management. It is quite common to come across reference to merchant banking and financial services as though they are distinct categories. The services provided by merchant banks depend on their inclination and resources - technical and financial. Merchant bankers (Category I) are mandated by SEBI to manage public issues (as lead managers) and open offers in take-overs. These two activities have major implications for the integrity of the market. They affect investors' interest and, therefore, transparency has to be ensured. These are also areas where compliance can be monitored and enforced. Merchant banks are rendering diverse services and functions. These include organizing and extending finance for investment in projects, assistance in financial management, raising Eurodollar loans and issue of foreign currency bonds. Different merchant bankers specialize in different services. However, since they are one of the major intermediaries between the issuers and the investors, their activities are regulated by: (1) SEBI (Merchant Bankers) Regulations, 1992.(2) Guidelines of SEBI and Ministry of Finance.(3) Companies Act, 1956.(4) Securities Contracts (Regulation) Act, 1956. 2.4.2 Credit Rating Agencies The 1990s saw the emergence of a number of rating agencies in the Indian market. These agencies appraise the performance of issuers of debt instruments like bonds or fixed deposits. The rating of an instrument depends on parameters like business risk, market position, operating efficiency, adequacy of cash flows, financial risk, financial flexibility, and management and industry environment. The objective and utility of this exercise is two-fold. From the point of view of the issuer, by assigning a particular grade to an instrument, the rating agencies enable the issuer to get the best price. Since all financial markets are based on the principle of risk/reward, the less risky the profile of the issuer of a debt security, the lower the price at which it can be issued. Thus, for the issuer, a favorable rating can reduce the cost of borrowed capital. EWIT/BKR/AN Page 6

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION From the viewpoint of the investor, the grade assigned by the rating agencies depends on the capacity of the issuer to service the debt. It is based on the past performance as well as an analysis of the expected cash flows of a company, when viewed on the industry parameters and performance of the company. Hence, the investor can judge for himself whether he wants to place his savings in a "safe" instrument and get a lower return or he wants to take a risk and get a higher return. 2.4.3 Stock Brokers Stockbrokers are the intermediaries who are allowed to trade in securities on the exchange of which they are members. They buy and sell on their own behalf as well as on behalf of their clients. Traditionally in India, partnership firms with unlimited liabilities and individually owned firms provided brokerage services. Therefore, restrictions on the amount of funds they could raise by way of debt. With increasing volumes in trading as well as in the number of small investors, lack of adequate capitalization of these firms exposed investors to the risks of these firms going bust and the investors would have no recourse to recovering their dues. With the legal changes being effected in the membership rules of stock exchanges as well as in the capital gains structure for stock-broking firms, a number of brokerage firms have converted themselves into corporate entities. In fact, NSE encouraged the setting up of corporate broking members and has today only 10% of its members who are not corporate entities. 2.4.4 Custodians In the earliest phase of capital market reforms, to get over the problems associated with paper based securities, large holding by institutions and banks were sought to be immobilized. Immobilization of securities is done by storing or lodging the physical security certificates with an organization that acts as a custodian - a securities depository. All subsequent transactions in such immobilized securities take place through book entries. The actual owners have the right to withdraw the physical securities from the custodial agent whenever required by them. In the case of IPO, a jumbo certificate is issued in the name of the beneficiary owners based on which the depository gives credit to the account of beneficiary owners. The Stock Holding Corporation of India Limited (SHCIL) was set up to act as a custodian for securities of a large number of banks and institutions who were mainly in the public sector. Some of the banks and financial institutions also started providing "Custodial" services to smaller investors for a fee. With the introduction of dematerialization of securities EWIT/BKR/AN Page 7

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION there has been a shift in the role and business operations of Custodians. But they still remain an important intermediary providing services to the investors who still hold securities in physical form. 2.4.5 Mutual Funds Mutual funds are financial intermediaries, which collect the savings of small investors and invest them in a diversified portfolio of securities to minimize risk and maximize returns for their participants. Mutual funds have given a major filliped to the capital market - both primary as well as secondary. The units of mutual funds, in turn, are also tradable securities. Their price is determined by their net asset value (NAV), which is declared periodically. 2.4.6 Depositories The depositories are important intermediaries in the securities market that is scrip-less or moving towards such a state. In India, the Depositories Act defines a depository to mean, "A company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange Board of India Act, 1992." The principal function of a depository is to dematerialize securities and enable their transactions in book-entry form. Dematerialization of securities occurs when securities issued in physical form are destroyed and an equivalent number of securities are credited into the beneficiary owner's account. In a depository system, the investors stand to gain by way of lower costs and lower risks of theft or forgery, etc. They also benefit in terms of efficiency of the process. But the implementation of the system has to be secure and well governed. All the players have to be conversant with the rules and regulations as well as with the technology for processing. The intermediaries in this system have to play strictly by the rules. Advantages A depository established under the Depositories Act can provide any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository. A depository cannot directly open accounts and provide services to clients. Any person willing to avail of the services of the depository can do so by entering into an agreement with the depository through any of its Depository Participants.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION The services, functions, rights and obligations of depositories, with special reference to NSDL are provided in the letter section of this Workbook. 2.4.7 Depository Participants A Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act, 1996. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the provisions of the SEBI Act. As per the provisions of this Act, a DP can offer depository related services only after obtaining a certificate of registration from SEBI. SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50lakh for the applicants who are stockbrokers or non-banking finance companies (NBFCs), for granting a certificate of registration to act as a DP. If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository. If an NBFC seeks to act as a DP on behalf of any other person, it needs to have a net worth of Rs.50 crore. In addition to the net worth specified by any other authority. No minimum net worth criterion has been prescribed for other categories of DPs. However, depositories can fix a higher net worth criterion for their DPs. NSDL stipulates a minimum net worth of Rs. 100lakh to be eligible to become a DP as against Rs. 50lakh prescribed by SEBI (D&P) Regulations 2.5 INTRODUCTION TO SECURITIES Security analysis and portfolio management require discipline and patience, and the work is not always rewarded by exceptional returns. We propose that investors are interested primarily in eventually selling a security for more than they paid for it. Including the receipt of interest or dividends during the time the security is held, the investor hopes to achieve a higher reward than would have been possible by simply placing the same amount of money in a savings account. This reward or return must be measured and estimated for each security being considered, with appropriate adjustments for decision making costs. But in seeking rewards that exceed those available on savings accounts, every investor, consciously or not, faces the very real risk that his hoped for return will fall short of his expectations. Risk means the uncertainty in the profitability distribution of returns. This EWIT/BKR/AN Page 9

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION aspect of investing insecurities must also be measurable and estimated for each security being considered. The entire process of estimating return and risk for individual securities is known as security analysis. Traditionally analysts have attempted to identify undervalued securities to buy, and overvalued securities to sell. Modern day thinking strongly influenced by the efficient market hypothesis sometimes popularly called the random walk theory questions the validity of or benefit to be derived from traditional security analysis. Briefly stated, the concept of market efficiency means that stock prices nearly always fully reflect all available information. If this is so, it would be exceedingly difficult for the average investor or analyst to earn exceptional returns particularly on a consistent basis. In fact, the only way for the analyst in such a market to achieve superior performance is by having (1) access to secret or inside information (2) superior analytical tools (3) superior forecasting abilities. Traditional investment analysis, when applied to securities, emphasizes the projection of prices and dividends. That is, the potential price of a firms common stock and the future dividend stream are forecast, and then discounted back to the present. This intrinsic value is then compared with the securitys current market price. If the current market price is below the intrinsic value, a purchase is recommended and vice versa. 2.6 INVESTMENT CATEGORIES Investments generally involve real assets or financial assets. Real assets are tangible, material things such as buildings, automobiles, and textbooks. Financial assets are pieces of paper representing an indirect claim to real assets held by someone else. These pieces of paper represent debt or equity commitments in the form of IOUs or stock certificates. Among the many properties that distinguish real from financial assets, one of special interest to investors is liquidity. Liquidity refers to the ease of converting an asset into money quickly, and at little exchange cost. Real assets are generally less liquid than financial assets, largely because real assets are more heterogeneous, often peculiarly adapted to a specific use. Financial assets can be categorized into:

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 2.6.1 Debentures It is a long-term Debt Instrument, which is not backed by Collaterals. Debentures are unsecured debt backed by the creditworthiness and reputation of the Debenture issuer and documented by an agreement called an indenture These are issued by companies and regulated under the SEBI guidelines of June 11, 1992. These are issued under a prospectus, which has to be approved by SEBI like in the case of equity issues. The rights of investors as debenture holders are governed by the Companies Act, which prohibits the issue of debentures with voting rights. There are a large variety of debentures that is available. This includes: Participating debentures, Convertible debentures with options, Third party convertible debentures, Debt/equity swaps, Zero coupon convertible notes, Secured premium notes, Zero interest fully convertible debentures, fully convertible debentures with interest, partly convertible debentures. 2.6.2 Bonds Indian Development Financial Institutions (DFIs) in India, like IDBI, ICICI and IFCI have been raising capital for their operations by issuing bonds. These include: Income bonds, Taxfree bonds, Capital gains bonds, Deep discount bonds, Infrastructure bonds, Retirement bonds In addition to the interest rates and maturity profiles of these instruments, the issuer institutions have been including a put/call option on especially the very long-dated bonds like deep discount bonds. Since the tenures of some of these instruments spanned some 20 or 25 years during which the interest rate regimes may undergo a complete change, the issuers have kept the flexibility to retire the costly debt. This they do by exercising their option to redeem the securities at pre-determined periods like at the end of five or seven years. 2.6.3 Preference Shares As the name suggests, owners of preference shares enjoy a preferential treatment with regard to corporate actions like dividend. They also have a higher right of repayment in case of winding up of a company. Preference shares have different features and are accordingly available as: Cumulative and non-cumulative, Participating, Cumulative & Redeemable fully convertible to preference

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION shares, Cumulative & Redeemable fully convertible to equity shares, Preference shares with warrants, Preference shares

