CHAPTER 1

INTRODUCTION

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 INTRODUCTION

Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't
really investing if you aren't performing fundamental analysis. Because the subject is so broad,
however, it's tough to know where to start. There are an endless number of investment strategies
that are very different from each other, yet almost all use the fundamentals. The biggest part of
fundamental analysis involves delving into the financial statements. Also known as quantitative
analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial
aspects of a company. Fundamental analysts look at this information to gain insight on a
company's future performance. A good part of this tutorial will be spent learning about the
balance sheet, income statement, cash flow statement and how they all fit together.

MEANING

In this section we are going to review the basics of fundamental analysis, examine how it can be
broken down into quantitative and qualitative factors, introduce the subject of intrinsic value and
conclude with some of the downfalls of using this technique. The Very Basics When talking
about stocks, fundamental analysis is a technique that attempts to determine a security's value by
focusing on underlying factors that affect a company's actual business and its future prospects.
On a broader scope, you can perform fundamental analysis on industries or the economy as a
whole. The term simply refers to the analysis of the economic well-being of a financial entity as
opposed to only its price movements.
Note: The term fundamental analysis is used most often in the context of stocks, but you can
perform fundamental analysis on any security, from a bond to a derivative. As long as you look
at the economic fundamentals, you are doing fundamental analysis. For the purpose of this
tutorial, fundamental analysis always is referred to in the context of stocks.

Fundamental Analysis: What Is It?

The Very Basics When talking about stocks, fundamental analysis is a technique that attempts to
determine a security's value by focusing on underlying factors that affect a company's actual
business and its future prospects. On a broader scope, you can perform fundamental analysis on
industries or the economy as a whole. The term simply refers to the analysis of the economic
well-being of a financial entity as opposed to only its price movements. Fundamental analysis
serves to answer questions, such as:
• Is the company's revenue growing?
• Is it actually making a profit?
• Is it in a strong-enough position to beat out its competitors in the future?
• Is it able to repay its debts?
• Is management trying to "cook the books"?

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Of course, these are very involved questions, and there are literally hundreds of others you might
have about a company. It all really boils down to one question: Is the company's stock a good
investment? Think of fundamental analysis as a toolbox to help you answer this question. Note:
The term fundamental analysis is used most often in the context of stocks, but you can perform
fundamental analysis on any security, from a bond to a derivative. As long as you look at the
economic fundamentals, you are doing fundamental analysis.

Fundamental analysis is the process of evaluating security for creating forecasts about its future
price. Fundamental analysis includes estimations based on many components related to stock,
including:

• The global industry

• Company financial statements
• Company press releases
• News releases
• Domestic political conditions
• Trade agreements and external politics
• Competitor analysis

If some fundamental indicators of a company show data that has a bad impact, this is likely to
negatively reflect the share price. On the other hand, if there’s a positive data release, like an
outstanding earnings report, for example, this can boost the stock price of the respective
company.
Here are some examples of key performance indices that are commonly used to analyze stocks
fundamentally:

• Earnings per share (EPS)

• Price-to-earnings (P/E) ratio
• Price-to-book (P/B) ratio
• Return on equity
• Beta

Each of these key performance indices gives information that is helpful for conducting a price
analysis. You can buy the stock on the assumption that the price will increase if your analysis
shows that the price of the stock is about to increase.

A Detailed Example of Fundamental Analysis

There’s no right way to do fundamental analysis, as stock trading is not as accurate as a math
problem. The same information in different industries and different stocks will never mean the
exact same thing. Here are a few of the most important fundamental indicators.

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Earnings Per Share (EPS)

The earnings per share relate to the portion of profit allocated to each of the company’s
shares. The EPS is an indication of the company’s profitability. The higher the earnings per
share, the better it is for the investor. A higher EPS is a symbol of a healthy company.
At the same time, if the earnings per share are unusually high, this could mean one of the
following things. Earnings can decrease and get back to normal. The price of the stock can
increase to normalize the stock price compared to the earnings.

Price-to-Earnings Ratio (P/E Ratio)

The price-to-earnings (P/E) ratio shows the company payouts compared to the price of the stock.
In other words, the P/E ratio shows whether a share of stock pays well compared to its price. We
calculate the P/E ratio by dividing the price per share by the earnings per share.
For example, imagine that the price per share is $30 and the stock pays $2 earnings per share:

30 / 2 = 15
The lower the P/E ratio, the higher the earnings compared to the stock price.
At first sight, the lower the P/E ratio, the more attractive the stock. But if we think carefully we
will realize that unusually low P/E ratio could show extra potential.
If the P/E ratio is too low, below 10 for example, this means that the price per share is low
compared to the earnings. This might mean that the stock is undervalued in price and it can
increase its price. The opposite is in force for the high P/E ratio.

Price-to-Book Ratio (P/B Ratio)

The price-to-book ratio is an indication that shows how much the stock worth compared to the
book value of the company. If a company worth $10 million and has 500,000 shares outstanding,
it will have a book value per share of:
10,000,000 / 500,000 = $20 book value per share
If the stock trades at $80 per share, then the price-to-book ratio is:
80 / 20 = 4 P/B ratio
The P/B ratio = price per share divided by the book value per share.
If the P/B ratio is more than 1, this means investors believe that the stock will grow at a faster
pace, which is the reason why its price is higher than its book value. In some cases, you can even
see P/B ratios of 100 and more. This could be a common parameter for the growth stocks.

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Return on Equity (ROE)

The return on equity is a measurement that determines how efficient a company is when using
the shareholders’ equity. You calculate the ROE by dividing the shareholders’ equity by the
company’s net income. If a company has generated $5 million this year and the shareholder
equity is $50 million, this means the ROE is
50,000,000 / 5,000,000 = 10%
Note that you should calculate the ROE result as a percentage.
The higher the ROE, the more efficient the company is. If a company generates a less than $5
million income this year (say $2 million) with the same shareholders’ equity, this means it is less
efficient:
50,000,000 / 2,000,000 = 4%
Here, the company has a lower ROE with the same shareholder’s equity, meaning that it is less
efficient

Beta (β)

The beta gives information about the stock price’s correlation to the industry it operates in. This
happens by comparing the stock to a benchmark index. The beta usually varies between -1 and 1.
Sometimes values can go much lower than -1 or much higher than 1.
Values above 0 mean that the stock correlates to the benchmark index. The higher the beta, the
higher the correlation. But the higher beta also means that the volatility is higher as well,
meaning that the risk of the asset increases.
Values below 0 mean that the stock is inversely correlated to the benchmark index. It won’t be
as a mirror image, but the ticks are likely to match. The lower the beta, the higher the inverse
correlation. However, the lower the beta, the lower the volatility.

Fundamental Analysis (FA) is a holistic approach to study a business. When an investor wishes
to invest in a business for the long term (say 3 – 5 years) it becomes extremely essential to
understand the business from various perspectives. It is critical for an investor to separate the
daily short term noise in the stock prices and concentrate on the underlying business
performance. Over the long term, the stock prices of a fundamentally strong company tend to
appreciate, thereby creating wealth for its investors.
We have many such examples in the Indian market. To name a few, one can think of companies
such as Infosys Limited, TCS Limited, Page Industries, Eicher Motors, Bosch India, Nestle
India, TTK Prestige etc. Each of these companies have delivered on an average over 20%
compounded annual growth return (CAGR) year on year for over 10 years. To give you a
perspective, at a 20% CAGR the investor would double his money in roughly about 3.5 years.
Higher the CAGR faster is the wealth creation process. Some companies such as Bosch India
Limited have delivered close to 30% CAGR. Therefore, you can imagine the magnitude, and the
speed at which wealth is created if one would invest in fundamentally strong companies
Fundamental analysis (FA) is a method of measuring a security's intrinsic value by examining
related economic and financial factors. Fundamental analysts study anything that can affect the

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security's value, from macroeconomic factors such as the state of the economy and industry
conditions to microeconomic factors like the effectiveness of the company's management.
The end goal is to arrive at a number that an investor can compare with a security's current price
in order to see whether the security is undervalued or overvalued.
This method of stock analysis is considered to be in contrast to technical analysis, which
forecasts the direction of prices through an analysis of historical market data such as price and
volume

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Fundamentals: Quantitative and Qualitative

You could define fundamental analysis as "researching the fundamentals", but that doesn't tell
you a whole lot unless you know what fundamentals are. As we mentioned in the introduction,
the big problem with defining fundamentals is that it can include anything related to the
economic well-being of a company. Obvious items include things like revenue and profit, but
fundamentals also include everything from a company's market share to the quality of its
management.
The various fundamental factors can be grouped into two categories: quantitative and qualitative.
The financial meaning of these terms isn't all that different from their regular definitions. Here is
how the MSN Encarta dictionary defines the terms:
• Quantitative – capable of being measured or expressed in numerical terms.
• Qualitative – related to or based on the quality or character of something, often as opposed to
its size or quantity. In our context, quantitative fundamentals are numeric, measurable
characteristics about a business.
It's easy to see how the biggest source of quantitative data is the financial statements. You can
measure revenue, profit, assets and more with great precision. Turning to qualitative
fundamentals, these are the less tangible factors surrounding a business - things such as the
quality of a company's board members and key executives, its brandname recognition, patents or
proprietary technology

Quantitative Meets Qualitative

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many
analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the
Coca-Cola Company, for example. When examining its stock, an analyst might look at the
stock's annual dividend payout, earnings per share, P/E ratio and many other quantitative factors.
However, no analysis of Coca-Cola would be complete without taking into account its brand
recognition. Anybody can start a company that sells sugar and water, but few companies on earth
are recognized by billions of people.
For example, let's say that a company's stock was trading at $20. After doing extensive
homework on the company, you determine that it really is worth $25. In other words, you
determine the intrinsic value of the firm to be $25. This is clearly relevant because an investor
wants to buy stocks that are trading at prices significantly below their estimated intrinsic value.
This leads us to one of the second major assumptions of fundamental analysis: in the long run,
the stock market will reflect the fundamentals. There is no point in buying a stock based on
intrinsic value if the price never reflected that value. Nobody knows how long "the long run"
really is. It could be days or years.
This is what fundamental analysis is all about. By focusing on a particular business, an investor
can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a
discount. If all goes well, the investment will pay off over time as the market catches up to the
fundamentals.
The big unknowns are:
1) You don't know if your estimate of intrinsic value is correct; and
2) You don't know how long it will take for the intrinsic value to be reflected in the marketplace.

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Tools of Fundamental analysis

The tools required for fundamental analysis are extremely basic, most of which are available for
free. Specifically you would need the following:

Annual report of the company

All the information that you need for FA is available in the annual report. You can download the
annual report from the company’s website for free

Industry related data

You will need industry data to see how the company under consideration is performing with
respect to the industry. Basic data is available for free, and is usually published in the industry’s
association website

Access to news

Daily News helps you stay updated on latest developments happening both in the industry and
the company you are interested in. A good business news paper or services such as Google Alert
can help you stay abreast of the latest news

MS Excel

Although not free, MS Excel can be extremely helpful in fundamental calculations With just
these four tools, one can develop fundamental analysis that can rival institutional research. You
can believe me when I say that you don’t need any other tool to do good fundamental research.
In fact even at the institutional level the objective is to keep the research simple and logical.

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Key features

• Fundamental Analysis is used to make long term investments

• Investment in a company with good fundamentals creates wealth

• Using Fundamental Analysis one can separate out an investment grade company from a junk
company

• All investment grade companies exhibit few common traits. Likewise all junk companies
exhibit common traits

• Fundamental analysis helps the analysts identify these traits

• Both Technical analysis and fundamental analysis should coexist as a part of your market
strategy

• To become a fundamental analyst, one does not require any special skill. Common sense, basic
mathematics, and a bit of business sense is all that is required

• A core satellite approach to the capital allocation is a prudent market strategy

• The tools required for FA are generally very basic, most of these tools are available for free.

