OPTIMUM PORTFOLIO:

An Empirical Analysis

Submitted By:
Neha Dhingra
Enroll No.-07BS2482
ICFAI Business School, Bangalore
 OPTIMUM PORTFOLIO:

An Empirical Analysis

Submitted By:
Neha Dhingra
07BS2482

A report submitted in partial fulfillment of the Requirements of

MBA Program of
ICFAI Business School, Bangalore

Faculty Guide: Company Guide:

Prof. Ashish Dash Ms. Rangapriya.S
Faculty Financial Analyst
ICFAI Business School Right Horizons
Bangalore Bangalore

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 Contents
LITRATURE REVIEW: 15
EMPIRICAL FRAMEWORK: 20
DATABASE: 23
TIME FRAME: 25
CHAPTER SCHEME: 25
2.1 AUTOMOBILE SECTOR: 28
2.2 TELECOMMUNICATIONS: 30
2.3 BANKING SECTOR: 33
Company Analysis: 42
Table 3.1: Lists the values of the various ratios used for analyzing the
fundamentals 42

Reliance Telecommunications: 44

Conclusion 65
Optimal Portfolio: 67
Observed Portfolio: 70

CONCLUSION 74

Appendix I: 79

Appendix II: Explains the Financial Ratios considered for the purpose of company
analysis. 83
Profitability Ratios: 83
Risk Ratios: 84

List of Tables

Table 1.1 Reviews the literatures that have been studied for the purpose of this
study.
Table 1.2 Lists various information available and unavailable in each of the
databases used for the purpose of this study.
Table 1.3 Displays the various stages and the dates of evaluations.
Table 2.1 Shows the respective shares of foreign as well as Public Sector Banks
in terms of branches, staff, deposits, advances and net profit

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Table 3.1 Lists the values of the various ratios used for analyzing the
fundamentals
Table 4.1 Lists the percentage allocation to each of these securities in the
optimum portfolio.
Table 4.2 Lists the percentage allocation to each of these securities in portfolio
of Reliance Growth mutual fund as on 31st March 2008.

List of Figures

Figure 2.1 Shows the categorization of various producers on the basis of

products produced by them in Automobiles Sector
Figure 2.2 Market Shares of Telecom Service Providers

Figure 3.1 Shows the various financial ratios that form the company
fundamentals.
Figure 4.1 Portrays the allocation in the Optimal and Observed Portfolio to
various sectors.

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ABSTRACT

This project explains how theory can serve as an instrument to analyze

the fundamentals of thirty five companies before recommending them as

an investment avenue. It discusses how to construct an optimal portfolio

making use of modern portfolio theory and thereby concluding that their

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exists very less correlation between the observed portfolio of a mutual

fund and an optimal portfolio thereby proving that this well performing

fund do not use theories rather the experience of fund managers which

makes them yield good returns.

EXECUTIVE SUMMARY

Name: Neha Dhingra Enrollment No.:07BS2482

Company Description:

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Right Horizons( www.righthorizons.com ) is an end to end investment

advisory and wealth management firm that focuses on providing a solution that

is specific to customer needs like corporate treasury management, Tax

planning, corpus fund planning etc.

Title of the project:

The study titled “Optimum Portfolio: An Empirical Analysis” is carried out

during 22nd February 2008 to 22nd May 2008 at Right Horizons Financial

Services Pvt. Ltd.

Objectives of the project:

Following are the objectives for this study:

 To understand and analyze key sectors such as Automobiles,

Telecommunication and Banking sectors for considering equity

investments.

 To identify companies within these sectors as well the ones comprising

portfolio of Reliance Growth mutual fund and conduct a Fundamental

Analysis on these equities.

 To construct an optimal portfolio, that includes the selected shares of

the sectors as well as shares comprising portfolio of Reliance Growth

mutual fund.

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  To compare the observed portfolio of a top performing mutual fund

with the optimal portfolio.

Background:

Portfolio Management is one of the most important aspects of financial

services. It aims at minimizing the risk of an investor and at the same time it

attempts to maximize the returns. This study is an attempt to search out

existing theoretical and empirical knowledge in the area of portfolio

management and further devise strategies to design an optimally diversified

portfolio.

Methodology used:

The study analyzes several key sectors such as Banking, Telecommunications

and Automobiles Further, an attempt is made to analyze thirty five companies

from the portfolio of Reliance Growth mutual fund (which is a well performing

mutual fund) operating in Indian equity market by using various financial

ratios. It then constructs an optimal portfolio using the empirical framework

developed by Elton Gruber and Pedberg. Further, the performance of the

observed portfolio of Reliance growth and that of the optimal portfolio

constructed in this study are compared.

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Findings and conclusion:

The study concludes that there is a very low correlation of .0939 between

Reliance growth mutual fund and that of the optimal portfolio constructed in

this study. The expected returns are calculated for the optimal portfolio which

yields 47.83 percent per year which is slightly lower than returns yielded by

the observed portfolio of Reliance growth i.e. 52.35 percent per year calculated

on the basis of average monthly returns over the period March 2005 to March

2008. However, this higher return could be attributed to the higher risk thsat is

taken in the construction of the portfolio of Reliance growth. The study finds

that though the observed portfolio (of Reliance growth) is yielding higher

returns at the same time it is exposed to higher risk.

Special Achievements & Recognitions:

• The Investment suggestions that are made out of the findings and initial

observations of this study are implemented for various high end

Clients. These suggestions included:

 Recommendations were given during the market correction of

March 2008 to various high end clients for switching from debt

to equity mutual funds.

 Identifying and communicating investment ideas relating to

mutual funds ( NFOs) and equities to clients for consideration

of Investment.

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 • Recognized for good performance and hard work related to the

organization.

• Recognized for choosing appropriate candidates for recruitment of

financial analyst and marketing executives.

• Personal satisfaction and confidence towards successfully integrating

Standard Portfolio theory and financial ratio analysis in investment

decision making for high end clients.

• Exposure to databases like Prowess, Capital Line has further the

enriched the learning experience of undertaking this study.

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ACKNOWLEDGEMENTS

I would like to thank Right Horizons Financial Services Pvt Ltd. And

especially for Ms.Rangapriya.S for giving me an opportunity to do my

internship with such an esteemed organization and providing me with

help and guidance in completing my study and provided me with an

opportunity to learn insights into the Financial Services Industry and

gave me an exposure across domains so that I can learn every aspect of

management.

I would also like to thank Prof.T.R.Venkatesh, Director of ICFAI

Business School for his words of encouragement and Prof.Ashish

Dash, my Faculty guide for his guidance, support, special training and

the time he committed to enhance the learning during the course of this

project and his help at every stage of project completion. Also, I would

like to thank the Placement team IBS Bangalore and Ms. Sharon Jose,

SIP coordinator for supporting me to get a suitable project for pursuing

my internship with an organization that has enhanced my learning’s.

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 Chapter 1:
OVERVIEW
(This chapter discusses the basic motivation behind the
study and the initial thought process when this study
was undertaken describing each and every step taken to
achieve the goals.)

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MOTIVATION

Portfolio Management is one of the most important aspects of financial

services. It aims at minimizing the risk of an investor and at the same

time it attempts to maximize the returns. To start with several

researchable questions occur to one’s mind in the context of portfolio

management like the ones listed below:

• What are the various intricacies involved in making investment

decision in favor of a particular stock?

• How risk can be managed while investing in equities?