2.6.4 Equity Shares As the name indicates, these represent the proportionate ownership of the company. This right is expressed in the form of participation in the profits of the company. There has been some innovation in the way these instruments are issued. Some hybrid securities like equity shares with detachable warrants are also available. 2.6.5 Government Securities The Central Government or State Governments issue securities periodically for the purpose of raising loans from the public. There are two types of Government Securities - Dated Securities and Treasury Bills. Dated Securities have a maturity period of more than one year. Treasury Bills have a maturity period of less than or up to one year. The Public Debt Office (PDO) of the Reserve Bank of India performs all functions with regard to the issue management, settlement of trade, distribution of interest and redemption. Although only corporate and institutional investors subscribe to government securities, individual investors are also permitted to subscribe to these securities. An investor in government securities has the option to have securities issued either in physical form or in book-entry form (commonly known as Subsidiary General Ledger [SGL] form). There are two types of SGL facilities, viz., SGL-1 and SGL-2. In the SGL-1 facility, the account is opened with the RBI directly. There are several restrictions on opening SGL-1 accounts and only entities, which fulfill all the eligibility criteria, are permitted to open SGL-1 account. The RBI has permitted banks, registered primary dealers and certain other entities like NSCCL, SHCIL and NSDL to provide SGL facilities to subscribers. A subscriber to government securities who opts for SGL securities may open an SGL account with RBI or any other approved entity. Investments made by such approved entity on its own account are held in SGL-1 account and investments held on account of other clients are held in SGL-2 account.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

3. COMPANY PROFILE
3.1 BACKGROUND AND INCEPTION OF THE COMPANY Indbank Merchant Banking Services Limited [Indbank] had its genesis as a Merchant Banking Division of Indian Bank in 1982 to provide specialized Merchant Banking & allied services. The division had managed 133 issues for an aggregate value of Rs.2250 crore between 1982 & 1989. The division was also involved in investor education programs in various centers across the country. Indbank was incorporated as a wholly owned Subsidiary of Indian Bank in 1989 to take over the business of Merchant Banking division of Indian Bank & to undertake other specialized activities like Leasing, Hire Purchase etc which banks were permitted to undertake only through their subsidiaries. Indbank was one among the few subsidiaries to be formed by nationalized banks for undertaking Merchant Banking & allied services. 3.1.1 Incorporation and Certificate of commencement of business Indbank was incorporated on 11th August 1989 & obtained certificate of registration bearing No. 18-17883 of 1989 from the Registrar of Companies, Tamilnadu. Indbank obtained certificate for commencement of business from the Registrar of Companies, Tamilnadu on 17th August 1989. 3.1.2 Promoters Indbank was promoted by Indian Bank, which was among the first native banks to be incorporated in south India in 1907. Indian Bank was nationalized in 1969. Indian Bank is also the promoter of Indian Bank Mutual Fund [trusts] for mutual fund activities, Indbank Housing Limited [along with HUDCOs] & Indfund Management limited [asset management Comp. for Indian Bank mutual funds].

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 3.2 NATURE OF THE BUSINESS CARRIED Indbank has Registered & Corporate Office at Chennai & branches at Mumbai, Chennai, Delhi, Bangalore, Coimbatore, Ahmadabad, Tirunelveli, Madurai, and Hyderabad & Pondicherry where the fee based activities are carried on. 3.2.1. Merchant Banking and Advisory Services Indbank is a Category 1 Merchant Banker registered with SEBI. Indbank undertakes: a. Acting as Merchant Bankers: Under various capacities like Lead Manager, Co-Manager, Advisor, Arranger etc. for public issues, rights issues & private placement. b. For acquisition of shares and takeovers under Securities Exchange Board of India [Substantial Acquisition of shares & Takeovers] Regulations, 1997, Securities Exchange Board of India [Buyback of Securities] Regulations, 1998 & Securities Exchange Board of India [De-listing of Securities] Guidelines, 2003. c. For Employee Stock Option Scheme / Stock Purchase Scheme by Corporate under the Securities Exchange Board of India [Employee Stock Option Scheme & Employee Stock Purchase Schemes], Guidelines, 1999. Advisory Services a. Valuation of shares and other financial instruments, b.Syndication of Loans , c.Stock Audit , d. Mergers and Amalgamations ,e. Project Counseling, appraisal & feasibility studies Under Merchant Banking, Indbank is governed by SEBI [Merchant Bankers Rules], 1992, SEBI [Merchant Bankers] Regulations, 1992, Guidelines issued to Merchant Bankers & Lead Managers prior to issue of codified RBM [GI Series], SEBI Guidelines, Rules & Regulations primarily governing companies & the relevant circulars issued by SEBI from time to time. 3.2.2. Stock Broking Indbank is a SEBI registered member National Stock Exchange of India [NSEs], Madras Stock Exchange [MSEs] & Over the Counter Exchange of India [OTCEIs]. At present Stock Broking is done only through NSE as virtually no activity takes place in MSE & OTCEI. EWIT/BKR/AN Page 14

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION Under broking, Indbank is governed by SEBI [Stock Brokers and Sub Brokers] Rules, 1992, SEBI [Stock Brokers and Sub Brokers] Regulations, 1992, SEBI Circulars & Circulars issued by Stock Exchanges from time to time. 3.2.3. Depository Participant Activities Indbank is a SEBI registered Depository Participant with National Securities and Depository Limited [NSDLs] & is governed by Depositories Act 1996, SEBI [Depositories and Participants] Regulations, 1996 & circulars issued by SEBI & NSDL from time to time. 3.2.4. Distribution of Mutual Fund & other Investment products As part of broking, Indbank distributes Mutual Fund & investment products & is registered with the Association of Mutual Funds of India [AMFIs] for distribution of Mutual Fund products. 3.3 VISION Be the most preferred, socially responsible and profitable merchant bank in the country 3.4 MISSION

To provide an optimum return to shareholders by maximizing the return on equity To provide business solutions that adds value to clients business ventures and ensures their continuous growth in wealth

To create a pleasant work environment for employees through training, empowerment and recognition of good performance.

To be a socially responsible organization that maintains high standards of business ethics and to have good corporate governance practices.

3.5 COMPANYS PHILOSOPHY The Company firmly believes in transparency, professionalism, accountability, risk management and code of ethics, which are the fundamental principles of Corporate Governance. The company will constantly endeavor to improve on these aspects on an ongoing basis.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 3.6 SERVICES Indbank, under one roof, offers a truly comprehensive range of financial services at one-stop shop by having a breed of professionals drawn from various disciplines form the core, ably supported by the cumulative experience of personnel at Indian bank offices all over the country, backed by the most sophisticated communication network for instant access to information and constant updations. The services include Merchant Banking and Corporate Advisory Services Stock Broking Online Trading Depository Participant Activities Distribution of Mutual Funds and other Investment products

3.6.1 Merchant Banking and Corporate Advisory Services Indbank is a Category 1 Merchant Banker registered with Securities Exchange Board of India (SEBI) undertaking assignments

Under various capacities like Lead Manager, Co-Manager, Advisor, Arranger etc. for public issues, rights issues and private placement.

For acquisition of shares & takeovers under SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 1997, SEBI (Buyback of Securities) Regulations, 1998 and SEBI (De-listing of Securities) Guidelines, 2003.

For Employee Stock Option Scheme / Stock Purchase Scheme by Corporate under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999.

Merchant banking today has become so complex and sophisticated in nature that its truly multi-faceted. Indbank has identified the major areas of services and has assigned specialist personnel to each Management of Equity & Debt Issues Rights /Public issues IPOs/Offer for sale of equity-through fixed price/book building routes, obtaining clearances for the same and drafting prospectus Compliance with Pre and Post issue requirements Underwriting EWIT/BKR/AN Page 16

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION Liaison with brokers and bankers ESOP/ESOS issues Private Placements of debt for banks, FIIs, industrial houses Venture Capital Tie-Ups Corporate Advisory service Valuation of shares & other financial instruments Capital restructuring Delisting Buyback Efficiency improvement studies Mergers and Acquisitions Identification of opportunities Evaluation of prospects Negotiations and working out of mechanics Documentation Managing open offers Loan Syndication Sourcing of Finance Detailed Project Appraisals Preparation of Information Memorandum Application for Assistance Negotiation of Terms and Documentation Project Counseling Collaboration Arrangement Detailed Project Appraisals Financial Closure Assistance in Project Implementation 3.6.2 Stock Broking Indbank is a SEBI registered member of National Stock Exchange of India (NSE), Madras Stock Exchange (MSE) and Over The Counter Exchange of India (OTCEI). Indbank currently operates in the Cash & Wholesale Debt Market Segments of NSE for both retail and institutional investors. EWIT/BKR/AN Page 17

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION Indbank is one amongst very few subsidiaries of nationalized banks who have entered into Stock Broking activity. Indbank is an empanelled broker for major financial institutions and banks. The website of Indbank is www.indbankonline.com, which provides a host of market information like quotes, indices, economy, industry and corporate news, and provides facilities for creating clients own portfolio, posting clients queries etc. 3.6.3 Online Trading To enable the customer to trade from anywhere under the Internet based trading system, Indbank had recently launched a powerful and user-friendly Online trading facility, which is completely safe and secure. The facility is designed to provide an expedient and seamless trading experience. (www.indbankonline.com -> online trading -> login) Indbank uses robust software, which utilizes highest levels of encryption standards to guard against intrusion. The software has many user friendly features to enable the Indbank Online Trading Client perform several functions over the Internet, including: View the market information Enter / Modify / Cancel the Orders View Order and trade status View the portfolio and cash balance information View transaction history Use of information price ticker Online Alerts for clients activities Hyperlinks to other services such as market historical information, exchange web sites, news, charting and a host of other value added features. Access to digital contracts for trades that are executed and to back office accounts.

