Syllabus:

SAPM
1.

Classification Capital Markets & Security Analysis

2.

Dividend & Dividend Yields Numerical

3.

Characteristics of Blue Chip Companies

4.

Growth Stocks, Dividend Yield Stocks

5.

Target Price Calculation - Numerical

6.

Interpretation of P/E Ratios

7.

Dividend Discount Model Numerical only

(Not in the soft copy conducted in class room)

 ASSET CLASSES
Asset class is a sort of investment, which includes bonds, stocks, real estate, or cash. Asset class
can alternatively be defined as the collection of securities demonstrating similar behaviors based on
same policies and regulations. The three primary asset classes are bonds (or fixed income), equities
(or stocks) and cash equivalents(or money market instruments). Some other asset class includes
natural resources, foreign currency, stocks, treasured metals, luxury items, automobiles etc.

Bank Fixed Deposits

Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of
money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of
interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity
period. There is great flexibility in maturity period and it ranges from 7days to 10 years. The interest is
compounded annually and is added to the principal amount.

Postal Services
India possesses the largest postal network in the world with 155,000 post offices spread all over the
country as on March 31, 2001. Post Office Recurring Deposit Account, Post Office Time Deposit
Account. Post office time deposit account is just like the bank fixed deposit account. These time
deposits are meant for those investors who want to deposit a lump sum for a fixed period. The amount
can be deposited for 1year, 2year, 3year, and 5years

National Savings Certificate

National Savings Certificate, popularly known as NSC, is a time-tested tax saving instrument that
combines adequate returns with high safety. Period of maturity of a certificate is six years. Interest
accrued on the certificates every year is liable to income tax but deemed to have been reinvested.

Public Provident Fund

Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also serves
as a retirement planning tool for many of those who do not have any structured pension plan covering
them. The account matures for closure after 15 years. Premature withdrawal is permissible every year
after completion of 5 years from the end of the year of opening the account.
Interest at the rate notified by the Central Government from time to time, is calculated and credited to
the accounts at the end of each financial year. Presently, the rate of interest is 8% per annum.
Income Tax rebate is available "on the deposits made", under Section 88 of Income Tax Act, as
amended from time to time. Interest credited every year is tax-free

Government Bonds (G-Sec)

These are issued by central governments across the world to raise money for public spending.
Basically you lend money to a government and it aims to pay you back on a set maturity date.
Government bond prices move up and down with market conditions and are often seen as a less
risky investment option when markets are volatile, although this isn't true all of the time. G-Sec has
maturity period-5,10 & 30 yrs. It is also considered as a way of deficit finance. It is considered as
Benchmark security for setting up of basic interest rates in the country.

Corporate Bonds
These are issued by large companies to raise money for different purposes. Compared with
government bonds, they usually carry a higher rate of interest as they are more susceptible than the
government to the economy. And like government bonds, prices move up and down with market
conditions. Corporate bonds are normally considered to be riskier than government bonds. This is
because companies can only stay in business as long as they're profitable, while governments have
a ready source of funds through taxes. If a company cannot pay back the loan, you could lose all
your money.

Shares
Shares are also known as equities. Owning shares in a company means you own a part of it. It also
means you can receive a share of the company's profits through dividends. You also have a share in
the value of the company's assets, through its share price.

Mutual Funds

Mutual Fund is an instrument of investing money. A mutual fund is a group of investors operating
through a fund manager to purchase a diverse portfolio of stocks or bonds. Therefore, keeping large
amounts of money in bank is not a wise option, as in real terms the value of money decreases over a
period of time.

Property
As an investment asset class, property usually means investing in commercial property such as:
offices; retail developments; and leisure and industrial developments.
A major attraction of property investment is that the success of the venture depends on professional
property management. Successful maintenance, refurbishment, repairs and tenancy arrangements
can all add value. Both the rental income and capital value of a property can be enhanced in this
way.