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Criticisms of Fundamental Analysis

The biggest criticisms of fundamental analysis come primarily from two groups: proponents of
technical analysis and believers of the "efficient market hypothesis".
Put simply, technical analysts base their investments (or, more precisely, their trades) solely on
the price and volume movements of securities. Using charts and a number of other tools, they
trade on momentum, not caring about the fundamentals. While it is possible to use both
techniques in combination, one of the basic tenets of technical analysis is that the market
discounts everything. Accordingly, all news about a company already is priced into a stock, and
therefore a stock's price movements give more insight than the underlying fundamental factors of
the business itself.
Followers of the efficient market hypothesis, however, are usually in disagreement with both
fundamental and technical analysts. The efficient market hypothesis contends that it is essentially
impossible to produce market-beating returns in the long run, through either fundamental or
technical analysis. The rationale for this argument is that, since the market efficiently prices all
stocks on an ongoing basis, any opportunities for excess returns derived from fundamental (or
technical) analysis would be almost immediately whittled away by the market's many
participants, making it impossible for anyone to meaningfully outperform the market over the
long term.

The Concept of Intrinsic Value

Before we get any further, we have to address the subject of intrinsic value. One of the primary
assumptions of fundamental analysis is that the price on the stock market does not fully reflect a
stock's "real" value. After all, why would you be doing price analysis if the stock market were
always correct? In financial jargon, this true value is known as the intrinsic value

Fundamental Analysis: Qualitative Factors - The Company

Fundamental analysis seeks to determine the intrinsic value of a company's stock. But since
qualitative factors, by definition, represent aspects of a company's business that are difficult or
impossible to quantify, incorporating that kind of information into a pricing evaluation can be
quite difficult. On the flip side, as we've demonstrated, you can't ignore the less tangible
characteristics of a company. In this section we are going to highlight some of the company-
specific qualitative factors that you should be aware of.

Business Model

Even before an investor looks at a company's financial statements or does any research, one of
the most important questions that should be asked is: What exactly does the company do? This is
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referred to as a company's business model – it's how a company makes money. You can get a
good overview of a company's business model by checking out its website or reading the first
part of its 10-K filing. Sometimes business models are easy to understand. Take McDonalds, for
instance, which sells hamburgers, fries, soft drinks, salads and whatever other new special they
are promoting at the time. It's a simple model, easy enough for anybody to understand. Other
times, you'd be surprised how complicated it can get. Boston Chicken Inc. is a prime example of
this. Back in the early '90s its stock was the darling of Wall Street. At one point the

company's CEO bragged that they were the "first new fast-food restaurant to reach $1 billion in
sales since 1969". The problem is, they didn't make money by selling chicken. Rather, they made
their money from royalty fees and high-interest loans to franchisees. Boston Chicken was really
nothing more than a big franchisor. On top of this, management was aggressive with how it
recognized its revenue. As soon as it was revealed that all the franchisees were losing money, the
house of cards collapsed and the company went bankrupt.
At the very least, you should understand the business model of any company you invest in. The
"Oracle of Omaha", Warren Buffett, rarely invests in tech stocks because most of the time he
doesn't understand them. This is not to say the technology sector is bad, but it's not Buffett's area
of expertise; he doesn't feel comfortable investing in this area. Similarly, unless you understand a
company's business model, you don't know what the drivers are for future growth, and you leave
yourself vulnerable to being blindsided like shareholders of Boston Chicken were.

Competitive Advantage

Another business consideration for investors is competitive advantage. A company's long term
success is driven largely by its ability to maintain a competitive advantage - and keep it.
Powerful competitive advantages, such as Coca Cola's brand name and Microsoft's domination
of the personal computer operating system, create a moat around a business allowing it to keep
competitors at bay and enjoy growth and profits. When a company can achieve competitive
advantage, its shareholders can be well rewarded for decades
Harvard Business School professor Michael Porter distinguishes between strategic positionning
and operational effectiveness. Operational effectiveness means a company is better than rivals at
similar activities while competitive advantage means a company is performing better than rivals
by doing different activities or performing similar activities in different ways. Investors should
know that few companies are able to compete successfully for long if they are doing the same
things as their competitors.
Professor Porter argues that, in general, sustainable competitive advantage gained by:
• A unique competitive position • Clear trade-offs and choices vis-à-vis competitors
• Activities tailored to the company's strategy
• A high degree of fit across activities (it is the activity system, not the parts that ensure
sustainability)
• A high degree of operational effectiveness

Management

Just as an army needs a general to lead it to victory, a company relies upon management to steer
it towards financial success. Some believe that management is the most important aspect for

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 investing in a company. It makes sense - even the best business model is doomed if the leaders of
the company fail to properly execute the plan.
So how does an average investor go about evaluating the management of a company?

This is one of the areas in which individuals are truly at a disadvantage compared to
professional investors. You can't set up a meeting with management if you want to invest a few
thousand dollars. On the other hand, if you are a fund manager interested in investing millions of
dollars, there is a good chance you can schedule a face-to-face meeting with the upper brass of
the firm.
Every public company has a corporate information section on its website. Usually there will be a
quick biography on each executive with their employment history, educational background and
any applicable achievements. Don't expect to find anything useful here. Let's be honest: We're
looking for dirt, and no company is going to put negative information on its corporate website.

Instead, here are a few ways for you to get a feel for management:
1. Conference Calls

The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) host quarterly conference
calls. (Sometimes you'll get other executives as well.) The first portion of the call is management
basically reading off the financial results. What is really interesting is the question-and-answer
portion of the call. This is when the line is open for analysts to call in and ask management direct
questions. Answers here can be revealing about the company, but more importantly, listen for
candor. Do they avoid questions, like politicians, or do they provide forthright answers?

2. Management Discussion and Analysis (MD&A)

The Management Discussion and Analysis is found at the beginning of the annual report
(discussed in more detail later in this tutorial). In theory, the MD&A is supposed to be frank
commentary on the management's outlook. Sometimes the content is worthwhile, other times its
boilerplate. One tip is to compare what management said in past years with what they are saying
now. Is it the same material rehashed? Have strategies actually been implemented? If possible,
sit down and read the last five years of MD&as; it can be illuminating.

3. Ownership and Insider Sales

Just about any large company will compensate executives with a combination of cash, restricted
stock and options. While there are problems with stock options (See Putting Management under
the Microscope), it is a positive sign that members of management are also shareholders. The
ideal situation is when the founder of the company is still in charge. Examples include Bill Gates
(in the '80s and '90s), Michael Dell and Warren Buffett. When you know that a majority of
management's wealth is in the stock, you can have confidence that they will do the right thing.
As well, it's worth checking out if management has been selling its stock. This has to be filed
with the Securities and Exchange Commission (SEC), so it's publicly available information. Talk
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is cheap - think twice if you see management unloading all of its shares while saying something
else in the media.

4. Past Performance

Another good way to get a feel for management capability is to check and see how executives
have done at other companies in the past. You can normally find biographies of top executives
on company web sites. Identify the companies they worked at in the past and do a search on
those companies and their performance.

Corporate Governance

Corporate governance describes the policies in place within an organization denoting the
relationships and responsibilities between management, directors and stakeholders. These
policies are defined and determined in the company charter and its bylaws, along with corporate
laws and regulations. The purpose of corporate governance policies is to ensure that proper
checks and balances are in place, making it more difficult for anyone to conduct unethical and
illegal activities.
Good corporate governance is a situation in which a company complies with all of its
governance policies and applicable government regulations (such as the Sarbanes-Oxley Act of
2002) in order to look out for the interests of the company's investors and other stakeholders.
Although, there are companies and organizations (such as Standard & Poor's) that attempt to
quantitatively assess companies on how well their corporate governance policies serve
stakeholders, most of these reports are quite expensive for the average investor to purchase.
Fortunately, corporate governance policies typically cover a few general areas: structure of the
board of directors, stakeholder rights and financial and information transparency. With a little
research and the right questions in mind, investors can get a good idea about a company's
corporate governance.

Financial and Information Transparency

This aspect of governance relates to the quality and timeliness of a company's financial
disclosures and operational happenings. Sufficient transparency implies that a company's
financial releases are written in a manner that stakeholders can follow what management is doing
and therefore have a clear understanding of the company's current financial situation.

Stakeholder Rights

This aspect of corporate governance examines the extent that a company's policies are benefiting
stakeholder interests, notably shareholder interests. Ultimately, as owners of the company,
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shareholders should have some access to the board of directors if they have concerns or want
something addressed. Therefore companies with good governance give shareholders a certain
amount of ownership voting rights to call meetings to discuss pressing issues with the board.
Another relevant area for good governance, in terms of ownership rights, is whether or not a
company possesses large amounts of takeover defenses (such as the Macaroni Defense or the
Poison Pill) or other measures that make it difficult for changes in management, directors and
ownership to occur.

Structure of the Board of Directors

The board of directors is composed of representatives from the company and representatives
from outside of the company. The combination of inside and outside director‘s attempts to
provide an independent assessment of management's performance, making sure that the interests
of shareholders are represented.
The key word when looking at the board of directors is independence. The board of directors is
responsible for protecting shareholder interests and ensuring that the upper management of the
company is doing the same. The board possesses the right to hire and fire members of the board
on behalf of the shareholders. A

board filled with insiders will often not serve as objective critics of management and will defend
their actions as good and beneficial, regardless of the circumstances.
Information on the board of directors of a publicly traded company (such as biographies of
individual board members and compensation-related info) can be found in the DEF 14A proxy
statement. We've now gone over the business model, management and corporate governance.
These three areas are all important to consider when analyzing any company. We will now move
on to looking at qualitative factors in the environment in which the company operates.

Fundamental Analysis: Qualitative Factors –

The Industry Each industry has differences in terms of its customer base, market share among
firms, industry-wide growth, competition, regulation and business cycles. Learning about how
the industry works will give an investor a deeper understanding of a company's financial health.

Customers

Some companies serve only a handful of customers, while others serve millions. In general, it's
a red flag (a negative) if a business relies on a small number of customers for a large portion of
its sales because the loss of each customer could dramatically affect revenues. For example,
think of a military supplier who has 100% of its sales with the U.S government. One change in
government policy could potentially wipe out all of its sales. For this reason, companies will
always disclose in their 10-K if any one customer accounts for a majority of revenues.

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Market Share

Understanding a company's present market share can tell volumes about the company's business.
The fact that a company possesses an 85% market share tells you that it is the largest player in its
market by far. Furthermore, this could also suggest that the company possesses some sort of
"economic moat," in other words, a competitive barrier serving to protect its current and future
earnings, along with its market share. Market share is important because of economies of scale.
When the firm is bigger than the rest of its rivals, it is in a better position to absorb the high fixed
costs of a capital-intensive industry

Industry Growth

One way of examining a company's growth potential is to first examine whether the amount of
customers in the overall market will grow. This is crucial because without new customers, a
company has to steal market share in order to grow.
In some markets, there is zero or negative growth, a factor demanding careful consideration. For
example, a manufacturing company dedicated solely to creating audio compact cassettes might
have been very successful in the '70s, '80s and early '90s. However, that same company would
probably have a rough time now due to the advent of newer technologies, such as CDs and
MP3s. The current market for audio compact cassettes is only a fraction of what it was during
the peak of its popularity.

Competition

Simply looking at the number of competitors goes a long way in understanding the competitive
landscape for a company. Industries that have limited barriers to entry and a large number of
competing firms create a difficult operating environment for firms.
One of the biggest risks within a highly competitive industry is pricing power. This refers to the
ability of a supplier to increase prices and pass those costs on to customers. Companies operating
in industries with few alternatives have the ability to pass on costs to their customers. A great
example of this is Wal-Mart. They are so dominant in the retailing business, that Wal-Mart
practically sets the price for any of the suppliers wanting to do business with them. If you want
to sell to Wal-Mart, you have little, if any, pricing power.

Regulation

Certain industries are heavily regulated due to the importance or severity of the industry's
products and/or services. As important as some of these regulations are to the public, they can
drastically affect the attractiveness of a company for investment purposes.

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 In industries where one or two companies represent the entire industry for a region (such as
utility companies), governments usually specify how much profit each company can make. In
these instances, while there is the potential for sizable profits, they are limited due to regulation.