Indbank Merchant Banking Services Limited has entered into an agreement with Indian Bank for the provision of online trading facilities to the customers of Indian Bank. For availing this facility the customer has to open a net banking account and demat account with Indian Bank or Indbank and online trading account with Indbank Merchant Banking Services Limited. This would enable the customer to trade from anywhere under the Internet

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION based trading system. This will benefit all customers having account with CBS branches of Indian Bank for undertaking stock market operations. 3.6.4 Depository Participant Activities Indbank is a SEBI registered Depository Participant with NSDL, since 1998, and is governed by the Depositories Act 1996, SEBI (Depositories & Participants) Regulations, 1996 and circulars issued by SEBI and NSDL from time to time. Demat is a safe and convenient way to hold securities eliminating the risks associated with physical certificates like bad deliveries, fake securities, delays, thefts etc facilitating faster transactions. Indbank offers demat services through its network of offices. 3.6.5 Distribution of Mutual Fund and other Investment products Indbank distributes Mutual Fund and investment products and is registered with the Association of Mutual Funds of India (AMFI) for distribution of mutual Fund products. Indbank offers this service through its network of offices.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 3.7 AREA OF OPERATION: OFFICE NETWORKS (LOCATIONS) There are around 30 branches and terminals few are listed below

SL.NO

LOCATION TYPE Registered Office

ADDRESS

Khivraj Complex 1, 1st Floor, 480, Anna Salai, Nandanam, Chennai (Madras), Tamil Nadu India, Pin: 600035 No.2 (Old No. 26.27), 3rd Floor, Krest Building, Chennai (Madras), Tamil Nadu India Pin: 600001 3rd floor Raja Annamalai Bldg. 19 Marshalls Road, Chennai (Madras), Tamil Nadu India, Pin: 600008. Upper Ground Floor World Trade Centre Babar Road, New Delhi, Delhi India, Pin: 110001 Verma Chambers, Ground Floor, 11, Homiji Street, Fort, Mumbai 400 001. 5th floor, Premchand House Avenue 172/1 High Court Way Ahmadabad, Gujarat India, Pin: 380009 1st floor 29 Infantry Road, Bangalore, Karnataka - India Pin:560001 5th floor 3-6-237 "Lingapur House" Block No.503 Himayat Nagar Hyderabad, Andhra Pradesh India, Pin: 500029 Raheja Centre, 205,206 A Block, II Floor, 1073 & 1074 Avinashi Road, Coimbatore 641 018.

Corporate Office

Branch Office

Branch Office

Branch Office

Branch Office

Branch Office

Branch Office

Branch Office

3.8 INFRASTRUCTURAL FACILITIES Online trading facility All terminals are interlinked Leased lines through which all networks are connected to head office Page 20

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 3.9 Competitors information INDBANK MERCHANT BANKING SERVICES LTD has many competitors like SCHIL, Karvy Consultancy, BGSE, IL&FS, Canara .Bank. ICICI, HSBC, HDFC, Share khan, IDBI. Standard hartered, ANZ GRINDLEYS, Religare, India bulls etc. Services provided by main competitors are given below

3.9.1 ICICI Direct Trading In Shares and Derivatives. Investing In Mutual Funds. IPOs and Bonds Online. Overseas Trading. Personal Finance. Risk Analyzer and Asset Allocator. Other Features: Market Desktop. Market Barometer and Industry Barometer. Direct Technical Charts and Multex Global Estimates. My Research that helps you to Research a Stock Better. News from CNBC and REUTERS. 3.9.2 Share Khan Technical Research Equity And Derivatives Trading Depository Services Fundamental Research Share Shops Portfolio Management EWIT/BKR/AN Page 21

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION Online Services Commodities Trading 3.9.3 India Bulls Power India Bulls India Bulls Signature Account Depository Services IPO online NRI Trading Currency Derivatives in NSE India Bulls Equity Analysis 3.9.4 HDFC Securities Trading in Equity and Derivatives' Mutual Funds and IPO Weekly Derivative Future Report . Aggressive Portfolio Conservative Portfolio Weekly Technical Report and Market Wrap Research and Charting. 3.9.5 RELIGARE CRN Login Call N Trade Portfolio tracker Research

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3.10 Milestones
Progressive merchant banker with notable progress made in short span of period- more than 1000 clients served till date. Business built on strong relationships, innovation, and uncompromising ethical standards. Multi-disciplinary professionals with a collective banking and corporate finance advisory experience of more than two decades. Excellent & intensely focused Transaction-closure orientation approach. Well entrenched relationships nurtured at the highest levels within the investor community, market intermediaries and the corporate sector. Commitment to high standards of delivery & value creation timelines Enviable record of successful Relationships. Perpetual client engagement and advisory support Customer centric approach+ Enviable solutions+ Right capitalization strategy = Growth 3.11 Work flow model (Trading mechanism) NSE carried the trading platform to the PCs at the residence of investors through the Internet and to handheld devices through WAP for convenience of mobile investors. This made a huge difference in terms of equal access to investors in a geographically vast country like India. The trading network is depicted in NSE has main computer which is connected through Very Small Aperture Terminal (VSAT) installed at its office. The main computer runs on a fault tolerant STRATUS mainframe computer at the Exchange. Brokers have terminals (identified as the PCs in the Figure 1) installed at their premises which are connected through VSATs/leased lines/modems. An investor informs a broker to place an order on his behalf. The broker enters the order through his PC, which runs under Windows NT and sends signal to the Satellite via VSAT/leased line/modem. The signal is directed to mainframe computer at NSE via VSAT at NSE's office. A message relating to the order activity is broadcast to the respective member. The order confirmation message is immediately displayed on the PC of the broker. This order matches with the existing passive order(s), otherwise it waits for the active orders to enter the system. On order matching, a message is broadcast to the respective member. The trading system operates on a strict price time priority. All orders received on the system are EWIT/BKR/AN Page 23

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION sorted with the best priced order getting the first priority for matching i.e., the best buy orders match with the best sell order. Similar priced orders are sorted on time priority basis, i.e. the one that came in early gets priority over the later one. Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not find a match, it remains in the system and is displayed to the whole market, till a fresh order comes in or the earlier order is cancelled or modified. The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. Several time-related (good till cancelled, good till day, immediate or cancel), price-related (buy/sell limit and stop loss orders) or volume related (all or none, minimum fill, etc) conditions can be easily built into an order. The trading system also provides complete market information on-line. The market screens at any point of time provide complete information on total order depth in a security, the five best buys and sells available in the market, the quantity traded during the day in that security, the high and the low, the last traded price, etc. Investors can also know the fate of the orders almost as soon as they are placed with the trading members. Thus the NEAT system provides an Open Electronic Consolidated Limit Order Book (OECLOB). Limit orders are orders to buy or sell shares at a stated quantity and stated price. If the price quantity conditions do not match, the limit order will not be executed. The term Limit Order Book refers to the fact that only limit orders are stored in the book and all market orders are crossed against the limit orders sitting in the book. Since the order book is visible to all market participants, it is termed as an Open Book.

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4. MC-KINSEY'S 7S FRAME WORK

The 7-S model is better known as Mc-Kinsey 7-S. The Mc-Kinsey 7-S model is widely discussed framework for viewing the inter relationship of strategy formulation and implementation. It helps to focus manager attention on the importance of linking the chosen strategy to a variety of activities that can affect the implementation of strategy. Developed in the early 1980s by Tom Peters and Robert Waterman, two consultants working at the McKinsey & Company consulting firm, the basic premise of the model is that there are seven internal aspects of an organization that need to be aligned if it is to be successful

4.1 Hard and soft elements

The 7-S elements are distinguished in so called hard S's and soft S's. The four soft-S like Style, skill, staff and shared values are hardly feasible. Hard and soft elements of MC KINSEYS 7s model

HARD ELEMENTS Strategy Structure Systems

SOFT ELEMENTS Shared Values Skills Style Staff

4.1.1 Hard elements

"Hard" elements are easier to define or identify and management can directly influence them. These are strategy statements, organization charts and reporting lines and formal processes and IT systems. The hard elements like structure, system and strategy are feasible and easy to identify.

4.1.2 Soft elements

Soft elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard EWIT/BKR/AN Page 25

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION elements if the organization is going to be successful. The way the model is presented in below depicts the interdependency of the elements and indicates how a change in one affects all the others

Mc Kinneys 7-s framework with reference to company profile

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION STRATEGY Strategy is the planning devise to maintain and build competitive advantage over the competition. The main strategies made by INDBANK MERCHANT BANKING SERVICES LTD., are The main strategy is to maintain the consistency in quality and provide good Quality services to their clients. To attain global best practices and become world class financial services Enterpriseguided by its purpose to move towards greater degree of sophistication and maturity. To adapt new technologies fast.

STRUCTURE

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION SKILLS It means the actual skills and competencies of the employees working for the company and the company itself what the company does the Oust- the distinctive capabilities and competencies that reside in the organization. An INDBANK MERCHANT BANKING SERVICES LTD is best known for its network & lot number of value added services. It's all India presence gives a competitive look. The company is doing well in adopting new products and services STYLE All organizations have their own management style. The style refers to how managers behave in an organization and how collectively spend their time to achieve the organizational goal. Indbank is managed by President & Whole Time Director under the supervision of Board of Directors of company. The President & Whole Time Director is assisted by Executive Vice President, Vice President's, Asst. Vice President's, Senior Project Executive, Project Executives, Senior Secretarial Officers and Secretarial Officers. BOARD & MANAGEMENT Board of Directors V Rama Gopal, Chairman T. M. Nagarajan PV Rajaraman P M Venkatasubramanian R Ravi G.Rangarajan (President and Whole Time Director) Committees of the Board Audit Committee T. M. Nagarajan PV Rajaraman P M Venkatasubramanian R Ravi Share Transfer & Investor's Grievance Committee R Ravi G.Rangarajan Compliance Officer P. Mugundan (Executive Vice President & Company Secretary)

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION SYSTEMS The systems consist of formal and informal procedures, including innovation systems, compensation systems. The systems also include data collection, storage and utilization for record and appraisal purposes. (Management information systems i.e. reports of various departments, financial information system i.e. marketing and sales information, employee information system. STAFF The staff of INDBANK MERCHANT BANKING SERVICES LIMITED is divided into national head, regional head, zonal head, cluster head and centre manager. It adopts various training facilities to Upgrade the skills of the employees Enable the employees to contribute towards organizational objectives. Facilitating a self learning The company has developed skills and expertise in sales and marketing of Demat, insurance, and other products SHARED VALUES Shared values also refer to the values and beliefs of the company. The value helps the members in the organization to achieve effective goals. The INDBANK MERCHANT BANKING SERVICES LIMITED is committed to abide to the following values and responsibilities: Be a lean, responsive and learning organization. Continuously improve to achieve world-class standards and total customer satisfaction. Maintain cost effective service to the customer. Ensure a common culture and a common set of values throughout the organization Recognize individuals' contributions. Develop stronger leadership skills, greater teamwork and a global perspective

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

5. SWOT ANALYSIS
SWOT analysis means analysis of the internal strengths and weakness of the company and also analysis of external opportunities and threats of the company.