CLASSIFICATION OF CAPITAL MARKET

CAPITAL MARKET

DEBT MARKET

DEBENTURES

STOCK MARKET

PRIMARY MKT

CONVERTIBLE DEBENTURES

IPO (INITIAL PUB OFFER)

NON CONVERTIBLE DEBENTURES

CALL MONEY MKT

BONDS
GOVERNMENT BONDS

SECONDARY MKT

CORPORATE BONDS

SHARES

FCCB (FOREIGN CURRENCY CONVERTIBLE BONDS)

WARRANTS

G-SEC ( GOVT SECURITIES )

T- BILLS ( TREASURY BILLS )

CPs ( COMMERICAL PAPERS )
CDs ( CERTIFICATE OF DEPOSITS )

SECURITY ANALYSIS & FEATURES

Government Bonds (G-Sec)

These are issued by central governments across the world to raise money for public spending.
Basically you lend money to a government and it aims to pay you back on a set maturity date.
Government bond prices move up and down with market conditions and are often seen as a less
risky investment option when markets are volatile, although this isn't true all of the time. G-Sec has
maturity period-5,10 & 30 yrs. It is also considered as a way of deficit finance. It is considered as
Benchmark security for setting up of basic interest rates in the country.

Corporate Bonds
These are issued by large companies to raise money for different purposes. Compared with
government bonds, they usually carry a higher rate of interest as they are more susceptible than the
government to the economy. And like government bonds, prices move up and down with market
conditions. Corporate bonds are normally considered to be riskier than government bonds. This is
because companies can only stay in business as long as they're profitable, while governments have
a ready source of funds through taxes. If a company cannot pay back the loan, you could lose all
your money.

Shares
Shares are also known as equities. Owning shares in a company means you own a part of it. It also
means you can receive a share of the company's profits through dividends. You also have a share in
the value of the company's assets, through its share price.

Call / Notice Money Market & Short Term Deposits / Term Money Market
1. This component of the money market in India deals with ( borrowed & lent ) overnight / one
day ( Call Money ) & Notice Money for period up to 14 days.
2. It is a market for short term funds repayable on demand & with maturity period varying
between one day to a fortnight.
3. When money is borrowed / lent for a day, it is known as Call ( Overnight ) Money.
4. When money is borrowed / lent for more than a day & up to 14 days, it is known as
Notice Money. No collateral security is required to cover these transactions. It is basically an
OVER THE COUNTER ( OTC ) market without the intermediation of brokers.
5. Call Money is required by Banks to meet their CRR requirements. They borrow money from
other banks & non bank entities to cover any shortage of cash on a Reporting Friday.

6. As per RBI stipulations for the maintenance of CRR by Banks, to enable Banks to choose an
optimum strategy of holding CRR depending on their intra-period cash flows, banks are
allowed to maintain CRR on the basis of the last Friday of the second preceding fortnight.
7. Reduction in the minimum CRR requirement is for smooth adjustment of liquidity & better cash
management to avoid sudden increase in overnight call rates.
Call Rates:
1. The interest rate paid on call loans is known as the call rate. The call rate varies from day to
day & often from hour to hour. It is very sensitive to changes in demand for the supply of call
loans.
2. The call rates during 1989 were frees from administrative ceiling & freely determined by
market forces.
3. Call Rates are influenced by number of factors:
a) Easy / tight liquidity in the market affect call rate.
b) Demand side of liquidity position is dependent on tax outflows, Govt. Of India
borrowing programs.
c) Reserves requirement for maintenance of CRR affect call rate.
d) Asymmetrical nature of participants few lenders & large borrowers.
e) Volatile forex market conditions affect call rates.
-

Banks fund foreign currency positions by withdrawing from call market

lead to hike in call rate.

TREASURY BILLS ( T BILLS ) MARKET

1. It is basically an instrument of short term borrowing by Govt. Of India. It is a particular finance
( i.e. a bill which does not arise from any genuine transaction in goods ) or a promissory note
issued by RBI on behalf of Government.
2. T-Bills are used to raise short term funds to bridge temporary gaps between receipts &
expenditure of Govt. Of India.

3. The main features of T-Bills are:

a) They are negotiable securities
b) They are issued at discount & are paid at par on maturity .
The difference between the price at which they are sold & their redemption value is
the effective return on T-Bills
c) High liquidity on account of short tenure ( 91 day & 364 days )
d) Absence of default risk due to Govt. Guarantee.
e) Assured yield
f)

Low transaction cost.

4. The development of T-Bill market is at the heart of growth of money market. T-bills play a vital
role in the cash management of the Govt.
5. Being a risk free instrument, their yields at various maturities serve as a benchmark.
91 Day T- Bills:
1. RBI issued 91 day T-Bills on the basis of weekly auctions.
2. A scheme for the issue of 91 day T-bill was introduced in 1992-93 on the basis of auction
system with predetermined amount.
3. The major holders of auctioned 91 day T-bills are the RBI, State Govt., State run pension
funds & eligible provident funds.