In other industries, regulation can play a less direct role in affecting industry pricing. For
example, the drug industry is one of most regulated industries. And for good reason - no one
wants an ineffective drug that causes deaths to reach the market. As a result, the U.S. Food and
Drug Administration (FDA) require that new drugs must pass a series of clinical trials before
they can be sold and distributed to the general public. However, the consequence of all this
testing is that it usually takes several years and millions of dollars before a drug is approved.
Keep in mind that all these costs are above and beyond the millions that the drug company has
spent on research and development.
All in all, investors should always be on the lookout for regulations that could potentially have a
material impact upon a business' bottom line. Investors should keep these regulatory costs in
mind as they assess the potential risks and rewards of investing.

Fundamental Analysis:

Introduction to Financial Statements The massive amount of numbers in a company's financial

statements can be bewildering and intimidating to many investors. On the other hand, if you
know how to analyze them, the financial statements are a gold mine of information.
Financial statements are the medium by which a company discloses information concerning its
financial performance. Followers of fundamental analysis use the quantitative information
gleaned from financial statements to make investment decisions. Before we jump into the
specifics of the three most important financial statements - income statements, balance sheets
and cash flow statements - we will briefly introduce each financial statement's specific function,
along with where they can be found.

The Major Statements

1. The Balance Sheet

The balance sheet represents a record of a company's assets, liabilities and equity at a particular
point in time. The balance sheet is named by the fact that a business's financial structure balances
in the following manner:
Assets = Liabilities + Shareholders' Equity
Assets represent the resources that the business owns or controls at a given point in time. This
includes items such as cash, inventory, machinery and buildings. The other side of the equation
represents the total value of the financing the company has used to acquire those assets.
Financing comes as a result of liabilities or equity. Liabilities represent debt (which of course
must be paid back), while equity represents the total value of money that the owners have
contributed to the business - including retained earnings, which is the profit made in previous
years.

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2. The Income Statement

While the balance sheet takes a snapshot approach in examining a business, the income
statement measures a company's performance over a specific time frame. Technically, you could
have a balance sheet for a month or even a day, but you'll only see public companies report
quarterly and annually.

3. Statement of Cash Flows

The statement of cash flows represents a record of a business' cash inflows and outflows over a
period of time. Typically, a statement of cash flows focuses on the following cash-related
activities:
• Operating Cash Flow (OCF): Cash generated from day-to-day business operations
• Cash from investing (CFI): Cash used for investing in assets, as well as the proceeds from the
sale of other businesses, equipment or long-term assets
• Cash from financing (CFF): Cash paid or received from the issuing and borrowing of funds
The cash flow statement is important because it's very difficult for a business to manipulate its
cash situation. There is plenty that aggressive accountants can do to manipulate earnings, but it's
tough to fake cash in the bank. For this reason some investors use the cash flow statement as a
more conservative measure of a company's performance.
10-K and 10-Q
Now that you have an understanding of what the three financial statements represent, let's
discuss where an investor can go about finding them. In India, the Securities and Exchange board
of India (SEBI) requires all companies that are publicly traded on a major exchange to submit
periodic filings detailing their financial activities, including the financial statements mentioned
above.
Some other pieces of information that are also required are an auditor's report, management
discussion and analysis (MD&A) and a relatively detailed description of the company's
operations and prospects for the upcoming year.
All of this information can be found in the business' annual 10-K and quarterly 10-Q filings,
which are released by the company's management and can be found on the internet or in physical
form.
The 10-K is an annual filing that discloses a business's performance over the course of the fiscal
year. In addition to finding a business's financial statements for the most recent year, investors
also have access to

The business's historical financial measures, along with information detailing the operations of
the business. This includes a lot of information, such as the number of employees, biographies of
upper management, risks, plans for growth, etc.
Businesses also release an annual report, which some people also refer to as the 10-K. The
annual report is essentially the 10-K released in a fancier marketing format. It will include much
of the same information, but not all, that you can find in the 10-K. The 10-K really is boring - it
is just pages and pages of numbers, text and legalese. However, just because it is boring does not
mean it is not useful. There is a lot of good information in a 10-K, and its required reading for
any serious investor.

17
You can think of the 10-Q filing as a smaller version of a 10-K. It reports the company's
performance after each fiscal quarter. Each year three 10-Q filings are released - one for each of
the first three quarters. (Note: There is no 10-Q for

The fourth quarter, because the 10-K filing is released during that time). Unlike the 10-K filing,
10-Q filings are not required to be audited. Here is a tip if you have trouble remembering which
is which: think "Q" for quarter.

Fundamental Analysis: Other Important Sections Found in Financial Filings

The financial statements are not the only parts found in a business's annual and quarterly SEC
filings. Here are some other noteworthy sections:

Management Discussion and Analysis (MD&A)

As a preface to the financial statements, a company's management will typically spend a few
pages talking about the recent year (or quarter) and provide background on the company. This is
referred to as the management discussion and analysis (MD&A). In addition to providing
investors a clearer picture of what the company does, the MD&A also points out some key areas
in which the company has performed well.
Don't expect the letter from management to delve into all the juicy details affecting the
company's performance. The management's analysis is at their discretion, so understand they
probably aren't going to be disclosing any negatives.

The Auditor's Report

The auditors' job is to express an opinion on whether the financial statements are reasonably
accurate and provide adequate disclosure. This is the purpose behind the auditor's report, which
is sometimes called the "report of independent accountants".
By law, every public company that trades stocks or bonds on an exchange must have its annual
reports audited by a certified public accountants firm. An auditor's report is meant to scrutinize
the company and identify anything that might undermine the integrity of the financial statements.

The Notes to the Financial Statements

Just as the MD&A serves an introduction to the financial statements, the notes to the financial
statements (sometimes-called footnotes) tie up any loose ends and complete the overall picture.
If the income statement, balance sheet and statement of cash flows are the heart of the financial
statements, then the footnotes are the arteries that keep everything connected. Therefore, if you
are not reading the footnotes, you are missing a lot of information.

18
 The footnotes list important information that could not be included in the actual ledgers. For
example, they list relevant things like outstanding leases, the maturity dates of outstanding debt
and details on compensation plans, such as stock options, etc.
There are two types of footnotes:

Accounting Methods –

This type of footnote identifies and explains the major accounting policies of the business that
the company feels that you should be aware of. This is especially important if a company has
changed accounting policies. It may be that a firm is practicing "cookie jar accounting" and is
changing policies only to take advantage of current conditions in order to hide poor performance.

Disclosure - The second type of footnote provides additional disclosure that simply could not be
put in the financial statements. The financial statements in an annual report are supposed to be
clean and easy to follow. To maintain this cleanliness, other calculations are left for the
footnotes. For example, details of long-term debt - such as maturity dates and the interest rates at
which debt was issued - can give you a better idea of how borrowing costs are laid out. Other
areas of disclosure include everything from pension plan liabilities for existing employees to
details about ominous legal proceedings involving the company.
The majority of investors and analysts read the balance sheet, income statement and cash flow
statement but, for whatever reason, the footnotes are often ignored. What sets informed investors
apart is digging deeper and looking for information that others typically would not. No matter
how boring it might be, read the fine print - it will make you a better investor.

Fundamental Analysis: The Income Statement

The income statement is the first financial statement you will come across in an annual report
It also contains the numbers most often discussed when a company announces its
resultsnumbers such as revenue, earnings and earnings per share. The income statement shows
how much money the company generated (revenue), how much it spent (expenses) and the
difference between the two (profit) over a certain time.
When it comes to analyzing fundamentals, the income statement lets investors know how well
the company's business is performing - or, basically, whether or not the company is making
money. Companies ought to be able to bring in more money than they spend or they don't stay in
business for long. Those companies with low expenses relative to revenue - or high profits
relative to revenue - signal strong fundamentals to investors.

Revenue as an investor signal

Revenue, also commonly known as sales, is generally the most straightforward part of the
income statement. Often, there is just a single number that represents all the money a company

19
brought in during a specific time period, although big companies sometimes break down revenue
by business segment or geography.
The best way for a company to improve profitability is by increasing sales revenue. For
instance, Starbucks Coffee has aggressive long-term sales growth goals that include a
distribution system of 20,000 stores worldwide. Consistent sales growth has been a strong driver
of Starbucks' profitability.
The best revenue are those that continue year in and year out. Temporary increases, such as
those that might result from a short-term promotion, are less valuable and should garner a lower
price-to-earnings multiple for a company.

What are the Expenses?

There are many kinds of expenses, but the two most common are the cost of goods sold (COGS)
and selling, general and administrative expenses (SG&A). Cost of goods sold is theexpense most
directly involved in creating revenue. It represents the costs of producing or purchasing the
goods or services sold by the company. For example, if Wal-Mart pays a supplier $4 for a box of
soap, which it sells to customers for $5. When it is sold, Wal-Mart's cost of goods sold for the
box of soap would be $4.
Next, costs involved in operating the business are SG&A. This category includes marketing,
salaries, utility bills, technology expenses and other general costs associated with running a
business. SG&A also includes depreciation and amortization. Companies must include the cost
of replacing worn out assets. Remember, some corporate expenses, such as research and
development (R&D) at technology companies, are crucial to future growth and should not be cut,
even though doing so may make for a better-looking earnings report. Finally, there are financial
costs, notably taxes and interest payments, which need to be considered.
Profits = Revenue – Expenses

Profit, most simply put, is equal to total revenue minus total expenses. However, there are
several commonly used profit subcategories that tell investors how the company is performing.
Gross profit is calculated as revenue minus cost of sales. Returning to Wal-Mart, the gross profit
from the sale of the soap would have been $1 ($5 sales price less $4 cost of goods sold = $1
gross profit).
Companies with high gross margins will have a lot of money left over to spend on other business
operations, such as R&D or marketing. So be on the lookout for downward trends in the gross
margin rate over time. This is a telltale sign of future problems facing the bottom line. When cost
of goods sold rises rapidly, they are likely to lower gross profit margins - unless, of course, the
company can pass these costs onto customers in the form of higher prices.

Operating profit is equal to revenues minus the cost of sales and SG&A. This number represents
the profit a company made from its actual operations, and excludes certain expenses and
revenues that may not be related to its central operations. High operating margins can mean the
company has effective control of costs, or that sales are increasing faster than operating costs.
Operating profit also gives investors an opportunity to do profitmargin comparisons between
companies that do not issue a separate disclosure of their cost of goods sold figures (which are
needed to do gross margin analysis). Operating profit measures how much cash the business
throws off, and some consider it a more reliable measure of profitability since it is harder to
manipulate with accounting tricks than net earnings.

Net income generally represents the company's profit after all expenses, including financial
expenses, have been paid. This number is often called the "bottom line" and is generally the
figure people refer to when they use the word "profit" or "earnings".

20
When a company has a high profit margin, it usually means that it also has one or more
advantages over its competition. Companies with high net profit margins have a bigger cushion
to protect themselves during the hard times. Companies with low profit margins can get wiped
out in a downturn. And companies with profit margins reflecting a competitive advantage are
able to improve their market share during the hard times - leaving them even better positioned
when things improve again.

Fundamental Analysis: The Balance Sheet

Investors often overlook the balance sheet. Assets and liabilities aren't nearly as sexy as revenue
and earnings. While earnings are important, they don't tell the whole story. The balance sheet
highlights the financial condition of a company and is an integral part of the financial statements.
The Snapshot of Health
The balance sheet, also known as the statement of financial condition, offers a snapshot of a
company's health. It tells you how much a company owns (its assets), and how much it owes (its
liabilities). The difference between what it owns and what it owes is its equity, also commonly
called "net assets" or "shareholders equity".
The balance sheet tells investors a lot about a company's fundamentals: how much debt the
company has, how much it needs to collect from customers (and how fast it does so), how much
cash and equivalents it possesses and what kinds of funds the company has generated over time.

The Balance Sheet's Main Three

Assets, liability and equity are the three main components of the balance sheet. Carefully
analyzed, they can tell investors a lot about a company's fundamentals.

Assets

There are two main types of assets: current assets and non-current assets. Current assets are
likely to be used up or converted into cash within one business cycle - usually treated as twelve
months. Three very important current asset items found on the balance sheet are cash,
inventories and accounts receivables.
Investors normally are attracted to companies with plenty of cash on their balance sheets. After
all, cash offers protection against tough times, and it also gives companies more options for
future growth. Growing cash reserves often signal strong company performance. Indeed, it
shows that cash is accumulating so quickly that management doesn't have time to figure out how
to make use of it. A dwindling cash pile could be a sign of trouble. That said, if loads of cash are
more or less a permanent feature of the company's balance sheet, investors need to ask why the
money is not being put to use. Cash could be there because management has run out of
investment opportunities or is too shortsighted to know what to do with the money.