5.1 Strength On line share trading. Flexible organization Low brokerage services High speed trading Brand name of the Company. No hidden charges. Customer education center Convenient & Safe Single - Window Access Cost effective Value-Added services EWIT/BKR/AN Page 30

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 5.2 Weaknesses No Service in Rural Segment. The person with out the knowledge of share market cannot open the De-mat account Trading account. 5.3 Opportunities More Potential Market. Awareness through Media. Foreign Direct Investments & Foreign Institutional Investors in Indian markets.

5.4 Threats Market fluctuations Government polices and war atmosphere from neighboring countries. Competition from banks and insurance sectors.
More number of competitors.

Fall in share market become a major threat. As it is related with marketing strategies and the market is uncertain this uncertainty becomes a threat.

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6. ANALYSIS OF FINANCIAL STATEMENT

6.1 BALANCE SHEET OF INDBANK MERCHANT BANKING SERVICES

LIABILITIES
Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net worth Secured Loans Unsecured Loans Total Debt Total Liabilities

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

44.39 44.39 0.00 0.00 -29.08 0.00 15.31 42.08 0.00 42.08 57.39

44.38 44.38 0.00 0.00 -7.89 0.00 36.49 17.90 0.00 17.90 54.39

44.38 44.38 0.00 0.00 18.87 0.00 63.25 0.00 0.00 0.00 63.25

44.38 44.38 0.00 0.00 7.75 0.00 52.13 0.00 0.00 0.00 52.13

44.38 44.38 0.00 0.00 6.10 0.00 50.48 0.00 0.00 0.00 50.48

ASSETS
Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deferred Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs)

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

65.43 54.91 10.52 0.00 13.37 3.12 4.29 2.93 10.34 35.19 0.87 46.40 0.00 12.77 0.13 12.90 33.50 0.00 57.39 19.16 3.45

63.82 54.17 9.65 0.00 12.12 1.06 8.54 3.56 13.16 33.42 0.96 47.54 0.00 14.77 0.15 14.92 32.62 0.00 54.39 30.31 8.22

48.22 38.06 10.16 0.00 25.62 0.44 6.02 4.47 10.93 39.01 0.94 50.88 0.00 15.46 7.94 23.40 27.48 0.00 63.26 11.70 14.25

41.54 34.47 7.07 0.00 12.55 0.39 4.44 4.42 9.25 33.10 6.39 48.74 0.00 12.03 4.19 16.22 32.52 0.00 52.14 15.78 11.75

32.48 25.65 6.83 0.00 13.32 0.00 10.34 5.07 15.41 28.29 3.59 47.29 0.00 16.39 0.56 16.95 30.34 0.00 50.49 37.26 11.37

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6.2 PROFIT & LOSS ACCOUNT
PARTICULARS Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalized Total Expenses PARTICULARS 0.00 0.00 1.33 0.00 -0.78 0.89 0.00 1.44 Mar '06 0.00 0.00 1.33 0.00 -0.38 1.03 0.00 1.98 Mar '07 0.00 0.00 1.76 0.00 -0.81 1.37 0.00 2.32 Mar '08 0.00 0.00 2.55 0.00 -0.36 1.51 0.00 3.70 Mar '09 0.00 0.00 3.72 0.00 0.54 1.78 0.00 6.04 Mar '10 6.79 0.00 6.79 0.13 0.00 6.92 25.77 0.00 25.77 -0.20 0.00 25.57 48.17 0.00 48.17 -1.45 0.00 46.72 9.24 0.00 9.24 -4.61 0.00 4.63 18.65 0.00 18.65 3.30 0.00 21.95 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

5.35 5.48 0.00 5.48 1.99 0.00 3.49 0.00 3.49 1.45 2.04 1.43 0.00 0.00 0.00 443.78 0.46 0.00 3.45

23.79 23.59 0.00 23.59 1.67 0.00 21.92 -0.50 21.42 0.25 21.17 1.98 0.00 0.00 0.00 443.78 4.77 0.00 8.22

45.85 44.40 5.06 39.34 1.24 0.00 38.10 0.00 38.10 3.55 34.55 2.31 0.00 6.66 1.13 443.78 7.79 15.00 14.25

5.54 0.93 0.00 0.93 1.27 0.00 -0.34 -0.52 -0.86 6.37 -7.23 3.70 0.00 3.33 0.57 443.78 -1.63 7.50 11.75

12.61 15.91 12.50 3.41 1.10 0.00 2.31 0.00 2.31 3.96 -1.65 6.04 0.00 0.00 0.00 443.78 -0.37 0.00 11.37

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6.3 FINANCIAL RATIOS
PARTICULARS Liquidity And Solvency Ratios Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Current Ratio

3.60

3.19

2.17

3.00

2.79

Quick Ratio

1.38

1.45

1.11

1.97

2.14

Debt Equity Ratio

2.75

0.49

--

--

--

Long Term Debt Equity Ratio

2.75

0.49

--

--

--

Debt Coverage Ratios

Interest Cover

--

--

8.82

--

0.96

Total Debt to Owners Fund

2.75

0.49

--

--

--

Financial Charges Coverage Ratio

--

47.16

9.06

1.22

1.05

Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios

--

46.66

8.07

-0.43

0.96

Inventory Turnover Ratio

2.26

24.49

--

--

--

Debtors Turnover Ratio

1.38

4.02

6.62

1.77

2.52

Investments Turnover Ratio

--

0.65

110.09

23.56

--

Fixed Assets Turnover Ratio

0.64

2.61

--

--

--

Total Assets Turnover Ratio

--

--

0.76

0.18

--

Asset Turnover Ratio

0.10

0.41

1.01

0.23

0.59

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7. LEARNING EXPERIENCE
India, being a developing country, consists of majority of middle class people who are risk averse in nature. It is their nature of investing and trading in stocks which has lead to the volatility in the stocks. This volatility has opened doors for investors and other new players like stock brokers, speculators, etc. to increase their gains through trading activities. The organizational study helps a student to get exposed with respect to the working of a stock exchange and also to get in depth knowledge regarding its evolution and functions. The project survey exhibits the extent of volatility that is present in todays stock market. The increase in such volatility has forced the stock exchanges to adopt stringent measures to curb the risk involved while trading in stocks and shares. Hence, the student can get an idea regarding the measures adopted by the stock exchanges to minimize the risk. The experience gained by me during the training at INDBANK MERCHANT BANKING SERVICES LIMITED was very useful, with good knowledge. The training has enriched my knowledge and helped me to gain thoroughly understand the functions and working of INDBANK MERCHANT BANKING SERVICES LIMITED. It has helped me to improve my presentation skills, communication and personality development.

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8. RESEARCH DESIGN
8.1 Title of the project: PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 8.2 Statement of the problem:Ideally investor would like to earn maximum return on his investment with minimum risk as possible; he can achieve this by assessing how much is truly securities are worth and comparing it with current market price to see if it is trading in market below its real worth or above it before committing funds for investment. Only with help of this investor can decide as to buy, hold or sell securities. This is called security valuation. Further investor should invest in diversified collection of securities of 10-20. The fundamental idea of this concept is to reduce security specific risk. The portfolio is always considered to be best compared to investment in individual security as it offers better combination of risk and return. This study deals with constructing portfolio for various risk class of investors on basis of security valuation 8.3 Objectives of the study: To construct portfolios based on the undervalued ratio, co-efficient of variations & relative valuation measures. To measure constructed portfolios performance in terms of return and compare them with benchmark sensex return. To make suggestions to investors on basis of findings in the study

8.4 Scope of the study:The scope of the study is limited to constructing portfolio which primarily consists on investing in equities and cash equivalents. It also covers studying relative and absolute valuation methods of securities, earning growth projection and stock filters used as basis for portfolio construction. Thus it involves using quantitative valuation as a basis for constructing portfolio. Qualitative analysis which can also be used as basis is however outside scope of the study.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION The study involves constructing portfolio from 50 securities- 5 stock from 10 sectors namely: Automobile sector, Banks - private sector, Cement sector, Diversified sector, Engineering sector, Finance sector, FMCG sector, Pharmaceuticals sector, Steel & aluminum sector, Computers software sector 8.5 Sources of data collection:Data collection for the study is purely from secondary data. Secondary data: consists of financial data of companies/scrips/share prices of various security used for valuation. The sources include Websites- moneycontrol.com, bseindia.com, yahoofinance.com INDBANK MERCHANT BANKING SERVICES LTD research reports, websites and broachers Journals like money today, Dalal street and books like standard and poor guide to selecting stocks 8.6 Limitations of study:1) In the study portfolios are constructed on quantitative basis through quantitative valuation. Qualitative analysis which should be used as basis for constructing portfolio is not part of the study. This is major limitation of this study 2) Only 50 stocks from 10 different sectors are considered for valuation and building portfolio, many scripts and other investments have been left out. Hence applicability of study is limited to this extent only. 3) Time and resources confined for study are limited which dont enable to make indepth comprehensive study. 4) The prices of scripts are fluctuating every day this is also a major limitation of the study. Hence the findings & suggestions of the study are applicable to specified time horizon.