182 Day T- Bills:

1. 182 day T-bills are introduced in 1986. The 91 day T-bill has failed to smoothen the short term
liquidity requirement mainly because of poor yields.
2. Apart from being a useful fiscal instrument, it was also a handy instrument for money
management in Banks as much as it could be effectively deployed meeting SLR & CRR
requirements.

364 Day T- Bills:

1. 364 day T-bill became extremely popular due to their higher yield with liquidity & safety and we
are being used as a benchmark by IDBI & other Financial Intermediaries for determining the
rate of interest on floating bonds.
2. They have widened the money market& provided innovative outlet for surplus funds.

14 Day Intermediate T Bills

1. It is introduced in 1996-97
2. The investors were limited to the State Govts., Foreign Central Banks and specified bodies.
There were non-transferable and were issued only in book entry forms to be redeemed at par.
3. They have been discounted now due to lack of public response.

COMMERCIAL PAPERS ( CPs ) MARKET

1. It is a short term unsecured negotiable instrument consisting of promissory notes with a fixed
maturity.
2. It is generally issued by companies as a means of raising short term debt & by a process of
securitization, intermediation of bank is eliminated.
3. It is issued on a discount to face value basis but it can also be issued in interest bearing form.
4. The issuer promises the buyer a fixed amount at a future date but ledges no assets. His
liquidity power is the only guarantee.
5. A CP can be issued by a company directly to investor or through bank / merchant banker.
6. When CP is directly issued to investor without intermediary, then it is called as Direct
Paper.
7. When CPs are issued security dealer, they are called as Dealer Paper.

Advantages:
1. It is s simple instrument as it hardly involves any documentation between issuer & the
investor.
2. It is additionally flexible in terms of maturities of the underlying promissory note, which can be
tailored to match the cash flows of the issuer.
3. CP provides investors with returns higher than what they obtain from the banking system.
4. There are no limitations on the end-use of the funds raised through CPs & instruments are
highly liquid.
5. The issue of CP is governed by guidelines issued by RBI.
6. All eligible participants should obtain the credit rating for issuance of CP from CRISIL, ICRA,
CARE, FITCH.
7. CP can be issued for maturities between a minimum of 7 days & maximum up to 1 year from
the date of issue.
8. CP can be issued in denominations of Rs.5 Lacs or multiples thereof. The amount invested by
a single investor should not be less than Rs.5 Lacs ( face value ).

CERTIFICATE OF DEPOSITS ( CDs )

1. A CD is a document of title to a time deposit and can be distinguished from a conventional
time deposit in respect of its free negotiability & hence marketability.
2. They are bearer documents and are readily negotiable.
3. It is a money market instrument, issued in a de-mat form or as a promissory note for funds
deposited at a bank / other Financial Institutions for a specific time period.
4. CDs can be issued by:
a) Commercial Banks ( excluding RRBs ( Regional Rural Banks ) / Local Area Banks )
b) All India Financial Institutions permitted by RBI
Raise short term resources within limit fixed by it.

5. Financial Institutions may issue together with other instruments namely Term Money,
Term Deposits, CPs & Inter-Corporate Deposits should not exceed 100% of its net
owned funds.
6. The minimum amount should be Rs.1 Lakh. CDs can be subscribed by Individuals /
Corporations / Companies / Trusts / Funds etc.
7. The maturity period of a CD issued by Banks should be between 7 days & 1 year maximum
8. The issuer is free to determine the discount rate. The interest rate on floating rate CDs should
be set periodically.
9. There is no locking period for CDs. CDs should be issued in De-mat form and can be
transferred.

Debentures:
1.

A debt security issued by companies, having a certain maturity and bearing a stated Coupon
rate.

2.

Debentures may be unsecured or secured by assets such as land & buildings of the issuing
company.

3.

Debenture holders have a prior claim on the earnings and assets in the event of liquidation as
compared

to
are

Preference
either

fully

&

4.

Debentures

convertible

5.

Non convertible debentures are also available.

Equity
or

partially

Shareholders.
convertible.

INDICES
Market Capitalization
The value of equity shares outstanding at prevailing market prices.

Market Capitalization : No. of shares x Market price of each share.

Free Float Market Cap: (No. of shares traded in the market Other than Promoters Stake) x Market
price.