• What are the alternative criteria for making investment decision

in a stock?

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• What criterions financial companies consider while making

investment recommendation in favor of a particular stock to their

clients?

• Do historically well performing mutual funds also invest in

similar equities? If so to what extent.

• To what extent optimal portfolio is correlated with the observed

portfolio of well performing Mutual funds?

• Whether Mutual funds that are closely related to optimal

portfolio have performed well in terms of historical returns?

The real motivating factor behind this study is to find plausible answers

for the questions raised above.

While the present Summer Internship Program at ‘Right Horizons

Financial Services Pvt. Ltd.’ 1will certainly give a practical exposure to

the art of security analysis and the craft of Investment decision making

(among others), an added attempt is undertaken to search out existing

theoretical and empirical knowledge in the area of portfolio

management and review the same to formulate a set of objectives for

this study.

1
The details regarding the SIP company and the work profile is provided in Appendix I

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 LITRATURE REVIEW:

While seminal works such as Sharpe et al (1994), Elton et al (1996),

Fisher et al provides an excellent review of theoretical aspects of

portfolio diversification and investment decisions, the following table

summarizes the theoretical and empirical review of related studies.

Table 1.1: Reviews the literatures that have been studied for

the purpose of this study.

Title Author Date Remarks

Modern Edwin J. 1996 This book deals with the
Portfolio Elton et
Theory and al economics behind designing a
Investment
Analysis portfolio as well as theories

regarding portfolio

optimization.
Investments William 2007 This book deals with art of
F.Sharp
e et al buying and selling securities as

well as security markets. Also,

it explains the Modern

Portfolio theory of Elton et al

and Sharpe ratio as an art of

designing portfolios
Security Donald 1995 This book portrays the art of

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Analysis and E.Fisher Industry and Company
Portfolio et al
Management analysis and the basics of

designing a portfolio by

selecting stocks from the

securities market.
“Constructing Debashi 2002 This paper has constructed an
an optimal sh Dutt
portfolio using optimal portfolio using the
Sharpe’s
single index Sharpe’s Model taking BSE
model”
100 as the market index but it

has not made use of adjusted

share price data which has

affected the outcome to a large

extent the portfolio is biased

towards Banking stocks with

the complete 100 per cent of

the corpus invested in banking

stocks which will be faced

with volatility as and when any

changes in banking sector

comes in operation.
“Return Lingjie 2007 This paper uses the quantile
Forecasts and ma et al
Optimal regression model in financial
Portfolio
Construction: markets and proposes models
a Quantile
Regression for return forecasting and
Approach”
portfolio construction. This

study concludes that the

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 Quantile Regression method is

more useful than classical

conditional mean method.

R2: A Market- John E. 2000 This study evaluates R 2 as a
Based Cresson
Measure of valid measure of portfolio and
Portfolio and
Mutual Fund mutual fund diversification
Diversification
and it provides evidence of

diversified portfolios and

diversified mutual funds

having significantly higher

R 2 than undiversified

portfolios and undiversified

mutual funds.
Modern Gregory 2002 This article examines selected
Portfolio Curtis
Theory(MPT) limits to the usefulness of
and Quantum
Mechanics MPT and through critical

examination of the

assumptions underlying, draws

conclusions how MPT can

provide helpful insights to

investors. It attempts to

classify various asset classes,

the role and use of hedge

funds, real estate, or hard

assets. In conclusion, This

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 study recommends

employability of MPT

concepts in financial advisory

area.
The Impact of Elton et New This paper discusses how
Mutual Fund al York
Family Univer investors who confine their
Membership sity,
on Investor May mutual fund holdings to a
Risk 2004
single fund family, tend to

restrict their returns exposing

their portfolio to much higher

risk. As, empirical evidence

shows that degree of

correlation between two

similar category funds of

similar mutual fund family is

much higher as compared to

two funds in same category but

different fund families.

These literatures have also helped in understanding the empirical

framework which could be used for the construction of optimal

portfolio. Further base on the above literature review the following

objectives are set out for this study.

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OBJECTIVE:

Following are the objectives for the study:

1. To understand and analyze Automobiles, Telecommunication

and Banking sectors 2 for consideration of equity investment.

2. To identify companies within these sectors as well the ones

3
comprising portfolio of Reliance Growth mutual fund and conduct a

Fundamental Analysis on these equities.

3. To construct an optimal portfolio, that includes the selected

shares of the sectors as well as shares comprising portfolio of Reliance

Growth mutual fund.

4. To compare the observed portfolio of a top performing mutual

fund with the optimal portfolio.

SCOPE OF THE STUDY:

2
These sectors are identified by the SIP Company for examining investment potential in these
sectors and to identify companies in these sectors in which investment can be considered.
Also, a few stocks have been decided considering the investment of Reliance Growth Fund
which is one of the consistent performers in mutual fund arena.

3
As on 31st March 2008.

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The scope of the present study in terms of portfolio diversification is

restricted to India. Further, the asset class that has been considered is

restricted to Indian equity market and more specifically national stock

exchange of India (NSE).

EMPIRICAL FRAMEWORK:

1. An Analysis of the sectors would be undertaken to identify stocks that

are among the top performers in their respective sectors. In doing so the

study will focus on various financial ratios such as Price/Earnings ratio,

Book value per share, Earnings per share, Interest Coverage ratio, Debt

equity ratio to mention a few.

2. The Mutual fund that is performing well would be identified using

historical performance and the allocation of funds in these mutual funds

would be examined.

3. An optimal portfolio would be developed in line with Elton et al

(1981) where the identified shares from the above analysis would be

included. The steps for the construction of an optimal portfolio in line

with Elton et al, as provided in Sharp et al (1995) are as follows:

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 i. Compute the return on various securities and the market return.

ii. Calculate the excess return-to-beta ratio for each stock under

consideration and rank them from highest to lowest order.

Ex c e Rs tseu r− tno− B e =t a R −βiR f. . . . .................1.)... (

Where,

R i ---- The expected return on stock i

R f ---- The return on a riskless asset

βi ---- The expected change in the rate of return on stock I

associated with a 1 per cent change in market return.

iii. Find out θ by using the formulae:

i ri − r f
∑ 2 im
β
θ =σ m
2 i =1 σ εi
i .......... .......... .......... ..( 2)
∑
βim
1+ σ m2
σ 2
i =1 εi

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 Where,

σ 2m =Variance of Market R eturns

σ ei2 =Variance of Stock' s movement that is not associated with movement of the market ind
This is the stock' s unsystemat ic risk.
ri =Average Return on security
rf =Return on government security
β im =Beta of the Security

iv. The optimal Portfolio consists of investing in all stocks for which

excess return over beta is greater that a particular cut-off point C.

v. Once the cut-off rate is determined, we know which security will figure

in the optimal portfolio. The next step is to calculate the proportion to be

invested in each security. The proportion to be invested in each security

is:

Xi = i
Zi
...........................(3)
∑ Zi
i =1

Where,

β im Ri − R f
Z= σ ei2
( β − C * ).................(4)

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 4. Finally this optimal portfolio would be compared with that of the

mutual funds.

DATABASE:

The Databases for the present study are secondary in nature. Table 1

provides information relating to the secondary databases useful in the

context of present study.