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9. THEORETICAL BACKGROUND
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall. In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of their intrinsic value of the stock, based on predictions of the future cash flows and profitability of the business. Fundamental analysis may be replaced or augmented by market criteria what the market will pay for the stock, without any necessary notion of intrinsic value. These can be combined as "predictions of future cash flows/profits (fundamental)", together with "what will the market pay for these profits? These can be seen as "supply and demand" sides what underlies the supply (of stock), and what drives the (market) demand for stock? In the view of others, such as John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories. 9.1 Fundamental criteria (fair value) The most theoretically sound stock valuation method, called income valuation or the discounted cash flow (DCF) method, involves discounting of the profits (dividends, earnings, or cash flows) the stock will bring to the stockholder in the foreseeable future, and a final value on disposal. The discounted rate normally includes a risk premium which is commonly based on the capital asset pricing model. 9.2 Stock Valuation Methods Stocks have two types of valuations. One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for (in other words, by supply and demand). Both of these values change over

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION time as investors change the way they analyze stocks and as they become more or less confident in the future of stocks. The fundamental valuation is the valuation that people use to justify stock prices. The most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio. This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices. The other way stocks are valued is based on supply and demand. The more people that want to buy the stock, the higher its price will be. And conversely, the more people that want to sell the stock, the lower the price will be. This form of valuation is very hard to understand or predict, and it often drives the short-term stock market trends. In short, there are many different ways to value stocks. The key is to take each approach into account while formulating an overall opinion of the stock. Look at each valuation technique and ask yourself why the stock is valued this way. If it is lower or higher than other similar stocks, then try to determine why. And remember, a great company is not always a great investment. Here are the basic valuation techniques: 9.2.1 Earnings per Share (EPS). EPS is the total net income of the company divided by the number of shares outstanding. They usually have a GAAP EPS number (which means that it is computed using all of mutually agreed upon accounting rules) and a Pro Forma EPS figure (which means that they have adjusted the income to exclude any one time items as well as some non-cash items like amortization of goodwill or stock option expenses). The most important thing to look for in the EPS figure is the overall quality of earnings. The formula for calculating EPS is:-

9.2.2 Return on Equity (ROE) This valuation technique measures how much money the company makes each year on its equity capital. Equity Capital is the amount of money invested in the company by owners of the company. The ratio is expressed as a percent and investor should look for a percent that approximates the level of growth that he/she expects. In its simplest definition, this ratio

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION measures the investment return that management is able to get for its equity capital. The higher the number the better will be the return. This can be calculated by:

9.2.3 Price to Earnings Ratio (P/E) When there are several EPS figures (historical and forecasts), the most common valuation technique used by analysts are the price to earnings ratio, or P/E. The formula for calculating P/E ratio is:-

9.2.4 Dividend Payout Ratio (DPOR) D/P Ratio is the ratio at which the company is decided to pay dividend to its share holders as a means of return on their investment. The payment of dividend is decided by the board of directors of the company. Dividends are paid annually or semi annually. D/r ratio can be calculated by:

9.2.5 Growth Rate Valuations rely very heavily on the expected growth rate of a company. For starters, valuator can look at the historical growth rate of both sales and income to get a feeling for what type of future growth that he can expect. However, companies are constantly changing, as well as the economy, so don't rely on historical growth rates to predict the future, but instead use them as a guideline for what future growth could look like if similar circumstances are encountered by the company. To calculate this future growth rate, an investor will need to do his/her own investment research. Growth rate will be calculated by using following formula: ( )

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 9.2.6 Intrinsic Value (IV) Intrinsic value is the real value of the companys shares that are traded in market. It tells the investor that the shares are undervalued or overvalued. If the intrinsic value is less than the market value it implies shares are overvalued & vice versa. It is calculated by: IV= 9.2.7 Dividend Yield (DYS) The dividend yield is the dividend paid in the last accounting year divided by the current share price: it is the reciprocal of the Price/Dividend ratio. It is calculated by:

9.2.8 Book Value per Share (BVS) Ratio indicates share of equity shareholders after company has paid all its liabilities at the time of liquidation, the shareholders can know what remains after making all payment. It shows how many times its higher than the par value and is calculated as follows:

9.2.9 Price to Book Value (PBV) P/B ratio is a financial ratio used to compare a company's book value to its current market price. Book value is an accounting term denoting the portion of the company held by the shareholders; in other words, the company's total tangible assets less its total liabilities. The calculation can be performed in two ways, but the result should be the same each way. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share (i.e. its book value divided by the number of outstanding shares).

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 9.2.10 Price Earnings Growth Ratio (PEG RATIO)
(Price/Earnings to Growth ratio) is a valuation metric for determining the relative trade-off

between the price of a stock, the earnings generated per share (EPS), and the company's expected growth

9.2.11 Price to Sales Ratio (P/S RATIO) P/S ratio is a valuation metric for stocks. It is calculated by dividing the company's market cap by the company's revenue in the most recent year; or, equivalently, divide the pershare stock price by the per-share revenue.

9.3 STOCK SELECTION CRITERIA Stock selection criteria are methods for selecting a stock(s) for investment. The stock investment or position can be "long" (to benefit from a stock price increase) or "short" (to benefit from a decrease in a stock's price), depending on the investor's expectation of how the stock price is going to move. The stock selection criteria may include systematic stock picking methods that utilize computer software and/or data. 9.3.1 Objectives The objective of stock selection criteria is to: 1) Maximize the total return on investment (appreciation plus any dividends received) for the targeted holding period 2) Limit risk (according to an individual's risks tolerance levels) 3) Maintain an appropriate degree of portfolio diversification. 9.3.2 Selection components The analytical components utilized by investors as stock selection criteria may include one or more of the following

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 9.3.2.1 Sector analysis Sector analysis involves identification and analysis of various industries or economic sectors that are likely to exhibit superior performance. Academic studies indicate that the health of a stock's sector is as important as the performance of the individual stock itself. In other words even the best stock located in a weak sector will often perform poorly because that sector is out of favor. Each industry has differences in terms of its customer base, market share among firms, industry growth, competition, regulation and business cycles. Learning how the industry operates provides a deeper understanding of a company's financial health. One method of analyzing a company's growth potential is examining whether the amount of customers in the overall market is expected to grow. In some markets, there is zero or negative growth, a factor demanding careful consideration. Additionally, market analysts recommend that investors should monitor sectors that are nearing the bottom of performance rankings for possible signs of an impending turnaround. 9.3.2.2 Quantitative cumulative value analysis This method is also commonly referred to as fundamental analysis. Fundamental analysts consider past records of assets, earnings, sales, products, management, and markets in predicting future trends in these indicators and how they may affect a companys future success or failure. By appraising a firms prospects, these analysts determine a stocks intrinsic value and assess whether a particular stock or group of stocks is undervalued or overvalued at the current market price. If the intrinsic value is more than the current share price, then this stock would appear to be undervalued and a possible candidate for investment. While there are several different methods for determining intrinsic value, the underlying premise is that a company is worth the sum of its discounted cash flows (DCF). The DCF is the value of future expected cash receipts and expenditures at a common date, which is calculated using net present value or internal rate of return. This means a company is worth the combined sum of its future profits, while at the same time being discounted in consideration of the time value of money. This value, as determined by the discounted cash flow analysis or its equivalents, consists of two components: 1. Current value ratios, such as the price-earnings (P/E) ratio and price-book (P/B) ratio. The PE ratio, also called the multiple, gives investors an idea of how much they are paying for a companys earning power. The higher the PE, the more investors are paying, and therefore the more earnings growth they are expecting. High PE stocks EWIT/BKR/AN Page 43

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION those with multiples over 20 are typically young, fast-growing companies. P/B is the ratio of a stocks price to its book value per share. A stock selling at a high PB ratio, such as 3 or higher may represent a popular growth stock with minimal book value. A stock selling below its book value may attract value-oriented investors who think that the companys management may undertake steps, such as selling assets or restructuring the company, to unlock hidden value on the companys balance sheet. 2. Earnings growth which may be reflected in measures like the Prospective Earnings Growth (PEG) ratio. The PEG ratio is a projected one-year annual growth rate, determined by taking the consensus forecast of next years earnings, less the current years earnings, and dividing the result by the current years earnings. 9.3.2.3 Management issues This involves examining perceptions about management and perceptions by management. It includes various qualitative judgments regarding the competence of current and prospective company management, as well as issues related to insider buying, future strategies to increase operations and market share. Most large companies compensate executives through a combination of cash, restricted stock and options. It is a positive sign when members of management are also shareholders. When management makes large purchases of their own stock with private funds, it may indicate that management insiders feel the company is undervalued, or that a favorable company event will occur soon. Another way to get a feel for management capability is to examine how executives performed at other companies in the past. Warren Buffett has several recommendations for investors who want to evaluate a companys management as a precursor to possible investment in that companys stock. For example, he advises that one way to determine if management is doing a good job is to evaluate the company's return on equity, instead of their earnings per share (the portion of a companys profit allocated to each outstanding share of common stock). "The primary test of managerial economic performance is achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share." Buffett notes that because companies usually retain a portion of their earnings, the assets a profitable company owns, should increase annually. This additional cash allows the company to report increased earnings per share even if their performance is deteriorating. He also emphasizes investing in companies with a management team that is committed to controlling costs. Cost-control is reflected by a profit EWIT/BKR/AN Page 44

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION margin exceeding those of competitors. Superior managers "attack costs as vigorously when profits are at record levels as when they are under pressure". Therefore, be wary of companies that have opulent corporate offices, unusually large corporate staffs and other signs of bloat. Additionally, Buffett suggests investing in companies with honest and candid management, and avoiding companies that have a history of using accounting gimmicks to inflate profits or have mislead investors in the past. 9.3.2.4 Technical analysis Involves examining how the company is currently perceived by investors as a whole. Technical analysis is a method of evaluating securities by researching the demand and supply for a stock or asset based on recent trading volume, price studies, as well as the buying and selling behavior of investors. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts or computer programs to identify and project price trends in a market, security, fund, or futures contract. Most analysis is done for the short or intermediate-term, but some technicians also predict long-term cycles based on charts, technical indicators, oscillators and other data. This is widely considered to be unsound and similar to astrological methods of discovery. Examples of common technical indicators include relative strength index, Money Flow Index, Stochastic, MACD and Bollinger bands. Technical indicators do not analyze any part of the fundamentals of a business, like earnings, revenue and profit margins. Technical indicators are used extensively by active traders, as they are designed primarily for analyzing short-term price movements. The most effective uses of technical indicators for a long-term investor are to help him/her to identify good entry and exit points for a stock investment by analyzing the short and long-term trends.