Inventories are finished products that haven't yet sold. As an investor, you want to know if a
company has too much money tied up in its inventory. Companies have limited funds available
to invest in inventory. To generate the cash to pay bills and return a profit, they must sell the
21
merchandise they have purchased from suppliers. Inventory turnover (cost of goods sold divided
by average inventory) measures how quickly the company is moving merchandise through the
warehouse to customers. If inventory grows faster than sales, it is usually a sign of deteriorating
fundamentals.

Receivables are outstanding (uncollected bills). Analyzing the speed at which a company collects
what it's owed can tell you a lot about its financial efficiency. If a company's collection period is
growing longer, it

Could mean problems ahead. The company may be letting customers stretch their credit in order
to recognize greater top-line sales and that can spell trouble later on, especially if customers face
a cash crunch. Getting

Money right away is preferable to waiting for it - since some of what is owed may never be paid.
The quicker a company gets its customers to make payments, the sooner it has cash to pay for
salaries, merchandise, equipment, loans, and best of all, dividends and growth opportunities.
Non-current assets are defined as not anything classified as a current asset. This includes items
that are fixed assets, such as property, plant and equipment (PP&E). Unless the company is in
financial distress and is liquidating assets, investors need not pay too much attention to fixed
assets. Since companies are often unable to sell their fixed assets within any reasonable amount
of time, they are carried on the balance sheet at cost regardless of their actual value. As a result,
it has is possible for companies to grossly inflate this number, leaving investors with
questionable and hard-to-compare asset figures.

Liabilities

There are current liabilities and non-current liabilities. Current liabilities are obligations the firm
must pay within a year, such as payments owing to suppliers. Non-current liabilities, meanwhile,
represent what the company owes in a year or more time. Typically, non-current liabilities
represent bank and bondholder debt.
You usually want to see a manageable amount of debt. When debt levels are falling, that is a
good sign. If a company has more assets than liabilities, then it is in decent condition. By
contrast, a company with a large amount of liabilities relative to assets ought to be examined
with more diligence. Having too much debt relative to cash flows required to pay for interest and
debt repayments is one way a company can go bankrupt.
Look at the quick ratio. Subtract inventory from current assets and then divide by current
liabilities. If the ratio is 1 or higher, it says that the company has enough cash and liquid assets to
cover its short-term debt obligations

Quick Ratio = Current Assets – Inventories

Current Liabilities

Equity

22
Equity represents what shareholders own, so it is often called shareholder's equity. As described
above, equity is equal to total assets minus total liabilities.

Equity = Total Assets – Total Liabilities

The two important equity items are paid-in capital and retained earnings. Paid-in capital is the
amount of money shareholders paid for their shares when the stock was first offered to the
public. It basically represents how much money the firm received when it sold its shares. In other
words, retained earnings are a tally of the money the company has chosen to reinvest in the
business rather than pay to shareholders. Investors should look closely at how a company puts
retained capital to use and how a company generates a return on it.
Most of the information about debt can be found on the balance sheet - but some assets and debt
obligations are not disclosed there. For starters, companies often possess hard-tomeasure
intangible assets. Corporate intellectual property (items such as patents, trademarks, copyrights
and business methodologies), goodwill and

Brand recognition are all common assets in today's marketplace. However, they are not listed on
company's balance sheets.
There is also off-balance sheet debt to be aware of. This is form of financing in which large
capital expenditures are kept off a company's balance sheet through various classification
methods. Companies will often use off-balance-sheet financing to keep the debt levels low. (To
continue reading about the balance
Sheet, see Reading the Balance Sheet, Testing Balance Sheet Strength and Breaking down the
Balance Sheet.)

Fundamental Analysis: The Cash Flow Statement

The cash flow statement shows how much cash comes in and goes out of the company over the
quarter or the year. At first glance, that sounds a lot like the income statement in that it records
financial performance over a specified period. However, there is a big difference between the
two

What distinguishes the two is accrual accounting, which is found on the income statement.
Accrual accounting requires companies to record revenues and expenses when transactions
occur, not when cash is exchanged. At the same time, the income statement, on the other hand,
often includes non-cash revenues or expenses, which the statement of cash flows does not
include.

Just because the income statement shows, net income of $10 does not means that cash on the
balance sheet will increase by $10. Whereas when the bottom of the cash flow statement reads
$10 net cash inflow, that is exactly what it means. The company has $10 more in cash than at the
end of the last financial period. You may want to think of net cash from operations as the
company's "true" cash profit.

Because it shows how much actual cash a company has generated, the statement of cash flows is
critical to understanding a company's fundamentals. It shows how the company is able to pay for
its operations and future growth.

23
 Indeed, one of the most important features you should look for in a potential investment is the
company's ability to produce cash. Just because a company shows a profit on the income
statement doesn't mean it cannot get into trouble later because of insufficient cash flows. A close
examination of the cash flow statement can give investors a better sense of how the company
will fare.

Three Sections of the Cash Flow Statement

Companies produce and consume cash in different ways, so the cash flow statement is divided
into three sections: cash flows from operations, financing and investing. The sections on
operations and financing show how the company gets its cash, while the investing section shows
how the company spends its cash. (To continue learning about cash flow, see The Essentials of
Cash Flow, Operating Cash Flow: Better than Net Income? and What Is A Cash Flow
Statement?)

1. Cash Flows from Operating Activities

This section shows how much cash comes from sales of the company's goods and services, less
the amount of cash needed to make and sell those goods and services. Investors tend to prefer
companies that produce a net positive cash flow from operating activities. High growth
companies, such as technology firms, tend to show negative cash flow from operations in their
formative years. At the same time, changes in cash flow from operations typically offer a
preview of changes in net future income. Normally it is a good sign when it goes up. Watch out
for a widening gap between a company's reported earnings and its cash flow from operating
activities. If net income is much higher than cash flow, the company may be speeding or slowing
its booking of income or costs.

2. Cash Flows from Investing Activities

This section largely reflects the amount of cash the company has spent on capital expenditures,
such as new equipment or anything else that needed to keep the business going. It also includes
acquisitions of other businesses and monetary investments such as money market funds.
You want to see a company re-invest capital in its business by at least the rate of depreciation
expenses each year. If it does not re-invest, it might show artificially high cash inflows in the
current year, which may not be sustainable.

3. Cash Flow from Financing Activities

This section describes the goings-on of cash associated with outside financing activities. Typical
sources of cash inflow would be cash raised by selling stock and bonds or by bank borrowings.

24
Likewise, paying back a bank loan would show up as a use of cash flow, as would dividend
payments and common stock repurchases.
Cash Flow Statement Considerations:
Savvy investors are attracted to companies that produce plenty of free cash flow (FCF). Free
cash flow signals a company's ability to pay debt, pay dividends, buy back stock and facilitate
the growth of business.
Free cash flow, which is essentially the excess cash produced by the company, can be returned to
shareholders or invested in new growth opportunities without hurting the existing operations.

Fundamental Analysis:

A Brief Introduction to Valuation While the concept behind discounted cash flow analysis is
simple, its practical application can be a different matter. The premise of the discounted cash
flow method is that the current

A Study on Fundamental Analysis

Value of a company is simply the present value of its future cash flows that are attributable to
shareholders. Its calculation is as follows:

For simplicity's sake, if we know that a company will generate $1 per share in cash flow for
shareholders every year into the future; we can calculate what this type of cash flow is worth
today. This value is then compared to the current value of the company to determine whether the
company is a good investment, based on it being undervalued or overvalued.

There are several different techniques within the discounted cash flow realm of valuation,
essentially differing on what type of cash flow is used in the analysis. The dividend discount
model focuses on the dividends the company pays to shareholders, while the cash flow model
looks at the cash that can be paid to shareholders after all expenses, reinvestments and debt
repayments have been made. However, conceptually they are the same, as it is the present value
of these streams that are taken into consideration.

As we mentioned before, the difficulty lies in the implementation of the model, as there are a
considerable amount of estimates and assumptions that go into the model. As you can imagine,
forecasting the revenue and expenses for a firm five or 10 years into the future can be
considerably difficult. Nevertheless, DCF is a valuable tool used by both analysts and everyday
investors to estimate a company's value.

Ratio Valuation

Financial ratios are mathematical calculations using figures mainly from the financial statements,
and they are used to gain an idea of a company's valuation and financial performance. Some of
the most well known valuation ratios are price-to-earnings and priceto-book. Each valuation ratio

25
uses different measures in its calculations. For example, priceto-book compares the price per
share to the company's book value.

The calculations produced by the valuation ratios are used to gain some understanding of the
company's value. The ratios are compared on an absolute basis, in which there are threshold
values. For example, in price-to-book, companies trading below '1' are considered undervalued.
Valuation ratios are also compared to the historical values of the ratio for the company, along
with comparisons to competitors and the overall market itself.

26
 AN INTRODUCTION TO INDIAN BANKING SYSTEM

INTRODUCTION

The banking sector is the lifeline of any modern economy. It is one of the important financial
pillars of the financial sector, which plays a vital role in the functioning of an economy. It is very
important for economic development of a country that it is financing requirements of trade;
industry and agriculture are met with higher degree of commitment and responsibility. Thus, the
development of a country is integrally linked with the development of banking. In a modern
economy, banks are to be considered not as dealers in money but as the leaders of development.
They play an important role in the mobilization of deposits and disbursement of credit to various
sectors of the economy.

The banking system reflects the economic health of the country. The strength of an economy
depends on the strength and efficiency of the financial system, which in turn depends on a sound
and solvent banking system. A sound banking system efficiently mobilized savings in productive
sectors and a solvent banking system ensures that the bank is capable of meeting its obligation to
the depositors.

In India, banks are playing a crucial role in socio-economic progress of the country after
independence. The banking sector is dominant in India as it accounts for more than half the
assets of the financial sector. Indian banks have been going through a fascinating phase through
rapid changes brought about by financial sector reforms, which are being implemented in a
phased manner.

The current process of transformation should be viewed as an opportunity to convert Indian

banking into a sound, strong and vibrant system capable of playing its role efficiently and
effectively on their own without imposing any burden on government.

After the liberalization of the Indian economy, the Government has announced a number of
reform measures because of the recommendation of the Narasimhan Committee to make the
banking sector economically viable and competitively strong.

The current global crisis that hit every country raised various issue regarding efficiency and
solvency of banking system in front of policy makers. Now, crisis has been almost over,
Government of India (GOI) and Reserve Bank of India (RBI) are trying to draw some lessons.
RBI is making necessary changes in his policy to ensure price stability in the economy. The main
objective of these changes is to increase the efficiency of banking system as a whole as well as
of individual institutions. Therefore, it is necessary to measure the efficiency of Indian Banks so
that corrective steps can be taken to improve the health of banking system.

EVALUATION OF INDIAN BANKING

27
 The period of last six decades has viewed many macro-economic development of India. The
monitory, external and banking policies have undergone several changes. The structural changes
in the Indian financial system specially in banking system has influence the evaluation of Indian
Banking in different ways. After the

Independence and implementation of banking reforms, we can see the changes in the functioning
of commercial banks. In order to understand the changing role of commercial banks and the
problems and challenges, it would be appropriate to review the major development in the Indian
banking sector. Evaluation of Indian banking may be traced through four distinct phases
1. Evolutionary phase (Prior to 1947)
2. Foundation phase (1947-1969)
3. Expansion phase (1969-1990)
4. Consolidation and Liberalization phase (1990 to till)

Evolutionary phase (Prior to 1947)

According to the Central Banking Enquiry Committee (1931), money-lending activity in India
could be traced back to the Vadic period, i.e., 2000 to 1400 BC. The existence of professional
banking in India could be traced to the 500 BC. Kautilya‟s Arthashastra, dating back to 400 BC
contained references to creditors, lenders and lending rates.

Banking was fairly varied to the credit needs for the trade, commerce, agriculture as well as
individuals in the economy, Mr. W.E. Preston, member, Royal Commission on India Currency
and finance set up in 1926, observed “….. it may be accepted that a system of banking that was
extremely suited to India‟s then requirements was in force in that country many countries before
the science of banking become an accomplished fact in England.