Table 1.2: Lists various information’s available an not available in each

of these databases

Limitations(
Data URL Data collected
If any)
Companies www.moneycontr Share prices Adjusted

Data ol.com share price

data not

available
Prowess Database Share prices & --

ratios
www.nseindia.co Indices Adjusted

m share price

data not

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 available
Mutual www.moneycontr Portfolio’s --

Fund ol.com
www.valueresear Portfolio’s Only top

chonline.com five

allocations

are

available
Sectoral www.trai.gov.in Telecom --

Data Industry
Economic Survey Sectoral --

of India 07-08 Productions

Union Budget Changes in --

2008-09 Taxes and

excise duties
Finance Ministry Indian --

of India Economy in

Comparison

with ROW
acmainfo.com Auto ancillary --

Industry
www.ssrn.com Journals --
Research Search.ebscohost. Journals --

com
Source: Compiled by the author

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 The time period is 2006-2008 for which various information have been

collected.

TIME FRAME:

Table 1.3: Displays the various stages and the dates of

evaluations.

Evaluation Date Activity

Stage
Stage- I 24th – 29th March, 2008 Project Proposal
Stage- II 21st – 26th April, 2008 Project Interim Evaluation
Stage- III 19th – 24th May, 2008 Project Final Evaluation
Stage- IV 19th – 24th May, 2008 Project Specific Evaluation
Source: Student Hand book, SIP, 2008

CHAPTER SCHEME:

The next chapter focuses on the analysis of Automobiles,

Telecommunications, and Banking sectors. Chapter three provides the

Fundamental analysis of thirty five securities that have been selected on

the basis of the securities comprising the portfolio of Reliance Growth

mutual fund as on 31 March 2008. Chapter four attempts to construct an

optimal portfolio and compare the same with that of observed portfolio

of the mutual fund. Chapter five summarizes the main findings of the

study and concludes.

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 Chapter two:
SECTORAL
ANALYSIS
(This chapter aims at analyzing three sectors namely
Automobiles, Banking and Telecommunications. This would help
in understanding the sectoral growth and performance which in
turn would be useful for making investment decisions in the
equities of these sectors.)

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2.1 AUTOMOBILE SECTOR:

Production of automotive industry which provides extensive forward and

backward linkages to other key segments of the economy is growing at an

impressive rate. However, as the Indian Industrial Production (IIP) data

suggest, their production growth has been negative during April-November

2007.

But, the turnover of the fast growing auto component industry, comprising

around 500 firms in the organized sector and more than 10,000 firms in the

small and unorganized sector, grew from US$ 3.1 billion to US$ 15 billion

between 1997-98 and 2006-074. The quality standards have also improved

which is evident from the International recognition as well as the expanding

exports which grew at a compound annual growth rate of 29.07 per cent to

reach US$ 2.9 billion while imports grew by 31 per cent to reach US$ 3.33

billion. Though, India is a net importer of auto components in the current

liberalized duty regime, the challenges faced by the industry is to innovate and

upgrade continuously to remain competitive in the international market and

strive to increase its market share from current 0.4 per cent share of the global

Auto Components Industry. Indian government has also finalized the

Automotive Mission Plan (AMP) 2006-16 for making India a preferred

destination for design and manufacture of automobiles and automotive

components5.

4
Indian Economic survey 2008
5
: Overview of the automotive component sector in India, April 2007 - The Indo-Italian
Chamber of Commerce and Industry

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Figure 2.1: Shows the categorization of various producers on the basis

of products produced by them

(Source: Overview of the automotive component sector in India, April 2007 -

The Indo-Italian Chamber of Commerce and Industry)

The Auto Component Industry is graduating to World- class by substantially

increasing investments in production capacities and by establishing

partnerships in India and abroad, investing in or acquiring companies overseas.

Budget 2008-09:

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 • Customs duty reduced on steel melting scrap and aluminum scrap from

5 per cent to nil.

• Excise duty reduced on buses and their chassis from 16 per cent to 12

per cent.

• Excise duty reduced on small cars from 16 per cent to 12 per cent and

on hybrid cars from 24 per cent to the general revised rate of 14 per

cent.

• Excise duty reduced on two wheelers and three wheelers from 16 per

cent to12 per cent.

Impact on sector:

• Customs duty nullified on select metal scrap might reduce the raw

material cost for some of the auto component players

• Excise duty reduction in select auto segments will help spur demand

for automobiles, which in turn will benefit the components industry.

2.2 TELECOMMUNICATIONS:

With more than 270 million connections, India’s telecommunication network

is the third largest in the world and the second largest among the emerging

economies of Asia. The telecom sector continued to register significant growth

during the year 2007 and has emerged as one of the key sectors contributing to

the Indian economic growth. This has been possible due to the supportive

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Government policies coupled with the private sector initiative. The focus of the

policy has been on network expansion, rural telephony, broadband coverage

and R&D and on providing an enabling environment for the competitive

growth of the sector. Opening of the sector has created an impressive forward

momentum in India resulting in massive investment and expansion with

technological changes and improvement in quality of the telecom services.

The liberalization efforts of the Government are evident in the growing share

of private sector in total telephone connections, which has increased from 39.2

per cent in 2004 to 72.4 percent in December 2007. The growth of wireless

services, in particular, has been phenomenal, with number of wireless

subscribers growing at a compound annual growth rate (CAGR) of 87.7

percent per annum since 20036. Today, the wireless subscribers are not only

much more than the fixed subscribers in the country, but also increasing at a

much faster pace. The share of wireless phones has increased from 24.3 per

cent in March 2003 to 85.6 per cent in December 2007. Improved affordability

of wireless phone has made the universal access objective more feasible.

The Universal Service Obligation Fund (USFO) continues to be used to

subsidize the developments in the telecom sector in the rural areas.

Figure 2.1: Market Shares of Telecom Service Providers:

6
Indian Economic survey 2008

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(Source: The Indian Telecom Services Performance Indicators July– September 2007. TRAI)

Budget 2008-09

• Specified inputs and raw materials for manufacture of specified

electronics/ IT hardware items have been exempted from excise duty.

• Additional duty of 1 per cent to be levied on imported mobile phones

towards national calamity contingency reserve.

• Countervailing duty on wireless data modem cards with exempted by

way of excise duty exemption. These goods are already exempt from

customs duty. However, 4 per cent additional duty of customs will be

attracted.

• Internet telecommunication service brought under the service tax net.

• Customs duty on convergence products to be reduced from 10 per cent

to 5 per cent.

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Impact on Sector:

• Exemption from excise duty for specified inputs and raw materials for

manufacture of specified electronics/ IT hardware to lower the network

cost for telecom service providers.

• Additional duty on imported mobile phones to make handsets

expensive, thus prohibiting a faster acceptance.

• Imposition of service tax on Internet telecommunication services to

make them expensive.

• Reduction in customs duty on convergence products to help establish

parity between devices used in the information/communication sector

and the entertainment sector.

2.3 BANKING SECTOR:

With the Indian economy developing and incomes rising even though standard

of living is rising there has been a trend of increasing Investment in the

economy. So, the Indian banking sector is at a turning point towards growth.

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Further, as Indian companies are globalizing, several Indian banks are pursuing

global strategies in order to compete with Foreign Banks.

There are in totality 222 commercial banks in India (of which 133 RRBs) with

nearly 70% of branches in rural/semi-urban areas. The ratio of assets of

commercial banks to GDP has increased to 92.5 per cent at end-March 2007 7.