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 9.4 Various Other Tools Used To Evaluate Stocks In addition to security valuation measures importance is given for few other stock measuring techniques they are:9.4.1 Relative Strength Index (RSI) The Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. ( Where:)

9.4.2 BETA ()
The concept of beta for measuring the riskiness of a stock is , if an investor selects stocks with low betas( i.e., (beta <1), then the investor will suffer less in a falling market. Of course, at the same time investor will also stand to gain less than the market average in rising market. In case an investor is prepared to take greater risk then he can choose stock with higher betas (beta >1) in order to gain more than the market average in a rising market. At the same time the investor should be prepared to lose more than the market average, in case the market crashes.

( ( )

9.4.3 Standard Deviation ( )

9.4.4 Co-Efficient Of Variation

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10 ANALYSIS & INTERPRETATION

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10.1 SECURITY VALUATION-AUTOMOBILE SECTOR Ashok Hero PARTICULARS Bajaj auto Tvs motors Leyland Honda
( ) ( ) ( ) ( )

SL NO 01

Tata motors
( )

02
= % = % = % = % = %

03

04
( ) ( ) ( )

05

)
* *

06

07

Intrinsic Value (I.V)

08

09

10

11

12

) ( )

( ( )

( ( )

13

( (

) )

( ( )

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

AUTOMOBILE SECTOR SL NO 14 PARTICULARS
( )

Ashok Leyland 6.43

Bajaj auto

Hero Honda 2.75

Tvs motors

Tata motors

3.64

9.33

5.68

15

-340.93

128.53

149.29

1278.08

61.83

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
1400 1200 1000 800 600 400 200 0 -200 -400 2.5 2 1.5 1 0.5 0

P/S

P/S

Asho Bajaj Hero Tvs Tata k auto Hond moto moto Leyla a rs rs nd CV -340.9 128.53 149.29 1278.1 61.83

INTERPRETATION In terms of P/S ratio which is the best value indicator for relative valuation in automobile sector, Ashok Leyland and Tata Motors are attractive with ratios 1.06 and1.26 respectively. Most attractive stock in terms of co-efficient of variation is Bajaj Auto and Tata Motors. Since the variations with respect to its returns is 128.53 and 61.83 respectively which is less when compared with other stocks.

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10.2 SECURITY VALUATION-BANKING SECTOR SL NO 01 PARTICULARS AXIS
( ) (

ICICI
)

HDFC
( )

KOTAK
( )

ING VYSYA
( )

02
= % = % = % = % = %

03

04
( ) ( ) ( )

05

)
*

06

07

Intrinsic Value (I.V)

08

09

10

11

12

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

BANKING SECTOR SL NO 14 PARTICULARS
( )

AXIS

ICICI

HDFC

KOTAK

ING VYSYA

8.79

6.14

8.86

7.94

7.79

15

2511.43

123.69

388.60

224.29

610.50

* Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
3000 2500 2000 1500 1000 500 0 KOTA ING K VYSYA CV 2511.43 123.69 388.6 224.29 610.5 AXIS ICICI HDFC 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

PBV

AXIS

ICICI

PBV 3.03

HDFC KOTA ING K VYSY A 2.18 4.37 3.05 1.76

INTERPRETATION In terms of PBV ratio which is the best value indicator for relative valuation in banking sector, ICICI bank and ING VYSYA bank are attractive with ratios 2.18 and1.76 respectively. Most attractive stock in terms of co-efficient of variation is ICICI bank and Kotak Mahindra bank. Since the variations with respect to its returns is 123.69 and 224.29 respectively which is less when compared with other stocks

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10.3 SECURITY VALUATION-CEMENT SECTOR ULTRA AMBUJA INDIA PARTICULARS ACC TECH CEMENTS CEMENTS
( ) ( ) ( ) ( )

SL NO 01

BINANI CEMENT
( )

02
= % = % = % = % = %

03

04
( ) ( ) ( )

05

)
*

06

07

Intrinsic Value (I.V)

08

09

10

11

12

) ( )

( ( )

( ( )

( ( )

13

( (

) )

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CEMENT SECTOR SL NO 14 PARTICULARS
( )

ULTRA TECH 8.03

ACC

AMBUJA CEMENTS 5.38

INDIA CEMENTS 5.43

BINANI CEMENT 7.29

5.98

15

166.25

110.33

130.58

1751.61

416.5

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
1800 1600 1400 1200 1000 800 600 400 200 0 3 2.5 2 1.5 1 CV 0.5 0

P/S

P/S

INTERPRETATION In terms of P/S ratio which is the best value indicator for relative valuation in cement sector, India Cements and Binani Cements are attractive with ratios 0.85 and 0.95 respectively. Most attractive stock in terms of co-efficient of variation is ACC and Ambuja Cements. Since the variations with respect to its returns is 110.33 and 130.58 respectively which is less when compared with other stocks.

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10.4 SECURITY VALUATION-DIVERSIFIED SECTOR Bombay PARTICULARS CAMLIN NESCO GRASIM dying
( ) ( ) ( ) ( )

SL NO 01

SINTEX
( )

02
= % = % = % = % = %

03

04
( ) ( ) ( )

05

)
*

06

07

Intrinsic Value (I.V)

08

09

10

11

12

13

( (

) )

( (

) )

( (

) )

( ( )

( ( )

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

DIVERSIFIED SECTOR SL NO 14 PARTICULARS
( )

CAMLIN

NESCO

Bombay dying 11.12

GRASIM

SINTEX

21.11

5.13

4.55

7.83

15

287.05

-173.43

1853.33

89.50

-3728.5

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
2000 1000 0 -1000 -2000 -3000 -4000 CV 25 20 15 10 5 0

PEG

PEG

INTERPRETATION In terms of PEG ratio which is the best value indicator for relative valuation in diversified sector, NESCO and Grasim Industries are attractive with ratios 0.20 and 0.42 respectively. Most attractive stock in terms of co-efficient of variation is Grasim Industries and Camlin. Since the variations with respect to its returns is 89.50 and 287.05 respectively which is less when compared with other stocks.

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10.5 SECURITY VALUATION-ENGINEERING SECTOR ALFA PRAJ PARTICULARS TIL BEML LAVAL Industries
( ) ( ) ( ) ( )

SL NO 01

LARSEN & TOUBRO

( )

02
= % = % = % = % = %

03

04
( ) ( ) ( )

05

)
*

06

07

Intrinsic Value (I.V)

08

09

10

11

12

) ( )

13

( (

) )

( ( )

( ( )

( ( )

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

ENGINEERING SECTOR SL NO 14 PARTICULARS
( )

TIL

BEML

ALFA LAVAL 4.28

PRAJ Industries 10.61

LARSEN & TOUBRO 6.31

10.99

7.73

15

165.26

1301.35

-173.28

456.54

300.48

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
1400 1200 1000 800 600 400 200 0 -200 2.5 2 1.5 1 CV 0.5 0

DYS

DYS

INTERPRETATION In terms of DYS which is the best value indicator for relative valuation in engineering sector, Alfa Laval and Praj Industries are attractive with ratios 2.05% and 1.71% respectively. Most attractive stock in terms of co-efficient of variation is TIL and Larsen and Toubro. Since the variations with respect to its returns is 165.26 and 300.48 respectively which is less when compared with other stocks.

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10.6 SECURITY VALUATION-FINANCE SECTOR Religare JM Reliance PARTICULARS HDFC ltd Enterprises financial capital
( ) ( ) ( ) ( )

SL NO 01

Tata investment
( )

02
= % = % = % = % = %

03

04
( ) ( ) ( )

05

)
*

06

07

Intrinsic Value (I.V)

08

09

10

11

12

) ( )

13

( (

) )

( ( )

( ( )

( ( )

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

FINANCE SECTOR SL NO 14 PARTICULARS
( )

Religare Enterprises 5.35

HDFC ltd

JM financial 11.32

Reliance capital 10.14

Tata investment 6.20

8.34

15

203.27

192.43

1912.16

-379.49

201.82

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices except JM financial which is fairly valued.

CV
2000 1500 1000 500 0 -500 CV 3 2.5 2 1.5 1 0.5 0

PBV

PBV

INTERPRETATION In terms of PBV ratio which is the best value indicator for relative valuation in finance sector, HDFC ltd and JM financial are attractive with ratios 1.21 and1.33 respectively. Most attractive stock in terms of co-efficient of variation is HDFC ltd and Tata Investment Corporation. Since the variations with respect to its returns is 192.43 and 201.82 respectively which is less when compared with other stocks

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10.7 SECURITY VALUATION-FMCG SECTOR DABUR PARTICULARS HUL ITC INDIA
( ) ( ) ( )

SL NO 01

BRITANIA
( )

GODREJ
( )

02
= 85.23% = 28.87% = 57.83% = 29.40 % = 7.91 %

03

04
( ) ( ) ( )

05

)
*

06

07

Intrinsic Value (I.V)

08

09

10

11

12
( ) ( ( ) ( ) ) ( ( ) ) ( ( ) ( ) ( ) )

13

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

FMCG SECTOR SL NO 14 PARTICULARS
( )

HUL

ITC

DABUR INDIA 6.76

BRITANIA

GODREJ

7.64

5.10

4.58

7.57

15

163.25

197.67

1408.33

503.30

2162

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
2500 2000 1500 1000 500 0 CV 25 20 15 10 5 0

PEG

PEG

INTERPRETATION In terms of PEG ratio which is the best value indicator for relative valuation in FMCG sector, Dabur India and Britannia Industries are attractive with ratios 0.58 and 0.53 respectively. Most attractive stock in terms of co-efficient of variation is Hindustan Unilever and ITC. Since the variations with respect to its returns is 163.25 and 197.67 respectively which is less when compared with other stocks

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10.8 SECURITY VALUATION-PHARMACEUTICALS SECTOR SL NO 01 Particulars Ranbaxy
( ) (

Cipla
)

Glenmark
( )

Biocon
( )

Dr. Reddys
( )

02
= 14.45 % = 18.31 % = 7.24 % = 15.87 % = 14.31 %

03

04
( ) ( ) ( )

05

)
* *

06

07

Intrinsic Value (I.V)

08

09

10

11

12

) ( )

( ( )

( ( )

13

( (

) )

( ( )

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

PHARMACEUTICALS SECTOR SL NO 14 PARTICULARS
( )

Ranbaxy

Cipla

Glenmark

Biocon

Dr. Reddys

5.67

7.15

4.43

7.38

7.99

15

94.03

262.67

71.57

111.72

179.23

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
300 250 200 150 100 50 0 CV 12 10 8 6 4 2 0

PEG

PEG

INTERPRETATION In terms of PEG ratio which is the best value indicator for relative valuation in pharmaceuticals sector, Cipla and Biocon are attractive with ratios 1.62 and 2.69 respectively. Most attractive stock in terms of co-efficient of variation is Glenmark Pharma and Ranbaxy Laboratories. Since the variations with respect to its returns is 71.57 and 94.03 respectively which is less when compared with other stocks

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10.9 SECURITY VALUATION-STEEL & ALUMINIUM SECTOR SL NO 01 PARTICULARS
(

SAIL
)

Tata steel
( )

Jsw steel
( )

Hindalco
( )

National aluminum
( )

02
= 20.27 % = 13.58 % = 20.84 % = 6.86 % = 7.83 %

03

04
( ) ( ) ( )

05

)
* *

06

07

Intrinsic Value (I.V)

08

09

10

11

12

13

) ( (

) )

( (

) )

( ( )

( ( )

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

STEEL & ALUMINIUM SECTOR SL NO 14 PARTICULARS
( )

SAIL

Tata steel

Jsw steel

Hindalco

National aluminum 8.62

8.17

14.31

11.99

9.32

15

-429.10

257.65

740.12

100.60

-734.24

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices.