They had their own inland bills of exchange or Hundis that were the major instruments of
transactions. The dishonouring of bundies was a rare at that time as most banking worked on
mutual trust, confidence and without securities. The first western bank of a joint stock verity was
Bank of Bombay, establishing 1720 in Bombay.

This was followed by bank of Hindustan in Calcutta, which was established in 1770 by an
agency house. This agency house and banks were close down in 1932. The first „Presidency
Bank‟ was the Bank of Bengal established in Calcutta on June 2, 1806 with a capital of Rs.50
Lakh. The Government subscribed to 20 percent of its share capital and shared the privilege of
appointing directors with voting rights. The bank had the task to discounting the treasury bills to
provide accumulation to the Government. The bank was given powers to issue notes in 1823.
The Bank of Bombay was the second presidency bank set up in 1840 with a capital of Rs. 52
Lakh, and the Bank of Madras the third Presidency bank established in July 1843 with a capital
of Rs. 30 Lakh.

The presidency banks were governed by Royal charters. The presidency banks issued currency
notes until the passing of the paper currency Act, 1861, when this right to issue currency notes
by the presidency banks was taken over and that function was given to the Government. The
presidency bank act, which came into existence in 1876, brought the three presidency banks
under a common statute and imposed some restrictions on their business. It prohibited them from
28
dealing with risky business of foreign bills and borrowing abroad for lending more than 6
months.

The presidency banks were amalgamated into a single bank, the Imperial Bank of India, in 1921.
The Imperial Bank of India was further reconstituted with the merger of a number of banks
belonging to old princely states such as Jaipur, Mysore, Patiala and Jodhpur. The Imperial Bank
of India also functioned as a central bank prior to the establishment of the Reserve Bank in 1935.
Thus, during this phase, the Imperial Bank of India performed three set of functions via
commercial banking, central banking and the banker to the government. The first Indian owned
bank was the Allahabad Bank set up in Allahabad in 1865, the second; Punjab National Bank
was set up in 1895 in

Lahore, and the third, Bank of India was set up in 1906 in Mumbai. All these banks were
founded under private ownership. The Swadeshi Movement of 1906 provided a great momentum
to joint stock banks of Indian ownership and many more Indian commercial banks such as
Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were
established between 1906 and 1913. By the end of December 1913, the total number of reporting
commercial banks in the country reached 56 comprising 3 Presidency banks, 18 Class „A‟ banks
(with capital of greater than Rs.5 lakh), 23 Class „B‟ banks (with capital of Rs.1 lakh to 5 lakh)
and 12 exchange banks. Exchange banks were foreign owned banks that engaged mainly in
foreign exchange business in terms of foreign bills of exchange and foreign remittances for
travel and trade. Class A and B were joint stock banks. The banking sector during this period,
however, was dominated by the Presidency banks as was reflected in paid-up capital and
deposits

BANKING STRUCTURE IN INDIA

Indian banking system consists of “non-scheduled banks” and “scheduled banks”. Non-
scheduled banks refer to those that are not included in the second schedule of the Banking
Regulation Act of 1965 and thus do not satisfy the conditions laid down by that schedule.
Schedule banks refer to those that are included in the Second Schedule of Banking Regulation
Act of 1965 and thus satisfy the following conditions: a bank must

(1) Have paid up capital and reserve of not less than Rs. 5 lakh and

(2) Satisfy the Reserve Bank of India (RBI) that its affairs are not conducted in a manner
detrimental to the interest of its deposits.

Scheduled banks consists of “scheduled commercial banks” and scheduled cooperative banks.
The former are further divided into four categories:

(1) Public sector banks (that are further classified as “Nationalized Banks and the “State Bank of
India (SBI) banks”)

(2) private sector banks (that are further classified as “Old Private Sector Banks” and “New
Private Sector Banks” that emerged after 1991)

(3) Foreign banks in India, and

29
 (4) Regional rural banks (that operate exclusively in rural areas to provide credit and other
facilities to small and marginal farmers, agricultural workers and small entrepreneurs). These
scheduled commercial banks except foreign banks are registered in India under the Companies
Act.

The SBI banks consist of SBI and five independently capitalized banking subsidiaries. The SBI
is the largest commercial bank in India in terms of profits, assets, deposits, branches and
employees and has 13 head offices governed each by a board of directors under the supervision
of a central board. It was originally established in 1806 when the bank of Calcutta (latter called
the Bank of Bengal) was established, and then amalgamated as the Imperial Bank of India after
the merger with the bank of Madras and the Bank of Bombay. The Imperial Bank of India was
Nationalized and named SBI in 1955.

Nationalized banks refer to private sector banks that were nationalized (14 banks in 1969 and 6
in 1980) by the central government compared with the SBI banks, nationalized banks are
centrally governed by their respective head offices.

In 1993, Punjab National Bank merged another nationalized bank, New Bank of India, leading
to a decline in total number of nationalized banks from 20 to 19.

Regional rural banks account for only 4% of total assets of scheduled commercial banks.
As at the end of March 2001, the number of scheduled banks is a follows: 19 nationalized
banks, 8 SBI banks, 23 old private sector banks, 8 new private sector banks, 42 foreign banks,
196 regional rural banks and 67 cooperative banks. However, number of scheduled commercial
banks in India as on 31 October 2012 as follows: 26 public sector banks 20 private sector banks.

30
Banking Structure in India

Central Banks

Central banks are the top banking institutions for any country in the world. In India, it is reserve
bank of India. They are responsible for many things like managing the currency, money supply
in the system, foreign exchange, etc for that country. These central banks are by and large owned
by the government.

Non-scheduled Banks

Non-scheduled banks by definition are those, which are not listed, in the 2nd schedule of the
RBI act, 1934. Banks with a reserve capital of less than five lakh rupees qualify as non-
scheduled banks. Unlike scheduled banks, they are not entitled to borrow from the RBI for
normal banking purposes, except, in emergency or “abnormal circumstances.” Jammu &
Kashmir Bank is an example of a non-scheduled commercial bank.

Cooperative Banks
31
 The banks, which are owned by the depositors, are called cooperative banks. These banks are
generally coming under non-profit entities. Generally, the banks in India are divided like
scheduled banks, non-scheduled banks, and central banks. Scheduled banks are those banks that
are listed under the second schedule of the RBI act came in 1934. There are certain conditions
that these banks have to follow in order to stay in this category. Like these banks should follow
the CRAR norms, and they need to pay upfront reserves and capital of 50 lakhs, etc.

Scheduled Banks

By definition, any bank that is listed in the 2nd schedule of the Reserve Bank of India Act, 1934
is considered a scheduled bank. The list includes the State Bank of India and its subsidiaries (like
State Bank of Travancore), all nationalised banks (Bank of Baroda, Bank of India etc), regional
rural banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and some cooperative
banks. These also include private sector banks, both classified as old (Karur Vysya Bank) and
new (HDFC Bank Ltd). To qualify as a scheduled bank, the paid up capital and collected funds
of the bank must not be less than Rs5 lakh. Scheduled banks are eligible for loans from the
Reserve Bank of India at bank rate, and are given membership to clearing houses.

Commercial Banks

The main task of the commercial bank is to lend and deposit the money from corporations as
well as the public. Thus, in India, there are two types of commercial banks, which exist. They are
scheduled commercial banks and non-scheduled commercial banks. However, for day-to-day
use, we prefer commercial Banks.

The commercial banks in India are SBI, Axis Bank, HDFC, Axis bank, etc. There are certain
conditions that these banks have to follow in order to stay in this category. Like these banks
should follow the CRAR norms, and they need to pa Public Sector Banks:

Public Sector Banks

Refer to a type of commercial banks that are nationalized by the government of a country. In
public sector banks, the government holds the major stake. In India, public sector banks operate
under the guidelines of Reserve Bank of India (RBI), which is the central bank. Some of the
Indian public sector banks are State Bank of India (SBI), Corporation Bank, Bank of Baroda,
Dena Bank, and Punjab National Bank.

Private Sector Banks: Refer to a kind of commercial banks in which private businesses and
individuals hold major part of share capital. These banks are registered as companies with
limited liability. Some of the Indian private sector banks are Visa Bank, Industrial Credit and
Investment Corporation of India (ICICI) Bank, and Housing Development Finance Corporation
(HDFC) Bank.
32
Foreign Banks

Refer to commercial banks that are headquartered in a foreign country, but operate branches in
different countries. Some of the foreign banks operating in India are Hong Kong and Shanghai
Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank,
and Grindlay’s Bank. In India, since financial reforms of 1991, there is a rapid increase in the
number of foreign banks. Commercial banks mark significant importance in the economic
development of a country as well as serving the financial requirements of the public. Upfront
reserves and capital of 50 lakhs, etc.

Regional Rural Bank

The main business of agricultural banks is to provide funds to farmers. They are worked on the
co-operative principle. Long-term capital is provided by land mortgage banks, nowadays called
land-development banks, while short-term loans are given by co-operative societies and co-
operative banks. Long-term loans are needed by the farmers for purchasing land or for
permanent improvements on land, while short-period loans help them in purchasing implements,
fertilizers and seeds. Such banks and societies are doing useful work in India.

Functions of Commercial Banks

The functions of commercial banks are discussed as follows:

Primary Functions:

Refer to the basic functions of commercial banks that include the following:

33
 Accepting deposits

Implies that commercial banks are mainly dependent on public deposits. There are two types of
deposits, which are discussed as follows:

Demand Deposits

Refer to kind of deposits that can be easily withdrawn by individuals without any prior notice to
the bank. In other words, the owners of these deposits are allowed to withdraw money anytime
by simply writing a check. These deposits are the part of money supply as they are used as a
means for the payment of goods and services as well as debts. Receiving these deposits is the
main function of commercial banks.

Time Deposits

Refer to deposits that are period. Banks pay higher interest on time deposits. These deposits can
be withdrawn only after a specific time period is completed by providing a written notice to the
bank.

Advancing Loans

Refers to one of the important functions of commercial banks. The public deposits are used by
commercial banks for granting loans to individuals and businesses. Commercial banks grant
loans in the form of overdraft, cash credit, and discounting bills of exchange.

Secondary Functions

Refer to crucial functions of commercial banks. The secondary functions can be classified under
three heads, namely, agency functions, general utility functions, and other functions.
These functions are explained as follows:

34
Agency Functions

Implies that commercial banks act as agents of customers by performing various functions,
which are as follows:

• Collecting Checks

Refer to one of the important functions of commercial banks. The banks collect checks and bills
of exchange on the behalf of their customers through clearing house facilities provided by the
central bank.

• Collecting Income

Constitute another major function of commercial banks. Commercial banks collect dividends,
pension, salaries, rents, and interests on investments on behalf of their customers. A credit
voucher is sent to customers for information when any income is collected by the bank.

• Paying Expenses

Implies that commercial banks make the payments of various obligations of customers, such as
telephone bills, insurance premium, school fees, and rents. Similar to credit voucher, a debit
voucher is sent to customers for information when expenses are paid by the bank.
General Utility Functions
Include the following functions:

• Providing Locker Facilities

Implies that commercial banks provide locker facilities to its customers for safekeeping of
jewellery, shares, debentures, and other valuable items. This minimizes the risk of loss due to
theft at homes.

• Issuing Travellers’ Checks

Implies that banks issue traveller’s checks to individuals for traveling outside the country.
Traveler’s checks are the safe and easy way to protect money while traveling.

35
• Dealing in Foreign Exchange

Implies that commercial banks help in providing foreign exchange to businesspersons dealing in
exports and imports. However, commercial banks need to take the permission of the central bank
for dealing in foreign exchange.

• Transferring Funds

Refers to transferring of funds from one bank to another. Funds are transferred by means of
draft, telephonic transfer, and electronic transfer.

Other Functions include the following:

• Creating Money

Refers to one of the important functions of commercial banks that help in increasing money
supply. For instance, a bank lends Rs. 5 lakh to an individual and opens a demand deposit in the
name of that individual.
Bank makes a credit entry of Rs. 5 lakh in that account. This leads to creation of demand
deposits in that account. The point to be noted here is that there is no payment in cash. Thus,
without printing additional money, the supply of money is increased

• Electronic Banking

Include services, such as debit cards, credit cards, and Internet banking.