Consequently, the degree of leverage enjoyed by the banking system, as

reflected in the equity multiplier has increased by 3.9 percent at the end of

March 20078. Foreign banks will have the opportunity to own up to 74 per

cent of Indian private sector banks and 20 per cent of government owned

banks. These foreign banks with huge capital reserves, cutting edge

technology, best international practices and skilled personnel will create a

major competitive challenge for Indian banks, especially the public sector

banks.

Banks are supporting growth in the economy by financing productive sectors

with bulk of commercial bank financing for short-term working capital needs

of industry, trade, agriculture & personal segment. Credit – Deposit ratio (CD

Ratio) increased to 72.5% against benchmark 60% reflecting the strong

underlying credit momentum.

Table 2.2: Shows the respective shares of foreign as well as Public

Sector Banks in terms of branches, staff, deposits, advances and net profit

7
Indian Banking: Shaping an Economic Powerhouse, Sh. T.S.Bhattarachya, M.D. SBI, 2006
8
Indian Banking: Shaping an Economic Powerhouse, Sh. T.S.Bhattarachya, M.D. SBI, 2006

34 | P a g e
 Branche Deposit Advance Net

s Staff s s Profit
% age share in total
Public Sector

Branches 88.41 87.23 75.24 73.25 73.62

Private Sector

Branches 11.33 10.76 19.42 20.24 16.95

Foreign Banks 0.26 2.01 5.44 6.51 9.43
ASCB Total Banks 100 100 100 100 100

(Source: Indian Banking: Shaping an Economic Powerhouse, Sh.

T.S.Bhattarachya, M.D. SBI, 2006)

Budget 2008-09:

• Initial provision of Rs 1,600 crore made for interest subvention in

2008-09.

• PSU banks and regional rural banks (RRBs) to offer debt waiver on all

agricultural loans disbursed up to March 2007 and due until the end of

December 2007.

• Complete debt waiver on all loans given to small and marginal farmers.

• The total value of relief to be offered to farmers is estimated at Rs

60,000 crore.

• The government has advised PSU banks and RRBs to add at least 250

rural household accounts every year at each of their rural and semi-

urban branches.

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 • Public sector banks have been asked to include Indira Awas Yojana

(IAY) houses under the differential rate of interest (DRI) scheme and

lend up to Rs 20,000 per unit at annual interest rate of 4 per cent.

• Banking Cash Transaction Tax (BCTT) being withdrawn with effect

from April 1, 2009.

Impact on sector:

• PSU banks are expected to face pressure on their net interest margins

until the subsidy for waiver of agricultural loans and one time

settlement of loans is released from the government.

• The cost of adding more rural households in their rural branches may

increase the operating cost for the PSU banks.

• Including Indira Awas Yojana (IAY) houses under the differential rate

of interest scheme at an interest rate of 4 per cent will increase the

proportion of sub-PLR lending for the PSU banks.

Taking the above developments into consideration, ever since Indian economy

opened its doors to MNCs, the Indian banking sector has been witnessing

bizarre changes in terms of new products and services and stiff competition as

well. The sorts of IPOs that have been taking place in banking sector are

amazing. In the light of these recent developments, a careful analysis of the

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profitability of Indian banking sector is inevitable. The present study attempts

to analyze the profitability of the two major banks in India: SBI and HDFC one

of which is a public sector undertaking and other a private sector venture.

Conclusion:

Therefore this chapter has determined the basic outlining features of these

sectors so that the investment decisions can be undertaken can be undertaken

keeping in view the research conducted on the basic fundamentals, the growth

achieved by each of these sectors in the past as well as the future prospects

projected on the basis of Union Budget 2008-09 which has impacted each of

these sectors in an entirely different way.

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 Chapter three:
Fundamental
Analysis
(This chapter intends to understand the fundamentals of the
selected companies using financial ratio analysis to consider
these companies for investment purpose.)

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Fundamental Analysis:

The thirty five companies selected from the portfolio of Reliance Growth’s
growth plan. These companies includes various sectors namely Automobiles,
Banking, Breweries, Chemicals, Construction, diversified, electrical
equipments, Energy, Information technology, Media, Mining, Oil drilling,
Petrochemicals, Pharmaceuticals, Shipping, Steel, Power, Telecommunication
and Trading. Ratio analysis of these companies will be undertaken considering
following ratios9:

Figure 3.1: Shows the various financial ratios that form the company
fundamentals.

9
The theoretical interpretations of these ratios are prescribed in Book Name Year.

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CompiledCompiled
by the Author
by the author
: The various aspects to analyze in the company fundamentals in order to consider investment.

Company Analysis10:
Table 3.1: Lists the values of the various ratios11 used for analyzing
the fundamentals

10
Highlighted values represent the highest and lowest values in that particular ratio.
11
Explanation for each of these ratios is presented in Appendix II

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 Secu
A mtek A uto L td.
M otherson Sumi Syst
E scorts L td.
M aruti Suzuki India L
Bank O f Baroda
Compiled by the Author: Audited financial Results for the financial year 2007.
Bharti Airtel:

H D F C Bank L td.
S e c
Source: Prowess

Performance in FY07:

State Bank O f India

43 | P a g e
 Profitability aspects this company is yielding very good returns to its

shareholders with a ROCE of 46.01 per cent, Earnings per share equal

to 21.17 and a PE of 36.08x. The earnings are yielding a return of 5.35

per cent to the market capitalization of this company at FY end. The

company has a policy of reinvesting its earnings into its operations.

But, from the aspect of riskiness as the current ratio for this company is

very low i.e. 0.35 which implies it has 0.35 units of current assets to

pay of 1 unit of its current liabilities which may act as a source of

financial risk to the company. On the other hand the ICR of the

company is appropriate as it has 0.46 units of dent for every one unit of

equity in its capital structure.

Reliance Telecommunications:

S ec
Source: Prowess

Performance in FY07:

From the aspect of profitability it is giving less return on the employed

R e lia n ce C o
capital as compared to its peer Bharti Airtel of 11.57 per cent with an

EPS of Rs.35.37 and an earnings yield of 5.49 per cent. It is also giving

very low dividends of Rs.0.50/share with a yield of 0.12 per cent on its

44 | P a g e
 market price as on 31 Dec 07. It is paying out 4.20 per cent of its

earnings as dividend and the rest 95.80 per cent is being ploughed back

into its operations.

But, from the aspect of riskiness it is considered to be more risky than

Bharti airtel with a lower current ratio of 0.34 and quick ratio of 0.08.

Since its utilizing more debt in its capital i.e. 0.71 units of debt for

every one unit of equity, its ICR is at a safe level of 6.32 per cent.

Therefore, it can be concluded that comparing the two companies comprising

the portfolio, Bharti Airtel is considered to be yielding High return with high

risk, and Reliance Communications is yielding lower returns with higher risk.

Bank of Baroda:

S ec
Source: Prowess

Performance in FY07

The bank has been able to improve business performance, achieving

B an k O f B aro
record business growth; significantly improving asset quality &

reducing NPA levels which can be determined with the return on

capital employed equal to 51.52 per cent and a PE of 7.63x. Even

45 | P a g e
 though it has yielded the highest yield on earnings out of the thirty

five companies yielding returns on dividend of 2.79 per cent. Taking

the risk aspects it is not in a very safe position with the interest

coverage ratio of 1.3 per cent; it is not in a position to take up more

debt in its capital even though it has a very low DE ratio of 0.45.