CV
800 600 400 200 0 -200 -400 -600 -800 CV 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

P/S

P/S

INTERPRETATION In terms of P/S ratio which is the best value indicator for relative valuation in steel and aluminum sector, Steel Authority of India and Tata Steel are attractive with ratios 1.64 and 2.21 respectively. Most attractive stock in terms of co-efficient of variation is Hindalco Industries and Tata Steel. Since the variations with respect to its returns is 100.60 and 257.65 respectively which is less when compared with other stocks

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10.10 SECURITY VALUATION-SOFTWARE(IT) SECTOR Tech PARTICULARS TCS INFOSYS WIPRO Mahindra
( ) ( ) ( ) ( )

SL NO 01

HCL Technologies
( )

02
= % = % = % = % = %

03

04
( ) ( ) ( )

05

)
*

06

07

Intrinsic Value (I.V)

08

09

10

11

12

) ( )

( ( )

) ( ( )

( ( )

( ( )

13

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION

SOFTWARE(IT) SECTOR SL NO 14 PARTICULARS
( )

Tech Mahindra 12.96

TCS

INFOSYS

WIPRO

HCL Technologies 7.45

5.52

7.72

19.48

15

1785.12

80.58

169.97

390.22

227.83

*Calculations of SD & CV are shown in annexure ANALYSIS From above table it is clear that all the stocks in this sector are undervalued as their intrinsic value are more than market prices except TCS which is overvalued as its intrinsic value is less than market price.

CV
1800 1600 1400 1200 1000 800 600 400 200 0 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

DYS

CV

DYS

INTERPRETATION In terms of DYS which is the best value indicator for relative valuation in software sector, TCS and Wipro are attractive with ratios 1.79% and 1.30% respectively. Most attractive stock in terms of co-efficient of variation is TCS and Infosys Technologies. Since the variations with respect to its returns is 80.58 and 169.97 respectively which is less when compared with other stocks

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10.11 PORTFOLIO CONSTRUCTION

1) Based on relative valuation measures best two scrips in each sector has been selected to construct portfolio and they are:10.11.1 Portfolio Construction Based On Relative Valuation SL.NO 01 SECTOR AUTOMOBILE SECTOR Tata Motors ICICI Bank 02 BANKS - PRIVATE SECTOR ING Vysya Bank 03 CEMENT SECTOR India Cements Binani Cement NESCO 04 DIVERSIFIED SECTOR Grasim Industries Alfa Laval (India) 05 ENGINEERING SECTOR Praj Industries 06 FINANCE SECTOR HDFC JM Financial 07 FMCG SECTOR Dabur India Britannia Industries Cipla 08 PHARMACEUTICALS SECTOR Biocon Steel Authority of India 09 STEEL & ALUMINIUM SECTOR Tata Steel 10 SOFTWARE SECTOR Tata Consultancy Services Wipro SCRIPS Ashok Leyland

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PORTFOLIO CONSTRUCTION
2) Based on co-efficient of variation best two scrips in each sector has been selected to construct portfolio 10.11.2 Portfolio Construction Based On Co-Efficient Of Variation SL.NO 01 SECTOR AUTOMOBILE SECTOR Bajaj Auto ICICI Bank 02 BANKS - PRIVATE SECTOR Kotak Mahindra Bank 03 CEMENT SECTOR ACC Ambuja Cements Grasim Industries 04 DIVERSIFIED SECTOR Camlin TIL 05 ENGINEERING SECTOR Larsen and Toubro HDFC 06 FINANCE SECTOR Tata Investment Corporation 07 FMCG SECTOR Hindustan Unilever ITC Glenmark Pharma 08 PHARMACEUTICALS SECTOR Ranbaxy Laboratories Hindalco Industries 09 STEEL & ALUMINIUM SECTOR Tata Steel Tata Consultancy Services Infosys Technologies SCRIPS Tata Motors

10

SOFTWARE SECTOR

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PORTFOLIO CONSTRUCTION
10.11.3 Portfolio Construction Based On Under Value Ratio SLNO SCRIP SECTOR UNDER VALUE RATIO 01 AUTOMOBILE

BAJAJ AUTO

38.32

02

DABUR INDIA

FMCG

34.67

03

NESCO

DIVERSIFIED

32.74

04

BINANI CEMENT

CEMENT

31.29

05

HUL

FMCG

30.37

06

GRASIM INDUSTRY

DIVERSIFIED

25.46

07

TECH MAHINDRA

SOFTWARE

24.41

08

WIPRO

SOFTWARE

22.75

09

ULTRATECH

CEMENT

22.09

10

ALFA LAVAL

ENGINEERING

20.64

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SLNO

SCRIP

SECTOR

UNDER VALUE RATIO

11

TIL

ENGINEERING

20.59

12

INFOSYS TECH

SOFTWARE

19.83

13

L&T

ENGINEERING

19.80

14

ACC

CEMENT

19.49

15

PRAJ INDUSTRIES

ENGINEERING

16.37

16

SAIL

STEEL & ALUMINIUM

16.23

17

HCL TECH

SOFTWARE

15.91

18

JSW STEEL

STEEL & ALUMINIUM

15.67

19

CIPLA

PHARMACEUTICALS

15.60

20

CAMLIN

DIVERSIFIED

14.53

*calculations of undervalued ratios are shown in annexure

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 10.12 PORTFOLIO EVALUATION

10.12.1 PORTFOLIO EVALUATION-RELATIVE VALUATION
STOCKS IV-MPS DIFFERENCE WEIGHT AGE AMOUNT MPS1 SHARES MPS2 (1/4/11) AMOUNT

ASHOK LEYLAND TATA MOTORS ICICI BANK ING VYSYA BANK INDIA CEMENTS BINANI CEMENT NESCO GRASIM INDUSTRIES ALFA LAVAL (INDIA) PRAJ INDUSTRIES HDFC JM FINANCIAL DABUR INDIA BRITANNIA CIPLA BIOCON SAIL TATASTEEL TCS WIPRO TOTAL 625.84 0.37029 37029.32 2458.15 15 2529.9 38110.16 31.07 0.01838 1953.00 325.5 6 319.25 1915.50 43.41 52.51 0.02568 0.03107 2357.20 3031.65 1178.6 1010.55 2 3 1242.9 1102.7 2485.80 3308.10 5.77 0.00341 355.50 59.25 6 57.9 347.40

10.4

0.00615

610.20

101.7

98.15

588.90

27.1 165.37

0.01603 0.09785

1645.40 9784.51

86.6 505.05

19 19

87.75 497.95

1667.25 9646.96

251.12

0.14858

14858.12

1216.6

12

1516.7

18523.18

13.77 76.11 0 34.93 52.66 52.97 43.11 26.18 72.46 0 105.34 1690.12

0.00815 0.04503 0.00000 0.02067 0.03116 0.03134 0.02551 0.01549 0.04287 0.00000 0.06233 1.0000

814.74 4503.23 0.00 2066.72 3115.76 3134.10 2550.71 1549.00 4287.27 0.00 6232.69 99879.11

84.1 641.55 29.3 100.75 367.7 339.55 379.95 161.35 621.7 1118.7 463.05

10 7 0 21 8 9 7 10 7 0 13

74.35 706.4 25.1 97.1 372.75 320.8 356.2 169.9 625.65 1179.65 475.85

720.28 4958.43 0.00 1991.84 3158.55 2961.03 2391.27 1631.08 4314.51 0.00 6404.98 105125.23

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RETURNS

25

20

15

RETURNS

10

0 PORTFOLIO SENSEX

INTERPRETATION From above table it is clear that return on this Portfolio is 21.30% during the period January 2011 to March 2011.Portfolio has outperformed Sensex in terms of returns.

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10.12.2 PORTFOLIO EVALUATION-CO-EFFICIENT OF VARIATION

STOCKS IV-MPS DIFFERENCE WEIGHT AGE AMOUNT MPS1 SHARES MPS2 (1/4/11) AMOUNT

TATA MOTORS BAJAJ AUTO ICICI BANK KOTAK MAHINDRA ACC AMBUJA CEMENTS GRASIM INDUSTRIES CAMLIN 625.84 0.21587 21587.39 2458.15 9 2529.9 22217.50 18.22 196 16.82 0.00628 0.06761 0.00580 628.47 6760.72 580.18 398.05 1005.65 127.8 2 7 5 450.9 1091.95 146.8 711.91 7340.89 666.44 43.41 477.79 52.51 0.01497 0.16481 0.01811 1497.36 16480.63 1811.25 1178.6 1246.9 1010.55 1 13 2 1242.9 1459.5 1102.7 1579.05 19290.63 1976.42

7.14

0.00246

246.28

49.15

53.6

268.58

TIL L&T HDFC

TATA INVESTMENT

134.12 338.47 76.11 42.77 91.9 2.87 23.34 30.91 13.55 72.46 0 634.87 2899.1

0.04626 0.11675 0.02625 0.01475 0.03170 0.00099 0.00805 0.01066 0.00467 0.02499 0.00000 0.21899 1.00000

4626.26 11675.00 2625.30 1475.29 3169.95 99.00 805.08 1066.19 467.39 2499.40 0.00 21898.87 100000.00

651.4 1709.35 641.55 534.45 302.6 170.25 347.55 567.5 229.3 621.7 1118.7 3201.95

7 7 4 3 10 1 2 2 2 4 0 7

515.25 1650.95 706.4 509.85 284.05 182.7 292.4 450.7 213.7 625.65 1179.65 3218.2

3659.32 11276.13 2890.67 1407.38 2975.62 106.24 677.33 846.75 435.59 2515.28 0.00 22010.00 102851.72

HINDUSTAN UNILEVER ITC GLENMARK RANBAXY HINDALCO INDUSTRIES TATA STEEL TCS INFOSYS TOTAL

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RETURNS

12.1 12 11.9 11.8 RETURNS 11.7 11.6 11.5 11.4 11.3 PORTFOLIO SENSEX

INTERPRETATION From above table it is clear that return on this Portfolio is 11.57% during the period January 2011 to March 2011.Portfolio is slightly below Sensex in terms of returns.