Types of Credit Offered by Commercial Banks:

A commercial bank offers short-term loans to individuals and organizations in the form of bank
credit, which is a secured loan carrying a certain rate of interest.
There are various types of bank credit provided by a commercial bank

36
Bank Loan

Bank loan may be defined as the amount of money granted by the bank at a specified rate of
interest for a fixed period. The commercial bank needs to follow certain guidelines to extend
bank loans to a client. For example, the bank requires the copy of identity and income proofs of
the client and a guarantor to sanction bank loan. The banks grant loan to clients against the
security of assets so that, in case of default, they can recover the loan amount. The securities
used against the bank loan may be tangible or intangible, such as goodwill, assets, inventory, and
documents of title of goods.

The advantages of the bank loan are as follows

• Grants loan at low rate of interest

• Involves very simple process of loan granting
• Requires minimum document and legal formalities to pass the loan
• Involves good customer relationship management
• Consumes less time because of modern techniques and computerization
• Provides door-to-door facilities

In addition to advantages, the bank loan suffers from various imitations, which are as
follows:

• Imposes heavy penalty and legal action in case of default of loan

• Charges high rate of interest, if the party fails to pay the loan amount in the allotted time
• Ads extra burden on the borrower, who needs to incur cost in preparing legal documents for
procuring loans
• Affects the goodwill of the organization, in case of delay in payment

Cash Credit

Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash
exceeding their account limit. The cash credit facility is generally sanctioned for one year but it
may extend up to three years in some cases. In case of special request by the client, the time limit
can be further extended by the bank. The extension of the allotted time depends on the consent of
the bank and past performance of the client. The rate of interest charged by the bank on cash
credit depends on the time duration for which the cash has been withdrawn and the amount of
cash.

The advantages of the cash credit are as follows:

37
 • Involves very less time in the approval of credit
• Involves flexibility as the cash credit can be extended for more time to fulfill the need of the
customers
. • Helps in fulfilling the current liabilities of the organization
• Charges interest only on the amount withdrawn by the customer. The interest on cash credit is
charged only on the amount of cash withdrawn from the bank, not on the total amount of credit
sanctioned.

The cash credit is one of the most important instruments of short-term financing but it has
some limitations.

• Requires more security for the approval of cash

• Imposes very high rate of interest

• Depends on the consent of the bank to extend the credit amount and the time limit

Bank Overdraft

Bank overdraft is the quickest means of the short-term financing provided by the bank. It is a
facility in which the bank allows the current account holders to overdraw their current accounts
by a specified limit. The clients generally avail the bank overdraft facility to meet urgent and
emergency requirements. Bank overdraft is the most popular form of borrowing and do not
require any written formalities. The bank charges very low rate of interest on bank overdraft up
to a certain time.

The advantages of the bank overdraft are as follows:

• Involves no documentation for the extension of overdraft amount

• Imposes nominal interest on the overdraft amount

• Charges fee only on the amount exceeding the account limit

The disadvantages of the bank overdraft are as follows:

• Incurs high cost for the clients, if they fail to pay the amount of overdraft for a longer period

• Hampers the reputation of the organization, if it fails to pay the amount of overdraft on time
38
 • Allows the bank to deduct overdraft amount from the customers’ accounts without their
permission

Discounting of Bill

Discounting of bill is a process of settling the bill of exchange by the bank at a value less than
the face value before maturity date. According to Sec. 126 of Negotiable Instruments, “a bill of
exchange is an unconditional order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or
determinable future time a sum certain in money to order or to bearer.”

The facility of discounting of bill is used by the organizations to meet their immediate need of
cash for settling down current liabilities.

Conditions laid down by the bank for discounting of bill are as follows:

• Must be intended to specific purpose

• Must be enclosed with the signature of the two persons (company, bank or reputed person)

• Must be less than the face value

• Must be produced before the maturity period.

39
CHAPTER 2

RESEARCH
AND
METHODOLOGY

40
 RESEARCH AND METHODOLGY

DEFINITION:

A detailed outline of how an investigation will take place. A research design will typically
include how data is to be collected, what instruments will be employed, how the instruments will
be used and the intended means for analysing data collected.

STATEMENT OF PROBLEM:

The study is undertaken for understanding how fundamental analysis is done and the various
tools, which are used for fundamental analysis. Forecasting with the help of those tools. This
study is aims to exploration of the topic “FUNDAMENTAL ANALYSIS”.

OBJECTIVES

:  to do technical and fundamental analysis of chosen securities

 to study the various theories of fundamental analysis

 Understand the performance of stocks of TCS

 Understanding and analyzing the factors that affect the movement of stock prices in the Indian
Stock Markets

SCOPE:

 Knowing the company‘s revenue growth.


 Understanding the company‘s position to beat out its competitors in future.

 its ability to repay its debts.


 Whether the company is a good investment and making good profits.
41
LIMITATIONS:

 The study was confined only to one particular sector. 

 The study was more confined with secondary data

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


 As the scope is defined by the researcher it restricts the number of variables which Influence
the industry

 The study was done for a short period of time, which might not hold true over a long period.

METHODOLOGY OF STUDY:

TITLE OF STUDY

The research has been based on secondary data analysis. The study has been exploratory as it
aims at examining the secondary data for analysing the previous researches that have been done
in the area of technical and fundamental analysis of stocks. The knowledge thus gained from this
preliminary study forms the basis for the further detailed Descriptive research. In the exploratory
study, the various technical indicators that are important for analysing stock were actually
identified and important ones short-listed.

SAMPLE DESIGN

The sample of the stocks for collecting secondary data has been selected because of Random
Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of
the other stocks chosen.

SAMPLE SIZE

The sample size for the number of stocks is taken as 10 for technical analysis and 4 for
fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed
study.

42
CHAPTER 3

LITERATURE
REVIEW

43
 LITERATURE REVIEW

Better stock valuation model of the Fundamental Analysis Approach, by reviewing the
theoretical foundations and literature reviews.

By reviewing the theoretical foundations for each model of the fundamental analysis models, and
sequentially beginning of the Discounted Dividend Model (DDM), through a Multiplier Models,
and finally the Discounted Cash Flow Model (DCFM), we find that all these models have
strengths, despite the lack of accuracy, because it is required financial efficiency market.
Recently Olson (1995) stated the simulated benefit in the formulation of the Residual Income
Model (RIM). The Olson Model identifies the relationship between stock values and accounting
variables.

By reviewing the literature reviews, in financial markets, we conclude that the best model that
can be relied upon to predict stock value, that proved credibility in both emerging and developed
markets, is Residual Income Model (RIM), which doesn’t require financial efficiency for its
application.

State Bank of India (SBI Bank)

The State Bank of India (SBI Bank) was established in 1806, in Kolkata. Three years after that,
it acquired its charter and was re-designed as Bank of Bengal in 1809. It was the very first joint-
stock bank of India, which the Bengal Government sponsored. Apart from Bank of Bengal, the
44
Bank of Madras and the Bank of Bombay was also part of this joint stock and remained at the
centre of the modern banking.

Initially, all three banks were Anglo-Indian creations and they came into play due to the
following three reasons-

• Lack of modernization of the Indian economy due to several arbitrary reasons

• Local European commerce needs and requirements

• Compulsions imperial finance

The transformation or evolution of the State Bank of India came about due to the ideas adopted
from the same movements happening in England and Europe. Another reason that contributed to
this evolution was the changes and modifications in the local trading environment, along with
India’s economic relationships with that of Europe and the global economic structure.

The current position of the State Bank of India (SBI Bank) The State Bank of India is a giant in
its own right, and there are several reasons that contribute to that. It is the oldest bank in the
country currently if you go by the size of its balance sheet.

Additionally, its market capitalization, hundreds of bank branches and the number of profits are
helping it give stiff competition to other private sector banks in the country

Presently, the bank is getting into a couple of new business with strategic tie-ups, which have
quite a large growth potential. Some of these tie-ups are General Insurance, Pension Funds,
Private Equity, Custodial Services, Mobile Banking, Structured Products, Advisory Services, and
Point of Sale Merchant Acquisition etc.

Additionally, it is concentrating on wholesale banking capacities and the top end of the market,
in order to offer India’s corporate sector with numerous services and products.
Gaining entry in the field of derivative instruments and structured products along with the
consolidation of the global treasury operations is also something they are focusing on now.

As of now, the State Bank of India is the biggest arranger responsible for external commercial
borrowings in the country and is the biggest provider of infrastructure debt. In addition, it is the
sole Indian bank to be a part of the Fortune 500 list

Apart from banking, State Bank of India was also associated with non-profit ventures since
1973, such as Community Services Banking. In such cases, administrative offices and branches
all over the country sponsor and take part in a huge number of social causes and welfare
activities.

Additionally, they had also launched three digital banking facilities, in order to make financial
transaction an easier affair for their customers.

Two of the digital banking facilities specialize in providing their services at the customers’
doorstep by utilizing the method of TAB banking (One for housing loan applicants and the other
for customers looking to open a savings account).

45
The third banking facility specializes in the KYC process (Know Your Customer). The other
services, which are offered by the State Bank of India, are the following-

• Personal Banking

• Rural/ Agriculture

• Small and Medium Enterprise (SME)

• Domestic Treasury

• NRI Services

• International Banking

• Corporate Banking

• Government Business

Housing Development Finance Corporation (HDFC)

The HDFC Bank was incorporated on August 1994 by the name of 'HDFC Bank Limited', with
its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January

1995. The Housing Development Finance Corporation (HDFC) was amongst the first to receive
an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private
sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994.

46
Treasury – Within this business, the bank has three main product areas – Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities, and Equities. The Treasury
business is responsible for managing the returns and market risk on this investment portfolio.

HDFC Securities (HSL) and HDB Financial Services (HDBFSL) are its subsidiaries.
Services offered by the company:

Personal Banking

• Accounts & Deposits

• Loans

• Cards

• Forex

• Investments & Insurance

NRI Banking

• Accounts & Deposits

• Remittances

• Investments & Insurance Loans Payment Services

Wholesale Banking

• Corporate

• Small & Medium Enterprises

• Financial Institutions & Trusts

• Government Sector

Bank of Baroda (BOB)

47
Bank of Baroda is one of the leading commercial banks in India. The Bank's solutions includes
personal banking which includes deposits gen-next services retail loans credit cards debit cards
services and lockers; business banking which includes deposits loans and advances services and
lockers; corporate banking which includes wholesale banking deposits loans and advances and
services and international business which includes non-resident Indian (NRI) services foreign
currency credits ECB offshore banking export finance import finance correspondent banking
trade finance and international treasury.

The Bank offers services such as domestic operations and For-ex operations. They also offer
rural banking services which include deposits priority sector advances remittance collection
services pension and lockers.

They also offer fee based services such as cash management and remittance services. The Bank
is having their head office located at Baroda and their corporate office is located at Mumbai.
Bank of Baroda is one of India's largest banks with a strong domestic presence spanning 5458
branches and 10027 ATMs and Cash Recyclers supported by self-service channels. The bank has
a significant international presence with a network of 105 branches/offices subsidiaries spanning
23 countries. The bank has wholly owned subsidiaries including BOB Financial Solutions
Limited (erstwhile BOB Cards Ltd.) and BOB Capital Markets. Bank of Baroda also has a joint
venture for life insurance business with India First Life Insurance. The bank owns 98.57% in The
Nainital Bank.

The bank has also sponsored three Regional Rural Banks namely Baroda Uttar Pradesh Gramin
Bank Baroda Rajasthan Gramin Bank and Baroda Gujarat Gramin Bank. Bank of Baroda was
incorporated on July 20 1908 as a as a private bank with the name The Bank of Baroda Ltd. The
Bank was established with a paid up capital of Rs 1 million and was founded by Maharaja
Sayajirao III of Baroda. In the year 1910, the Bank opened their first branch in the city of
Ahmedabad. In the year 1919, they opened their first branch in Mumbai City. In the year 1953,
the Bank opened first international branch at Mombasa Kenya. During the period 1953-1969, the
Bank opened three branches in Fiji five branches in Kenya three branches in Uganda and one
each in London and Guyana.