HDFC Bank:

S ec
Source: Prowess

Performance in FY 07

HDFC Bank is considered to be a risky investment with a very low on

all ratios except current ratio. But, it is giving good returns with a

H D F C B ank
ROCE of 47.57 percent and EPS 0f Rs.35.74 and a PE of 26.7, it is

considered to be a security with high risk high return yielding

capacity and can be strongly considered for the aggressive portion of

a portfolio.

State Bank of India:

Performance in FY07

46 | P a g e
S ec
 Source: Prowess

SBI has yielded returns of 60.69 percent on its earnings and 1.49

percent on the dividend paid. With a PE of 11.67x it definitely seems

to be a strong option for investment in the blue chip companies.

Considering the risk aspects, it has a very low interest coverage ratio

of 1.32 per cent and with very high debt equity ratio of 1.79, it may

expose the bank to very high risk levels.

Therefore, it can be concluded that HDFC Bank is considered as possessing the

strongest fundamentals followed by SBI which has a strong backing from

government of India and lastly Bank of Baroda as it is still in the phase of

modernization and will take time to reach at the levels of operation of other

two banks.

Radico Khaitan Limited:

S ec
Source: Prowess

Performance in FY07

The company has given less than average returns in last FY with a

R a d ic o K h a ita
yield on its earnings of 7.10 percent and the lowest EPS in the whole

group of Rs.3.37. From the aspect of riskiness even though it has

47 | P a g e
 current ratio at adequate levels it has a very high concentration of debt

in its portfolio i.e. 2.73 units of debt for every one unit of equity

which can be analyzed from the low levels of ICR. But, it can be

considered for the purpose of diversification across sectors.

United Phosphorous:

S ecu
Source: Prowess

Performance in FY07

UPL is considered to be a safe investment with current ratio at

appropriate level but it has a high debt-equity ratio of 1.76. This

U n ite d P h o sp h
company can be considered to be an overpriced security by a PE of

66.78 but it is yielding low returns of 6.17 percent as it is not paying

out any dividends also, but it can be considered for investment due to

the growth prospects in the chemicals sector.

Adani Enterprises Limited:

S ecu
Source: Prowess

48 | P a g e
 Performance in FY07

Adani enterprises have yielded good returns on the capital employed

in the company i.e. 24.72 percent. But considering the PE ratio 34.21x

it seems to be an overpriced share as the earnings are not justified by

the price demanded by the security which is proved by a low yield on

its dividend i.e. 0.21 percent even though it has a very high proportion

of debt in its capital structure it is not able to give adequate returns to

its ordinary shareholders.

Jai Prakash Associates:

S ecu
Source: Prowess
Performance in FY07

Jaypee Group is an accredited brand in the construction domain and it

has also performed well in the last FY giving dividends yield to the

extent of 3.34 percent and an EPS of Rs.18.93. On the aspect of

Ja ip ra k a sh A ss
riskiness also it is considered to have moderate levels of risk with an

exception towards Quick ratio which is much lower than acceptable

levels. Therefore it can be considered to be a more than average

returns and moderate level of risk exposed company.

Madhucon Projects:

49 | P a g e
 S ec
Source: Prowess

Performance in FY07

Madhucon project can be considered to be yielding average returns

with average level of risk which can be seen by ICR, Current ratio

and Dent Equity ratio at adequate levels except Quick ratio which is

M ad h u co n P
low and can expose the company to higher risk. Also, it has yielded

average returns to its shareholders with an EPS of Rs.11.30 and a

dividend payout ratio of 5.31 per cent it has paid a dividend of 60

paisa per share as dividends.

Therefore it can be concluded that in the domain of construction Jai Prakash

associates can be considered as a better avenue for investment than Madhucon

Projects. But, keeping in view the growth potential in Infrastructure sector

especially in a growing economy like India, construction sector is projected to

yield good returns.

Greaves Cotton Limited:

S ecu
Source: Prowess

50 | P a g e
 Performance in FY07

With an ICR of 10.84 and debt-equity ratio of 0.25 graves cotton

seems to be performing lower than average on risk aspects and

yielding ROCE of 51.38 percent and an EPS of Rs.15.48, it yielding a

returns on dividends of 2.20 percent. Even though it is exposed to less

financial risk, it is exposed to a high degree of business risk because

of the intensive competition in this sector especially in an open

economy like ours.

Orient Paper and Industries:

S ecu
Source: Prowess

Performance in FY07

OPIL is yielding the highest ROCE in all the selected companies of

53.1 percent and the lowest PE of 5x. Also, it is yielding the highest

O rien t P a p er &
returns on its dividends of 24.37 percent. The company is also

exposed to less risk in terms of the Current ratio, ICR. But, the

company has a large amount of debt in its capital of 2.01 units for

every one unit of equity which may act as a matter of concern for its

future growth prospects.

51 | P a g e
 Reliance Industries Limited:

S ec
Source: Prowess

Performance in FY07

The company has yielded very high returns in FY07 with EPS of

Rs.78.28 and a ROCE of 22 percent. Even though it is considered to

be risky investment considering the Quick and Current ratios but the

R elia n ce In d u
returns have justified the risk taken by an investor in expectations of

higher returns. Therefore, RIL can be considered for the aggressive

portion of the portfolio as this company has a backing of Reliance

group and it is expected to yield good returns even in the future

especially with its presence across sectors.

Crompton Greaves Limited:

Performance in FY07 S ec
With a PE of 38.02x it has yielded a ROCE of 40.25 percent, it can be

considered to be a less than average risk and more than average

C r o m p to n G r e
returns. This company can definitely be considered for the moderate

52 | P a g e
 part of portfolio as electricity generation is one arena where the

economy is less open and thereby exposed to less competition and

thereby is exposed to less business risk.

Reliance Energy:

S ecu
Source: Prowess
Performance in FY07

Reliance Energy yielded EPS of Rs.32.83 per share with a dividend

payout ratio of 16.14 percent yielding returns on its dividends of 1.07

percent. From the aspect of riskiness it can be considered to be

R elia n ce E n erg
exposed to average level of riskiness with a high ICR and low debt

equity ratio 0.68 and current and quick ratio in a moderate position.

AIA Engineering Limited:

S ecu
Source: Prowess

Performance in FY07

The company can be considered to be exposed to very high risk since

all the current assets held by the company are in the form of inventory

A I A E n g in eer
which is not as liquid as any other current asset thereby not able to

53 | P a g e
 support the financials at a stage of crisis except that it is yielding

enough profits to bear the interest cost as can be observed by the ICR

of 70.17 per cent. But, since it is yielding good returns to its

shareholders with an EPS of Rs. 35.60, it seems to be attractive trading

at a PE of 33.72x.

BEML India:

S ec
Source: Prowess
Performance in FY07

The company has a backing by the GOI and is yielding good returns

observed by EPS of Rs.55.77 and ROCE of 33.97 percent. The

company’s earnings are justified as it is not paying out any dividends to

B E M L L td .
its shareholders instead it is investing it back into the company’s

operations. With a very low Debt Equity ratio, it is considered to be

Good Avenue for investment.

Gujarat State Fertilizers & Chemicals Ltd:

S ecu
Source: Prowess

54 | P a g e
 Performance in FY07

The company is yielding good returns on its dividends of 2.58 percent

and an EPS of Rs.30.50. Even from the aspect of riskiness it is exposed

to less than average risk. But, since Indian Economy is transforming

from an Agrarian Economy and the share of Agriculture in Indian GDP

is reducing the future growth prospects for this business may get

restricted due to this fact.