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10.12.3 PORTFOLIO EVALUATION-UNDERVALUED RATIO

STOCKS IV-MPS DIFFERENCE WEIGHT AGE AMOUNT MPS1 SHARES MPS2 (1/4/11) AMOUNT

BAJAJ AUTO DABUR INDIA NESCO BINANI CEMENT HUL GRASIM INDUSTRY TECH MAHINDRA WIPRO

477.79 34.93 165.37 27.1 91.9 625.84 165.31

0.12573 0.00919 0.04352 0.00713 0.02418 0.16469 0.04350

12573.42 919.21 4351.84 713.16 2418.42 16469.47 4350.26

1246.9 100.75 505.05 86.6 302.6 2458.15 677.3

10 9 9 8 8 7 6

1459.5 97.1 497.95 87.75 284.05 2529.9 690.75

14717.23 885.91 4290.66 722.63 2270.17 16950.19 4436.65

105.34

0.02772

2772.11

463.05

475.85

2848.73

ULTRATECH ALFA LAVAL TIL INFOSYS TECH L&T ACC PRAJ INDUSTRIES SAIL HCL TECH JSW STEEL CIPLA CAMLIN TOTAL

225.26 251.12 134.12

0.05928 0.06608 0.03529

5927.89 6608.42 3529.47

1019.8 1216.6 651.4

6 5 5

1109.2 1516.7 515.25

6447.56 8238.53 2791.77

634.87 338.47 196 13.77 26.18 74.68 151.84 52.97 7.14 3800

0.16707 0.08907 0.05158 0.00362 0.00689 0.01965 0.03996 0.01394 0.00188 1.00000

16707.11 8907.11 5157.89 362.37 688.95 1965.26 3995.79 1393.95 187.89 100000.00

3201.95 1709.35 1005.65 84.1 161.35 469.35 969.2 339.55 49.15

5 5 5 4 4 4 4 4 4

3218.2 1650.95 1091.95 74.35 169.9 467.05 949.6 320.8 53.6

16791.89 8602.79 5600.52 320.36 725.45 1955.63 3914.98 1316.97 204.91 104033.55

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( )

RETURNS

18 16 14 12 10 8 6 4 2 0 PORTFOLIO SENSEX RETURNS

INTERPRETATION From above table it is clear that return on this Portfolio is 16.36% during the period January 2011 to March 2011.Portfolio has outperformed Sensex in terms of returns.

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11.FINDINGS
Now at final following facts emerges from the study on portfolio construction through security valuation at INDBANK MERCHANT BANKING SERVICES LIMITED

1) AUTOMOBILE SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of P/S ratio which is the best value indicator for relative valuation in automobile sector, Ashok Leyland and Tata Motors are attractive with ratios 1.06 and1.26 respectively. Most attractive stock in terms of co-efficient of variation is Bajaj Auto and Tata Motors. Since the variations with respect to its returns is 128.53 and 61.83 respectively which is less when compared with other stocks.

2) BANKS - PRIVATE SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of PBV ratio which is the best value indicator for relative valuation in banking sector, ICICI bank and ING VYSYA bank are attractive with ratios 2.18 and1.76 respectively. Most attractive stock in terms of co-efficient of variation is ICICI bank and Kotak Mahindra bank. Since the variations with respect to its returns is 123.69 and 224.29 respectively which is less when compared with other stocks

3) CEMENT SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of P/S ratio which is the best value indicator for relative valuation in cement sector, India Cements and Binani Cements are attractive with ratios 0.85 and 0.95 respectively. Most attractive stock in terms of co-efficient of variation is ACC and Ambuja Cements. Since the variations with respect to its returns is 110.33 and 130.58 respectively which is less when compared with other stocks. EWIT/BKR/AN Page 78

PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 4) DIVERSIFIED SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of PEG ratio which is the best value indicator for relative valuation in diversified sector, NESCO and Grasim Industries are attractive with ratios 0.20 and 0.42 respectively. Most attractive stock in terms of co-efficient of variation is Grasim Industries and Camlin. Since the variations with respect to its returns is 89.50 and 287.05 respectively which is less when compared with other stocks.

5) ENGINEERING SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of DYS which is the best value indicator for relative valuation in engineering sector, Alfa Laval and Praj Industries are attractive with ratios 2.05% and 1.71% respectively. Most attractive stock in terms of co-efficient of variation is TIL and Larsen and Toubro. Since the variations with respect to its returns is 165.26 and 300.48 respectively which is less when compared with other stocks.

6) FINANCE SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices except JM financial which is fairly valued. In terms of PBV ratio which is the best value indicator for relative valuation in finance sector, HDFC ltd and JM financial are attractive with ratios 1.21 and1.33 respectively. Most attractive stock in terms of co-efficient of variation is HDFC ltd and Tata Investment Corporation. Since the variations with respect to its returns is 192.43 and 201.82 respectively which is less when compared with other stocks

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 7) FMCG SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of PEG ratio which is the best value indicator for relative valuation in FMCG sector, Dabur India and Britannia Industries are attractive with ratios 0.58 and 0.53 respectively. Most attractive stock in terms of co-efficient of variation is Hindustan Unilever and ITC. Since the variations with respect to its returns is 163.25 and 197.67 respectively which is less when compared with other stocks

8) PHARMACEUTICALS SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of PEG ratio which is the best value indicator for relative valuation in pharmaceuticals sector, Cipla and Biocon are attractive with ratios 1.62 and 2.69 respectively. Most attractive stock in terms of co-efficient of variation is Glenmark Pharma and Ranbaxy Laboratories. Since the variations with respect to its returns is 71.57 and 94.03 respectively which is less when compared with other stocks

9) STEEL & ALUMINIUM SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices. In terms of P/S ratio which is the best value indicator for relative valuation in steel and aluminum sector, Steel Authority of India and Tata Steel are attractive with ratios 1.64 and 2.21 respectively. Most attractive stock in terms of co-efficient of variation is Hindalco Industries and Tata Steel. Since the variations with respect to its returns is 100.60 and 257.65 respectively which is less when compared with other stocks

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PORTFOLIO CONSTRUCTION THROUGH SECURITY VALUATION 10) SOFTWARE SECTOR All the stocks in this sector are undervalued as their intrinsic value are more than market prices except TCS which is overvalued as its intrinsic value is less than market price. In terms of DYS which is the best value indicator for relative valuation in software sector, TCS and Wipro are attractive with ratios 1.79% and 1.30% respectively. Most attractive stock in terms of co-efficient of variation is TCS and Infosys Technologies. Since the variations with respect to its returns is 80.58 and 169.97 respectively which is less when compared with other stocks 11) Based on relative valuation measures best two scrips in each sector has been selected and portfolio of 20 stocks have been constructed. 12) Based on co-efficient of variation best two scrips in each sector has been selected and portfolio of 20 stocks have been constructed. 13) Based on undervalued ratio best 20 stocks among the 50 stocks have been selected and portfolio is constructed for investment. 14) Return on Portfolio based on relative valuation is 21.30% during the period January 2011 to March 2011.Portfolio has outperformed Sensex in terms of returns. 15) Return on Portfolio based on co-efficient of variation is 11.57% during the period January 2011 to March 2011.Portfolio is slightly below Sensex in terms of returns. 16) Return on Portfolio based on undervalued ratio is 16.36% during the period January 2011 to March 2011.Portfolio has outperformed Sensex in terms of returns.

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12. SUGGESTIONS
Company uses various valuation methods. Company can concentrate more on P/S ratio for automobile, cement, steel & aluminum sectors. PBV ratio for banking and finance sector.PEG ratio for diversified, FMCG, pharmaceuticals sector. DYS for engineering and software sectors. Company can use IV-MPS as basis for giving weights to scrips in risky and low and moderate risk portfolio. It is difficult to include qualitative information on company/scrips in value terms so one can use it as elimination tool rather than selecting tool while choosing scrips for portfolio. Investor should clearly spell out their risk appetite and investment objective before investing. They can properly get assessed their risk appetite through risk assessment questionnaire. Investor should base their investment decision on quantitative analysis unless they have proper means to discount qualitative information into value of stocks. Investors should generally avoid stocks with P/E above 50, high standard deviation, no P/S history. Investor should invest across sectors should build portfolio of 20 stocks to avoid risk.

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13. CONCLUSION
The project entitled PORTFOLIO CONSTRUCTION THROUGH SECURITY

VALUATION provides a good basis for how to evaluate various securities and build winnable portfolio to reduce risk and maximize returns. It can be concluded that in security valuation one should in addition to looking at intrinsic value of securities should also consider various valuation ratios like PRICE TO SALES RATIO (P/S), PRICE EARNING TO GROWTH RATIO (PEG), DIVIDEND YIELD PER SHARE (DYS), PRICE PER BOOK VALUE (PBV) AND BOOK VALUE PER SHARE (BVS). These valuation ratios are used as basis while picking securities in various sectors in the project. This project work is therefore believed to be guide to those seeking to develop their own portfolios and provide basis to how to build winning portfolios.

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