48
In the year 1958 The Hind Bank merged with the Bank and in the year 1962 The New Citizen
Bank Ltd amalgamated with the Bank. In the year 1964, The Umargaon Peoples' Bank &
Tamilnadu Central Bank amalgamated with the Bank. In July 1969, the Bank was nationalized
and the name was changed from 'The Bank of Baroda Ltd' to 'Bank of Baroda'. During the period
1969 to 1974, they established three branches in Mauritius two branches in UK and one branch
in Fiji. They entered in the oil rich Gulf countries in the year 1974 with two branches were
opened in UAE one at Dubai and another at Abu Dhabi. In the year 1976 the Bank sponsored the
first of their 19 Regional Rural Banks thereby seeking to complement their operations in rural
heartland.

In the year 1977 they launched the 'Gram Vikas Kendra' (GVK) an innovative model for
integrated rural development. In the year 1984, the Bank launched their Credit Card Operations.
In the year, 1988 The Traders Bank Ltd amalgamated with the Bank. In the year 1991, the Bank
established their housing finance subsidiary BOB Housing. They also established subsidiaries for
businesses of credit cards (BOBCARDS) asset management (BOB AMC) and capital market
activities (BOB Caps).

In December 1996, the Bank entered the capital market with an Initial Public Offering. In the
year 1997 they opened a branch in Durban. In the year 1999 the Bank commenced operations as
a depository. Also Bareilly Corporation Bank amalgamated with the Bank during the year. In the
year 2000, the Bank appointed Arthur Andersen India Pvt Ltd as risk management consultant for
setting up Comprehensive Risk Management Architecture for the Bank. In the year 2001, they
established a separate Risk Management Department and specialized integrated treasury branch.
In the year, 2002 The Benares State Bank Ltd merged with the Bank. They launched Debit Card
project in affiliation with VISA. In the year 2004, The South Gujarat Local Area Bank
amalgamated with the Bank. In June 1 2004, the Bank signed a MoU with National Insurance
Company Ltd for selling their non-life insurance products under corporate agency arrangement.
During the year 2004-05, the Bank expanded their interconnected ATM network to cross 501
spread over 180 centres in the country.

Products & Services of BOB

Given below is the list of services offered by the Bank of Baroda:-

• Retail Banking

• Rural/Agri Banking

• Wholesale Banking

• SME Banking

• Wealth Management

• Demt

49
• Product Enquiry

• Internet Banking

• NRI Remittances

• Baroda e Trading

• Interest Rates

• Deposit Products

• Loan Products

• ATM / Debit Cards

Bank of Baroda takes special care to look after the requirements of its shareholders.
Given below are the various benefits provided to the shareholders of the bank:-

• Change of address or names of Shareholders

• Transmission of shares

• Transposition

• De-materializing Shares

• Investors Services Department

• Registrars & Share Transfer Agent

• Bonds related to Transfer

• Lodgement of Shares

• Duplicate Share Certificate

• Duplicate Dividend Warrants

• Revalidation

• Means of communication

• Investor Grievance Committee

• Electronic Clearing Services or ECS

50
• Stock Market Data

• Personal Services

• Deposits

• Gen-Next

• Loans

• Credit Cards & Debit Cards

• Services

• Lockers

• Corporate Services

• Wholesale Banking

• Deposits

• Loans

• Advances

• Services

• International Services

• NRI Services

• FGN Currency Credits (Foreign Currency Credits)

• ECB (External Communication Borrowings)

• FCNR (B) Loans

• Offshore Banking

• Finance in Export and Import

• Correspondent Banking Facility

• International Treasury

Treasury service of Bank of Baroda includes Domestic operations and Forex operations.

51
Bank of Baroda Rural Services:-

• Domestic Services

• Deposits

• Priority Sector Advances

• Services

• Lockers

• Priority Sector Advances

• Small Scale Industries

• Small Business

• Retail Loans

• Schemes sponsored by the GOI (Government of India)

• Baroda General Credit Card Scheme (BGCC)

• Agriculture related Loans

• Bank of Baroda Home Loan

Bank of Baroda home loan is one of the most well-known products of the bank. It comes in
various forms and is tailor made as per the requirements of the different customers.
Bank of Baroda home loans are a prestigious part of the Bank of Baroda. The bank was
established in the year 1908. It has its headquarters in Mumbai. The Bank of Baroda offers
various types of loans and the home loans are an important part of the package.
The need for new houses, flats, apartments, house construction, repairing an existing house
requires financial support. Bank of Baroda home loans is one of the best financial support all
such people who are looking for houses or trying to repair existing houses can avail.

52
Axis bank

Axis Bank is the third largest private sector bank in India. The Bank offers the entire spectrum
of financial services to customer segments covering Large and Mid-Corporates, MSME,
Agriculture and Retail Businesses.

The Bank has a large footprint of 4,050 domestic branches (including extension counters) with
11,801 ATMs & 4,917 cash recyclers spread across the country as on 31st March, 2019. The
overseas operations of the Bank are spread over eleven international offices with branches at
Singapore, Hong Kong, Dubai (at the DIFC), Colombo, Shanghai and Gift City-IBU;
representative offices at Dhaka, Dubai, Abu Dhabi, Sharjah and an overseas subsidiary at
London, UK. The international offices focus on corporate lending, trade finance, syndication,
and investment banking and liability businesses.

Axis Bank is one of the first new generation private sector banks to have begun operations in
1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India
(SUUTI) (then known as Unit Trust of India), Life Insurance Corporation of India (LIC),
General Insurance Corporation of India (GIC), National Insurance Company Ltd., The New
India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd. The shareholding of Unit Trust of India was subsequently transferred to
SUUTI, an entity established in 2003.

With a balance sheet size of Rs. 8,00,997 crores as on 31st March 2019, Axis Bank has achieved
consistent growth and with a 5 year CAGR (2013-14 to 2018-19) of 16% in Total Assets, 14% in
Total Deposits, 17% in Total Advances.

Accounts

• Easy Access Savings Account

53
• Prime Savings account

• Salary Savings Account

• Power salute: A salute to the defence forces

• Azaadi

• Senior Privilege Savings Account

• For the woman of today – Smart Privilege Savings Account

• A complete banking solution for Trusts, Associations, Societies, Government Bodies, Section
25 companies and NGOs

• Pension Savings Bank Account,

Deposits

• Fixed Deposits

• Recurring Deposits

• Encash 24

• Tax Saver Fixed Deposit

Loans

Welcome to the wide range of Axis Bank's Loan products. Put an end to your financial troubles.

• Power Homes

• Power Drive

• Personal Power

• Study Power

• Asset Power

• Two Wheeler Loan

• Loan against Security

• Consumer Power

54
Cards Apart from Gold & Silver credit cards,

Axis Bank provides

• Axis Bank Meal Card

• Axis Bank Gift Card

• LIC co-branded Annuity Card

55
CHAPTER 4

DATA ANALYSIS
AND
INTERPRETATION

56
Indian Economy:

The Growth story the global economy is showing signs of a paradigm shift—with Asia starting
to establish itself as the global economic leader. India‘s growth, along with china, will play a key
role in the transition of Asia into a glob– al economic power. India‘s growth story is driven by
domestic consumption. India is blessed with a unique demographic situation where more than 55
percent of the total population was under the age of 30 years in 20111. Rising income levels will
lead to the emergence of a new middle class, with a much higher consumption demand, as com–
pared to the past. The Indian middle class as a percentage of the total population is expected to
grow from 44 percent in 2010 to 59 percent in 2020.

Rising income levels in India will fuel domestic consumption. India‘s real GDP (PPP, 2005
prices) is expected to grow at a healthy 6.7 percent during the current decade3. 1991 was an
important year for the Indian economy. It was the year when India changed its economic policies
which resulted in a long period of sustained growth for India‘s GDP. More foreign companies
started operating in India, several industries were deregulated and the private sector in India
gained traction. BCG estimates show that by 2020, more than 75 percent of the total population
would have grown up in a liberalized economy (i.e., post 1991 era) four. This segment of the
population is more aware and has been exposed to the multitude of product and service offerings
in the new liberalized economy that did not exist before 1991. Their attitudes and behaviours are
completely different from those before them. These consumers are willing to spend more for the
right product / service, they are comfortable navigating the multitude of choices available to
them, they are more aware of what products, and services are offered across the world.
Companies will need to re–align their business models to meet the expectations of this new
India.

Industry overview

An untapped Opportunity a comparison of India‘s it spends with more developed economies

shows that the India‘s overall it spend as a percentage of GDP is less than 1 percent—
significantly lower than the global average of 2.5 percent7

more developed economies typically spend more on it and as Indian economy grows, it
spending is likely to increase significantly. Greater it spends lead to productivity improvement
through process automation, incremental business on electronic medium and real time access to
in– formation. The labour productivity in India in 2011 was us$ 9,310, compared to us$ 69,900
in UK and us$ 96,000 in the United States.

Key Questions on Domestic IT Market:

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The Indian it industry is at an inflection point in its evolution. The end users will demand
continued performance improvements to protect their profitability, new technologies to serve the
next billion customers and innovative commercial models to make the offerings viable.
The operating models of it providers will have to evolve to be able to serve the changing needs
of the end users. Because of the inter–linkage between it and the growth of the economy, the end
users and it providers will have to collectively ensure effective leverage of it in India. The
Government will play an important role as both a buyer and a facilitator in enabling it adoption.

Company overview

Tata Consultancy Services Limited (TCS)

Is an Indian multinational information technology (IT) services, business process and consulting
company headquartered in Mumbai, Maharashtra. TCS operates in 46 countries and has 199
branches across the world. It is a subsidiary of the Tata Group and is listed on the Bombay Stock
Exchange and the National Stock Exchange of India. TCS is the largest Indian company by
market capitalization and is the largest India-based IT services company by 2013 revenues. TCS
is ranked 40th overall in the Forbes World's Most Innovative Companies ranking, making it both
the highest-ranked IT services company and the top Indian company. TCS is a leader in the
global marketplace and among the top 10 firms in the world. It has proven its success over the 40
years

Tata Consultancy Services is an IT services, consulting and business solutions organization that
delivers real results to global businesses, ensuring a level of certainty that no other firm can
match. TCS offers a consulting-led integrated portfolio of IT and IT-enabled services delivered
through its unique Global Network Delivery Model (GNDM) recognized as the benchmark of
excellence in software development.

Lineage: TCS is part of the Tata group, one of India‘s largest industrial conglomerates and most
respected brands.

History: TCS was established in 1968 as a division of Tata Sons Limited. TCS Ltd. was
incorporated as a separate entity on January 19, 1995.

Mission:

 To help customers achieve their business objectives by providing innovative, best-in-class

consulting, IT solutions and services

 To make it a joy for all stakeholders to work with us.

Values:


58
 Leading change

 Integrity

 Respect for the individual

 Excellence

 Learning and sharing

Industries Serviced:

 Banking, Financial Services

 Insurance

 Retail and Consumer Packaged Goods


 Telecom

 Media and Information Services


 High Tech

Full Services Portfolio:

 Application Development and Maintenance

 Business Intelligence

 Enterprise Solutions

 Assurance Services

 Engineering and Industrial Services

 IT Infrastructure Services

 Business Process Services

 Consulting

 Asset-leveraged Solution
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PRESS RELEASES:

TCS ranked as the #1 Employer in Europe by Top Employers Institute

London | Mumbai, March 21, 2014: Tata Consultancy Services(BSE: 532540, NSE: TCS), a
leading IT services, consulting and business solutions organization, today, announced that it has
been named as the Top Employer in Europe by the Top Employers Institute for the second
consecutive year. TCS was ranked first among the 20 companies that were eligible for the award.
The company was recognized as an exceptional performer across six core Human Resources
(HR) areas: Primary conditions, secondary benefits, working conditions, training, career
development and company culture.

TCS ranked #1 manufacturing industry IT service provider in Europe

London | Mumbai, February 24, 2014: Tata Consultancy Services (BSE: 532540, NSE: TCS), a
leading IT services, consulting and business solutions organization, has been ranked top for
overall capabilities in EMEA for manufacturing-specific outsourcing services. The study,
conducted by leading analyst firm IDC, praised TCS for its ability to provide holistic support for
large and diverse IT initiatives.