Infosys Technologies:

S ecu
Source: Prowess

Performance in FY07

Infosys Technologies doesn’t have debt in its capital, which implies it

is completely owned by its shareholders which imply that less is

In fo sy s T ech n o
divided amongst each shareholder with a dividend yield of only 0.57

percent. But, since the company has very strong fundamentals it can be

invested into for the stable part of the portfolio as these blue chip

companies have a very less chances of a major fall in earnings or share

prices.

Northgate Technologies Ltd.:

55 | P a g e
 S ecu
Source: Prowess

Performance in FY07

Northgate Technologies has the highest ICR of 135.13 as it does not

have any debt in its capital which inturn has an impact on the yield to

N o r th g a te T e c h
its ordinary shareholders which is visible by the yield earned by its

dividends which is 0.92 percent. Currently trading at a PE of 28.57x it

can be considered for investment due to the strong growth potential in

the innovative technologies being introduced by the company. As it is

still in the phase of growth it can be considered to be an avenue for

investment that is exposed to moderate levels of risk and return.

New Delhi Television Ltd.:

S ecu
Source: Prowess

Performance in FY07

NDTV seems to be an overpriced security trading at PE of 86.43x

N ew D elh i T el
which is the highest but it is a company with very high risk levels at

ICR of -0.57 percent and a ROCE of -3.17 percent. But its current and

56 | P a g e
 quick ratios are at appropriate levels. It is yielding a low returns on its

dividends of 0.25 percent and that on its earnings of 1.29 percent which

is the lowest in the group. But it can be considered for investment only

on the grounds of growth prospects in this industry, so that adequate

diversification can be accomplished to take advantage of growing per

capita incomes in the country.

Gujarat Mineral Development Corporation Limited:

S ec
Source: Prowess

Performance in FY07

GMDC has the highest dividend payout ratio of 55.53 percent and is

therefore yielding a return on its dividends of 10.52 percent with a

G u ja r a t M i n e r
ROCE of 11.01 percent. From the aspect of riskiness it is considered to

be having more than average risk since it has a low quick ratio

implying that its current assets are more in the form of inventories also

it has a high concentration of debt in its capital with an ICR of 2.65

percent.

Jain Irrigation Systems Ltd.:

S ecu
Source: Prowess

57 | P a g e
 Performance in FY07

This company belongs to the miscellaneous sector having a DPR of

13.23 percent with an earnings yield of 8.87 percent currently trading at

27.81 x seems to be yielding good returns considering from the aspect

of riskiness it has a high concentration of debt than equity in its capital

allocation with an interest coverage ratio of 2.53 percent it seems to be

yielding high returns exposing the portfolio to high risk.

Shiv-Vani Oil & Gas Exploration Services Ltd.:

S ecu
Source: Prowess

Performance in FY07

This company has the policy of not giving out any dividends to its

shareholders rather reinvesting it into the business. This company can

S h iv -V a n i O il &
be considered to be exposed to less than average risk levels because of

Current, Quick and ICR with the only concern being the high

concentration of debt in its capital which is 2.24 unit of debt for every

one unit of equity. From the aspect of returns it is yielding higher than

average returns currently trading at a PE of 37.91x, it can be considered

as a safe investment.

58 | P a g e
 Bombay Dyeing & Mfg. Co. Ltd.:

S ec
Source: Prowess

Performance in FY07

This company has the highest concentration of debt in its capital i.e.

3,21 units of debt for every one unit of equity which is the reason

B o m b a y D y ein
behind a low ICR, Quick and current ratio. But, it seems to be an

overpriced share with currently trading at PE of 58.16. It can be

considered for investment on the grounds of backing it has from the

Wadia group of companies.

Divi'S Laboratories Ltd.:

S ec
Source: Prowess

Performance in FY07

This company does not have the policy to give out dividends rather

they believe in yielding capital appreciation for its shareholders. It can

D i v i 'S L a b o r a t
be considered as a safe investment with all the risk ratios at appropriate

59 | P a g e
 levels, it is also yielding good returns to its shareholders with an EPS of

Rs.148.50 and yield on earnings at 6.53 percent level.

Lupin Ltd.:

S ec
Source: Prowess

Performance in FY07

Lupin seems to be an underpriced share with a PE of 16.12 and its

dividends yielding a return of 1.65 percent and a ROCE of 21.93

percent and dividends of Rs.10 per share. Considering from the aspect

L u p in L td .
of riskiness all the ratios are at appropriate levels, it can be concluded

to be a low risk and average returns yielding company

Bharati Shipyard Ltd.:

S ecu
Source: Prowess

Performance in FY07

Bharati ship yard is yielding less return on dividends paid by of 0.86

B h a r a ti S h ip y a r d
percent, with an EPS of Rs.32.51 and all the risk ratios at appropriate

levels. Bharati Shipyard can be regarded as an underpriced security

60 | P a g e
 especially with the growth propects in the shipping industry especially

due to increasing foreign trade in the country.

J S W Steel Ltd.:

S e cu
Source: Prowess
Performance in FY07

JSW steel is yielding much more than average returns on its dividends

of 2.53 percent with an EPS of Rs.85.44. Keeping in view the risk

J S W S te e l L td .
ratios it can be considered as a high risk company but with yielding

high returns. Therefore, it can be concluded an underpriced security

trading s PE of 5.77x with the amount of returns its yielding even

though it is exposing the portfolio to higher risk.

Jindal Saw Ltd.:

S ec
Source: Prowess
Performance in FY07

With the growth prospects in steel sector this security seems to be

underpriced as currently is being traded at a PE 9.26x and earnings

yielding returns of 18.87 percent. Even from the aspect of riskiness it is

Jin d a l S a w L 61 | P a g e
 considered to be average risk as all the ratios are at appropriate levels

except Quick ratio which implies that current assets are more in the

form of inventories which cannot be liquidated in an unforeseen

circumstance.

Jindal Steel & Power Ltd.:

S ec
Source: Prowess

Performance in FY07

JSPL is the company yielding the highest EPS of Rs.228.30 and the

highest dividend per share of Rs.18. From the aspect of riskiness it is

J in d a l S tee l & P
considered to be a highly risky investment from the aspect of current

and quick ratio but the interest cost can be easily covered by the

company’s financials.

Amtek Auto Ltd:

62 | P a g e
Se
 Source: Prowess

Performance in FY07

This company if considered from the aspect of riskiness it carries less

than average risk with quick ratio of nine and current ratio of 12.18 but

the returns is yielded is less than its counterparts in the same domain

which is the major reason this company is not considered to be a viable

option for investment.

Motherson Sumi Systems Ltd.:

S ec
Source: Prowess

Performance in FY07

The company has performed pretty well in FY07 especially with the

budget completely in the favor of this sector it has been well positioned

to leverage the benefits of the same by yielding a return on total capital

M o th e r so n
invested equal to 27.82 per cent and EPS of Rs. 4.86 yielding returns

on dividend of 2.09 per cent. From the aspect of riskiness this company

is considered to fall in the bracket of low risk due to a high interest

coverage ratio. It can be considered risky only due to a low Quick ratio

due to a large amount of current assets in form of inventories.

63 | P a g e
 Escorts Limited:

S ec
Source: Prowess

Performance in FY07

The company has yielded good returns on its earnings as high as 30.36

per cent being the third highest in the group of selected companies but

it is exposed to very high levels of risk with a low on current, quick and

E sc o r ts L td .
interest coverage ratio and also the company is not paying any

dividends to its shareholders it is not yielding adequate returns.

Maruti Suzuki Limited:

S ec
Source: Prowess

Performance in FY07

The company has performed very well in the last FY yielding EPS of

M a r u ti S u z
Rs.54.50 and ROCE of 34.4 per cent. Considering from the risk aspects

the company has very less amount of debt i.e. 0.11 units of debt for

64 | P a g e
 every one unit of equity, thereby it has a very high interest coverage

ratio of 59.39 per cent and current and quick ratios are also at

appropriate levels.

Therefore, in the domain of Automobiles Amtek Auto is not considered

to be a feasible for investment due to its inability to venture on the

opportunities that have come its way as the other three companies have

appropriately ventured upon.

Conclusion

This chapter has analyzed each of these companies making use of risk and

return ratios in order to categorize these companies on the basis of parameters

like high risk, low risk, high return and low returns so as to determine which of

these companies can be considered as a part of a portfolio and how to invest

adequately into these companies so that the joint motive of capital safety as

well as capital appreciation can be realized.

65 | P a g e
66 | P a g e
Optimal Portfolio:
The following table shows the optimal portfolio constructed making use of the

adjusted share price data of last three years i.e. March 2005-2008. The

Chapter Four:
Optimal Portfolio
Construction &
Correlation
Analysis
(This chapter aims at designing an optimal portfolio using the
Modern Portfolio Theory so as to determine the allocations
assigned to each of these securities so that the investible surplus
can be adequately invested to achieve a well diversified
portfolio.)

following are the allocations corresponding to each share from the investible

surplus to yield good returns.

67 | P a g e
 Table 4.1: Lists the percentage allocation to each of these

securities in the optimum portfolio.

Stock
Bharti
HDFC
Rcom
RelianceIndustries
From Crom ptonGreaves
Source: Using Equation 1 through 4
the above portfolio it is observed that Bharti Airtel of

Divi'SLaboratorie
telecommunications sector having a PE of 44.5x and yielding a return on

capital employed equal to 46.01 per cent is absorbing the highest proportion of

the investible surplus. But, if considered from the aspect of riskiness it is

JainIrrigationSys
M aruti Suzuki Ind
68 | P a g e
considered to be moderately risky investment with a low current ratio of 0.35

units and very low quick ratio of 0.1412.

The next highest investment is in HDFC Bank from the banking domain

having a PE of 28.58x and return on capital employed at 47.57 per cent of the

total invested capital is also a risky investment because of high debt- equity

ratio at 0.95 units and interest coverage ratio of 1.51, since the company is

possessing a very high leverage it is in a position to yield good returns for its

equity shareholders.

Next on the portfolio is Reliance communications from the

telecommunications domain which is company trading at 66.93x which is the

highest in this sector the major reason being the strong backing that it possess

from the Reliance Group of Companies.

Further, the portfolio has been diversified to maintain adequate levels of

riskiness along with providing adequate returns. Keeping in view to allocate

the surplus in such a manner that adequate diversification can be undertaken

across sectors rather than concentrating into a few sectors thereby reducing the

amount of volatility that the portfolio is exposed to and reducing the impact on

consistent returns.

12
Data taken from FY07

69 | P a g e
 Two securities Adani Enterprises from trading sector which was attracting 2.43

per cent investment in the portfolio of reliance growth and Amtek Auto Ltd

from the automobiles domain has been excluded from the Optimal Portfolio as

it was yielding returns less than cut off point determined in the model.

Observed Portfolio:

Table 4.2: Lists the percentage allocation to each of these securities in

the portfolio of Reliance Growth mutual fund as on 31st March 2008.

JainIrrigationSystem s
RelianceIndustriesLtd
Jindal Steel &PowerL
Jindal SawLtd.
JaiprakashAssociatesL
Source: www.moneycontrol.com

NewDelhi TelevisionL
DEGREE OF CORRELATION

Gujarat M
70 | P a g e
ineral Devp.
Adani EnterprisesLtd.
The degree of Spearman’s rank correlation between the observed portfolio of

Reliance Growth and Optimal Portfolio is very less of .0939 which shows that

the theoretical views are not being followed in the operation of these mutual

funds rather they are investing on the basis of some unknown factors or

intuition of the Fund Manager.

The returns from the portfolio calculated on the basis of average returns over

the considered period are 47.83 percent per year which is lower than returns

yielded by the allocations to these securities in the observed portfolio of

Reliance growth which is yielding returns equal to 52.35 percent per year

considering the average returns over the period considered.

Conclusion:

Thereby, it can be concluded that the optimal portfolio is considering the risk-

return parameters while deciding the allocations to the various securities but it

is designed keeping in view moderate riskiness thereby it is yielding lesser

returns than the Reliance growth which is considered to be an aggressive fund

but a consistent performer in the mutual fund arena, but in the optimal

portfolio the risk levels are maintained appropriately across allocation to

various securities. As if an individual invests in securities he may not have the

mindset to expose its money to such high risk levels, he may rather settle at

lower returns keeping in view the capital safety criterions.

71 | P a g e
72 | P a g e
 Chapter Five:
Conclusion
(This chapter aims at summarizing and concluding the study.)

73 | P a g e
 CONCLUSION

The study concludes that there is a very low degree of correlation of .0939

between portfolio of Reliance growth mutual fund and that of the optimal

portfolio constructed in this study. The expected returns are calculated for the

74 | P a g e
optimal portfolio which yields 47.83 percent per year which is slightly lower

than returns yielded by the observed portfolio of Reliance growth i.e. 52.35

percent per year calculated on the basis of average monthly returns over the

period March 2005 to March 2008. This difference can be attributed to the fact

that Optimal Portfolio’s risk exposure is 0.63 percent as compared to Reliance

growth of 6.98 percent. This is due to the fact that the optimum allocation is

such that it is exposed to lowest possible risk and is yeilding highest possible

returns provided the level of risk. Similarly their may be other possible

allocations but it will either expose the portfolio to a higher level of risk thus

yeilding higher returns or a lower level of risk and lower returns. Therefore, it

can be concluded that the Optimal Portfolio is the best possible allocation on

the efficient frontier, other allocations are possible but with all possessing

different combinations of risk and returns.

Sectoral Allocations of the Portfolio’s:

Figure 5.1: Portrays the allocation in the Observed Portfolio and

Optimum Portfolio to various sectors.

75 | P a g e
Optimum portfolio is well diversified in terms of sectoral allocation with a

little biased towards the telecommunications sector absorbing 15.5 percent

which is considered to be bullish due to the communication vertical and with

majority of the Indian telecom service providers as they are offering new breed

of services such as mobile TV, broadband and IPTV. Followed by banking

sector having a share of 12.3 percent as after the farm loan waiver and forex

derivative losses in the Union Budget 2008 has caused huge price and

valuation distortions in banking stocks making them prospective investments

for long term. Both Pharma and Diverfied sectors have equal allocation of 7.8

percent. Various other sectors are absorbing between 5 percent to nil of the

76 | P a g e
overall allocation which makes it less volatile due to allocation of twenty five

different sectors.

Observed portfolio has the highest sectoral allocation towards diversified of

9.3 percent with a which is considered to be a viable option since operations of

these companies are not concentrated in one product thereby even if a

particular product is losing in the market other products can save the bottom

line of the company. Followed by Steel sector having a share of 7.2 percent

since the growth prospects in this sector over a long term period.