The report recognized TCS‘proven track record to design and implement systems for some of the
region‘s leading companies. TCS partners with manufacturers from a range of industries to help
transform their existing business models and implement technology solutions. These solutions
improve operations by reducing operational expenditure, utilizing existing capacity optimally,
improving operating efficiencies across the value chain and improving the time-to-market for
new product releases. Each solution is tailored to the partner company, ensuring each business
can meet its objectives within the usual safety and regulatory parameters.

RESEARCH & DEVELOPMENT (R&D)

Specific areas in which the Company carried out R&D

The Company conducts R&D initiatives with the aim of promoting invention as well as
innovation. TCS R&D has three-research area council’s viz., Software, Systems and Application.
Researchers in each area are exploring new technology ideas relevant to TCS customers. (R&D)
investment in TCS continues to be along three segments and time horizons:

 Derivative innovation: Improving the current offerings to the customers. .

 Disruptive innovation: Enabling radical changes to the customers work methods and business
models.

 Platform innovation: Preparing the customers for the near term future
60
 TCS tools continued to improve quality and efficiency of service delivery. These tools form part
of TCS‘derivative innovations. This suite of products automate IT service processes such as
application design and development, software assurance, application support and maintenance,
performance testing and monitoring, test data management, enterprise data management. As for
platform innovations, the Company

has progressed with the ‗Enterprise Information Fusion‘ platform and has been working on
subjects such as currency risk models, robotic surveillance, domain knowledge repositories,
machine learning applications, crowd sourcing platforms and building energy management
systems. Several pilot projects are being run

Using the ‗Intelligent management Infrastructure System‘, capable of creating radical changes in
infrastructure. The Company is also working on genomics and disease markers, Nano fluids, data
discovery and human systems. TCS Co-Innovation Network (COINTM) continues to connect
innovative research and technology research with customers. There are currently 10 academic
alliances and 22 emerging technology partners. The Company‘s research scholar programme
now sponsors 111 PhD researchers from 31 institutions across the length and breadth of the
country. TCS researchers worked on 450 papers that were presented at national and international
conferences and in top tier journals. In the financial year 2012-13, the Company filed 425 patents
and nine patents were granted. On a cumulative basis, out of 1,280 patents filed, 81 have been
granted.

Benefits derived

Intellectual assets created by R&D teams were deployed internally and for customer projects
creating substantial savings. The Company held 77 innovation events including ‗innovation days
‘with customers and ‗innovation forums‘(a congregation of COINTM collaborates, academic
researchers and key customers). During the financial year 2012-13, TCS Innovations won 10
awards including the Medici Innovation Hall of Fame, Thomson Reuters India Innovation
Awards 2012 and the Asian CIO Leadership Awards 2012. Many senior researchers from TCS
won awards and accolades. Several media news items and interviews with research leaders
focused on TCS research.

Awards and achievements

During the year, the Company received various awards and recognitions, some of which are
given below:

 Awarded Company of the Year by Business Standard  Ranked as India‘s Most Valuable
Company in BT 500 from Business Today

 Ranked No. 1 in India by Institutional Investors 2012 All-Asia Executive Team rankings

61
 Selected as Best Managed Board in India by Aon Hewit – Mint Study 2012

 ICAI Gold Shield for Excellence in Financial Reporting (2011-12), third time in succession
Global

 Rated as one of the world‘s greenest companies by Newsweek Magazine

 Listed in Forbes Asia‘s Fab 50

 Awarded Best Performing Consultancy Brand in Europe


 Recognized as leading IT Services and Outsourcing Firm in China

 Top honours at the Asian CIO Leadership Awards in Dubai

 Top Software Company at Quest Forum India Quality Award 2012

 Three recognitions in UKs Business in the Community‘s (BITC) Awards for Excellence 2012

 Caring Company Award 2012 for CSR activities in Hong Kong

Plans:

STRATEGY

The Company‘s strategy for long-term profitable growth is based on continuously scaling its
core IT services business, while investing in new customers, services, markets and industries.
The Company‘s strategy of strengthening the current business and investing in the future
revolves around

(1) Customer centricity

(2) Full services portfolio

(3) Global network delivery model (GNDMTM)

(4) Non-linear business models and

(5) Experience certainty.

1) Customer centricity: Building deep and long lasting customer relationships is the key to the
Company‘s long term success. The Company has undertaken several initiatives to be customer
centric, including
62
Creation of a domain-centric organization structure and building deep domain knowledge and
technology skills across industries.

2) Staying relevant: TCS is helping enterprises to standardize, rationalize and transform their
business operations to become operationally efficient and remain cost competitive in the market
place. The Company is working closely with its customers, helping them to gain deeper insights
into their customers‘needs and enabling them to realign their offerings accordingly

Expected growth of TCS by MOSL’s research report:

Acquires French IT Services firm ALTI; Synergy seen from access to marquee clientele;
1.4% accretion to revenues and negligible impact on EPS

- TCS announced the acquisition of ALTI, a French IT Services firm providing services around
Enterprise Solutions, Assurance and CRM, for a total consideration of EUR75m. ALTI SA
reported EUR126m

Revenues in CY12 and has grown revenues at a CAGR of 15% over the last 5 years. The
company has a large number of marquee clients across industries such as BFSI, Services,
Utilities – examples include Allianz, BNP Paribas, HSBC, Mercedes Benz, L‘Oreal, SAP etc. ‐
The acquisition gives TCS access to blue‐chip French and European clients. France is the third
largest IT Services market in Europe, estimated to be EUR30b. We believe that acquisition
synergies in the long run could come from ANTI‘s marquee

clientele. TCS‘breadth of offerings and scale of operations lends potential to expand its wallet
share significantly in this group, than ALTI‘s current scale at each.

Impact on Financials: ‐

1,200 employees in ALTI contributed towards EUR126m revenues in CY12. Assuming a high
utilization rate at onsite, in the range of 90‐95%, we get billing rate in the ballpark of
USD75‐80/hour, which is comparable to onsite rates for top Indian vendors. ‐ Given a revenue
base of EUR126m in CY12 and 5‐year revenue CAGR of 14.5%, the acquisition adds ~1.4% to
FY13 revenue base and changes our FY14E /FY15E USD revenue estimates by 1.1%/1.0%

‐ Also, given the consideration amount of EUR75m, even if we assume that TCS paid 12x
trailing earnings in CY12, we arrive at a PAT margin of 5%. Assuming TCS paid 10x CY12, we
arrive at a PAT margin of 6%. After factoring in the post-tax yield forgone on cash, accretion to
EPS is negligible.

Valuation and View:

63
‐ TCS trades at 19x FY14E and 17.3x FY15E EPS. We expect the company to grow its USD
revenues at a CAGR of 14.6% over FY13‐15 and EPS at a CAGR of 10.2% during this period.

‐ While we expect TCS to continue leading the pack in terms of growth and execution, at 19x
FY14, we see the outperformance priced into the stock, making it difficult to surprise the street
Maintain Neutral.

Event:

‐ TCS announced the acquisition of ALTI, a French IT Services firm providing services around
Enterprise Solutions, Assurance and CRM.

‐ The company signed a definitive agreement for acquisition of 100% acquisition shares in Alti
SA, for an all cash consideration of EUR75m.

About ALTI SA:

‐ ALTI SA is a technology services firm specializing in IT solutions like EAS, Testing and
CRM.

‐ It is a privately held company owned by its management and two private equity funds –
CM‐CIC LBO Partners and IDI.

‐ The company grew its revenues to EUR126m in CY12 from EUR64m in CY07, and employs
1,200 people based out of France, Belgium and Switzerland.

‐ The company is regarded as one of the top 5 System Integrators of Enterprise Solutions.

‐ ALTI‘s clientele includes the following:

Insurance: Allianz, Ageas, Axa, BNP Paribas Cardif, Generali

Banking: Amundi, HSBC, Axa Bank, Banque de France, Credit Agricole, Societe Generale

Industry/Services: Mercedes Benz, L‘Oreal, Alcatel Lucent, Sanofi Aventis, Air France, SAP,
Sodexo, Orange

Public Sector/Utilities: Ministry of Justice, Ministry of Finance, UNESCO, Ville de Paris,

SUEZ Environment.

64
Rationale:

‐ Primarily, the acquisition gives TCS access to blue‐chip French and European clients across
multiple verticals like BFSI, Manufacturing and Utilities

‐ France is the third largest IT Services market in Europe, estimated to be EUR30b+

(~USD40b+), after UK and Germany, and the acquisition is expected to help TCS accelerate
growth in France with an expanded set of Services.

Our View:

‐ We believe that the benefits from ANTI‘s marquee clientele could be a significant synergy
from the acquisition. TCS‘breadth of offerings and scale of operations lends potential to expand
its wallet share significantly in this group, than ALTI‘s current scale at each.

‐ The trend of Continental Europe gradually opening up to outsourcing and off shoring has been
increasingly visible in the last few quarters, because of which expanding reach in the geography
has been a key imperative for the industry.

TCS‘acquisition of ALTI follows Infosys‘acquisition of Lodestone in 2QFY13, which was based

out of Zurich and had 83% of revenues from Europe. Continued increase in the outsourcing trend
out of Europe could be a key growth driver for the industry, and hence, we do not think that this
is the last of the transactions undertaken in the region

65
CHAPTER 5

CONCLUSION
FINDINGS AND SUGGESTIONS

66
 FINDINGS AND CONCLUSIONS

FINDINGS:

1) In the Economic Analysis we can see that economic is booming after two and current position
shows that this is the good time to invest after the recession because GDP growth rate is
increasing. Overall economy is growing.

2) The growth of real GDP has generally shown declining trend since the first quarter of 2011-
2012. GDP growth in India during 2011-12 and 2012-13 is in sync with trends in similar
emerging economies.

3) The labour productivity in India in 2011 was US$ 9,310, compared to US$ 69,900 in UK and
US$ 96,000 in the United States.

4) In the analysis of TCS we can see that EPS is increasing yoy. And dividend is also increasing
so investor can invest in the company but on other side we company‘s intrinsic value is less than
the current price it shows that the share price is overvalued and investor should sell the share.
But if investor want to invest in the company for long term than he can have a good profit
because company growing rapidly in terms of profit and net sales and its EPS & DPS are
increasing over the years.

5) There has been in an increase in all the financial aspects of TCS. It tells us that it is a very
good investment to be made.

6) TCS has been an over performer when it is compared with the market index SENSEX.

7) The revenue of TCS has grown over the years. Some of the graphs in the data given in chapter
4 suggest that TCS is making profit and is able to repay its debts. Some graphs also suggest that
it is strong enough to beat out its competitors in the future.

67
CONCLUSION:

Fundamental analysis holds that no investment decision should be without processing and
analysing all relevant information. Its strength lies in the fact that the information analysed is
real as opposed to hunches or assumptions. On the other hand, while fundamental analysis deals
with tangible facts, it does not tend to ignore the fact that human beings do not always act
rationally. Market prices do sometimes deviate from fundamentals. Prices rise or fall due to
insider trading, speculation, rumour, and a host of other factors.

The above report says that our economic is growing after the recession and it is the good time
for the one who want to invest. And according to the industry analysis investor can invest in the
banks but he/she should be careful for the investment

All the findings during this project tell us that TCS is would be a good investment and an
investor should certainly have it in the portfolio of investment.

68
 SUGGESTIONS

The analysis carried out at on the TCS, their profit and loss account, balance sheet and ratios. I
shall suggest the investors to invest in TCS than the other IT companies as a value investment.

 Strong increase in profit year-on-year basis.

 Increasing EPS indicate good earnings.

 Increase in sharing profit with shareholders in form of dividend.

 TCS is expanding its footholds on international level also; its


 Insurance and asset management business are also performing well.

 TCS is the one of largest companies in the IT industry.

 the net worth of TCS is high.

 When compared with SENSEX, TCS has been an over performer

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CHAPTER 6

BIBLIOGRAPHY

70
Bibliography

Information and data used in the project has been collected from the following sources
Website

www.moneycontrol.com

www.capitalmarket.com

www.wikipedia.com

www.bankbazzar.com

www.ndtv.com

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