Miscellaneous, Pharma Construction and steel & power sre absorbing

approximately equal shares of 6.8 percent therefore a source of high

concentration in sectors where high pricing presures exist from the government

which in the future may eat up the companies bottom lines. Various other

sectors are absorbing between 5 percent to nil of the overall allocation.

The study finds that though the observed portfolio (of Reliance growth) is

yielding higher returns at the same time it is exposed to higher risk since

its highly concentrated in a few sectors allocation meager allocations to

other sectors. On the other hand, optimal portfolio is not concentrating in

a few sectors rather allocating less to medium allocations to other sectors.

Therefore it is found out to be the best possible allocation on the Efficient

frontier.

REFERENCES:

Books:

77 | P a g e
 • William F.Sharpe, Gordo J. Alexander and Jeffery V. Bailey
(Sixth Edition), “Investments”- Chapter 6-7.
• Edwin J.Elton and Martin J. Gruber, Fifth Edition., “Modern
Portfolio Theory and Investment Analysis” - Chapter 7-9.
• By Donald E. Fischer and Ronaki J.Jordan(1995).“Security
Analysis and Portfolio Management” Chapter 9-12.

Journal Articles:

• Edwin J. Elton , Martin J. Gruber and T. Clifton Green(2004),

“The Impact of Mutual Fund Family Membership on Investor
Risk” URL-http://pages.stern.nyu.edu/~mgruber/working
%20papers/mutual%20fund%20family%20membership.pdf
• Gregory Curtis (2002) “Modern portfolio theory and Quantum
mechanics” URL-
http://www.greycourt.com/whitepapers/WhitePaper020-MPT.pdf
• Debashish Dutt (2006), “Constructing an optimal portfolio using
Sharpe’s single index model”, URL:
http://www.myicwai.com/knowledgebank/fm09.pdf
• Lingjie ma and Larry pohlman (2005), “Return Forecasts and
Optimal Portfolio Construction: a Quantile Regression Approach”
Url- http://www.fma.org/Chicago/Papers/equityQR2.pdf

Published Government Reports:

• Government Of India(2008), Economic Survey of India 2008,

Ministry of Finance, New Delhi

Articles from Websites:

• Business Line “Oracle bullish on telecom vertical” Dated 15th

December 2006. URL

78 | P a g e
 http://www.thehindubusinessline.com/2006/12/16/stories/2006121
603130400.htm
• CNBC TV-18, “Bullish on public sector banking space:
Sundaram BNP” Dated 17th April 2008 URL-
http://www.moneycontrol.com/mccode/news/article/news_article.
php?autono=334629
• TRAI (2008) “The Indian Telecom services Performance
Indicator Report for the Quarter ending March 2008” accessed
from www.trai.gov.in.

Other Databases:

• Portfolio of Reliance Growth Mutual Fund as on 31st December

2008. URL- www.moneycontrol.com
• Annualized Returns of Returns Growth Mutual Fund URL-
www.valueresearchonline.com. Accessed on 5th April 2008.

Appendix I:

‘Right Horizons Financial Services Pvt. Ltd.’

Right Horizons is an end to end investment advisory and wealth

management firm that focuses on providing a solution that is specific to

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customer needs like corporate treasury management, Tax planning, corpus

fund planning etc. It works towards understanding financial goals of

customers, helping them to attain those goals.

Right Horizons was founded in the year 2003, by its CEO, Mr. Anil Rego. He

formerly worked in the Business Planning and Mergers & Acquisitions

functions with the finance department of Wipro Technologies for 7 years.

Anil has been on many a panel at various seminars on related financial

areas. He has delivered guest lectures at premier Business-Schools in

Bangalore. He was invited as an expert on Radio City and was covered in

columns of leading papers like The Times of India, Business standard,

Economic Times, Rediff, Business Line, etc.

Reporting to:

• Mr. Anil Rego, CEO, Right Horizons

• Mrs. Rachna Rego, M.D., Right Horizons

• Ms. Rangapriya.S, Financial Head, Right Horizons

Job responsibilities:

1. FINANCE:

• Preparing Weekly Market reports

• Handling Portfolio Management Services of their End to End

clients on a monthly basis.

• Recommending on scrips to invest.

• Capital Gains calculation to determine the capital gains tax

to be paid by them at the end of FY08

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 • Making Recommendations for Mutual Fund, Life Insurance,

ULIP and Pension Plans for their clients.

• Switch recommendations at the time of Market correction.

• To prepare Fund Comparison for the week comprising of

returns as well as top portfolio holdings in terms of Securities as

well as sectors.

• To prepare write up on NFOs

• To calculate the fees to be paid by profits earned on the

portfolios of PMS Clients.

• To study the tax Structure In India

• Calculating XIRR for the portfolio returns for their clients.

• Covered the Budget 08 as well as Economic Survey for the

budget report.

• Worked on Monthly reports for informing the clients on the

status of their Portfolio Returns.

• Track a list of 15 stocks and prepare reports on their

fundamentals.

2. HUMAN RESOURCES:

• To recruit a Programmer for LAMP Technology.

• To recruit a Financial Analyst

• To recruit an Engineer capable of MOODLE Technology.

• To recruit three Wealth Managers.

• To recruit two Relationship Managers for Bangalore Branch

and four for Chennai branch.

• To recruit a front end receptionist.

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 3. MARKETING:

• To explore NGOs as their future clients by designing a

portfolio and mailing it to NGOs in Bangalore

3. INFORMATION TECHNOLOGY:

• To input the IT Engineer for the data that should be updated

on their site in respective heads like Life Insurance, Stock

Market, women investors etc.

4. RESEARCH:

• To research on Contrarian Style of Investment as well Contra

Mutual Funds

• To research for the E-learning package for Right Horizons

Institute for Wealth Management.

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Appendix II: Explains the Financial Ratios considered for the
purpose of company analysis.

Profitability Ratios:

• Earnings Per Share(EPS):

This measure helps in ascertaining the difference between

performances of various companies following different dividend

policies.

• Return on Capital Employed(ROCE):

This ratio shows the percentage returns on the total capital

employed by the company.

• Dividend Per Share(DPS):

This is the amount of profit distributed to ordinary shareholders.

• Dividend Yield(DY):

This is the measure of income accruing to an investor as a result of

any fluctuations in the price of the share

• Earnings Yield(EY):

This ratio measures the yield with respect to earnings as a few

companies have the policy of giving out less profits as dividends

rather re-investing the earned profits into the operations of the

business.

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 • Dividend Payout Ratio(DPR):

This ratio measures the amount of profits distributed by the

management of a company and it is a measure of building

confidence in the management of the company. But, it can also be a

source of paying higher dividends even when the company is facing

a decline in earnings.

• Price- Earnings Ratio(PE):

This ratio is the measure of the degree to which investors value a

particular company.

Risk Ratios:

• Current Ratio(CR):

This ratio measures the risk of the company if its Current assets are

enough to fulfill its current liabilities, higher the ratio the better it is.

• Quick Ratio(QR):

This ratio is similar to current ratio except that it excludes

inventories thereby it is considered to be more conservative ratio.

• Debt Equity Ratio(DE):

This ratios measures the extent to which the capital is financed by

Debt and the portion financed by Equity.

• Interest Coverage Ratio(ICR):

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 This ratio is measure of a company meeting its obligation in

comparison to its interest payments.

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