National Index: An index of 100 stocks quoted nationwide on different stock exchanges such as those n
Bombay, Delhi & Kolkatta, which is computed by the statistics Department of the Bombay Stock Exchange;
hence it is called the BSE National Index ( BSENI ). The index was developed as a more representative
PROXY
Of the stock market since the SENSITIVE INDEX consists on only 30 stocks quoted on the BSE; these 30
figure among the 100 comprising the National Index.
For calculating the market value of any component share, the price of the share outstanding and hence, t he
index expresses as:
Aggregate market value of all the stocks in the sample / Average market value during the base period
The base period if 1983 84. Adjustments are made to the weight and the base year average if a company
included in index issues BONUS SHARES, RIGHTS ETC.
A welcome development has been recent contribution of 500 stock index by CRISIL. Its base value is 1000
and its composition captures a high degree of MARKET CAPITALIZATION, industry representation, trading
frequency and other criteria.

SENSEX - The Barometer of Indian Capital Markets

For the premier stock exchange that pioneered the securities transaction business in India, over a century of
experience is a proud achievement. A lot has changed since 1875 when 318 persons by paying a then princely
amount of Re. 1, became members of what today is called Bombay Stock Exchange Limited (BSE).
Over the decades, the stock market in the country has passed through good and bad periods. The journey in
the 20th century has not been an easy one. Till the decade of eighties, there was no measure or scale that
could precisely measure the various ups and downs in the Indian stock market. BSE, in 1986, came out with a
Stock

Index-SENSEX-

that

subsequently

became

the

barometer

of

the

Indian

stock

market.

The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index
(Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai,
Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from October
14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE.
Introduction
SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30
component stocks representing large, well-established and financially sound companies across key sectors.
The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and
international markets through print as well as electronic media. It is scientifically designed and is based on
globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being
calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted"
methodology is a widely followed index construction methodology on which majority of global equity indices
are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float
methodology.
The growth of the equity market in India has been phenomenal in the present decade. Right from early
nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the late
nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the
fancy of the investors. SENSEX has captured all these happenings in the most judicious manner. One can
identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country,
it provides the time series data over a fairly long period of time (from 1979 onwards). Small wonder, the
SENSEX has become one of the most prominent brands in the country.

Index Specification:
Base Year
Base Index Value
Date of Launch
Method of
calculation
Number of
scrips

1978-79
100
01-01-1986
Launched on full market capitalization method and effective September 01, 2003, calculation
method shifted to free-float market capitalization.
30

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at
any point of time reflects the free-float market value of 30 component stocks relative to a base period. The
market capitalization of a company is determined by multiplying the price of its stock by the number of shares
issued by the company. This market capitalization is further multiplied by the free-float factor to determine the
free-float market capitalization.
The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the
notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market capitalization of 30
companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base
period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index
adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the
index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX on a
continuous basis.
Understanding Free-float Methodology
Concept
Free-float methodology refers to an index construction methodology that takes into consideration only the freefloat market capitalization of a company for the purpose of index calculation and assigning weight to stocks in
the index. Free-float market capitalization takes into consideration only those shares issued by the company
that are readily available for trading in the market. It generally excludes promoters' holding, government
holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal
course. In other words, the market capitalization of each company in a free-float index is reduced to the extent
of its readily available shares in the market.
Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology.

Major advantages of Free-float Methodology

 A Free-float index reflects the market trends more rationally as it takes into consideration only those
shares that are available for trading in the market.
Free-float Methodology makes the index more broad-based by reducing the concentration of top few
companies in Index.

A Free-float index aids both active and passive investing styles. It aids active managers by enabling
them to benchmark their fund returns vis- -vis an investible index. This enables an apple-to-apple
comparison thereby facilitating better evaluation of performance of active managers. Being a
perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive
managers as it enables them to track the index with the least tracking error.

Free-float Methodology improves index flexibility in terms of including any stock from the universe of
listed stocks. This improves market coverage and sector coverage of the index. For example, under
a Full-market capitalization methodology, companies with large market capitalization and low freefloat cannot generally be included in the Index because they tend to distort the index by having an
undue influence on the index movement. However, under the Free-float Methodology, since only the
free-float market capitalization of each company is considered for index calculation, it becomes
possible to include such closely-held companies in the index while at the same time preventing their
undue influence on the index movement.

Globally, the Free-float Methodology of index construction is considered to be an industry best practice
and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a
leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI
India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian
equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the
famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.

Definition of Free-float
Shareholding of investors that would not, in the normal course come into the open market for trading are
treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. Specifically, the following
categories of holding are generally excluded from the definition of Free-float:
Shares held by founders/directors/ acquirers which has control element
Shares held by persons/ bodies with "Controlling Interest"

 Shares held by Government as promoter/acquirer

Holdings through the FDI Route
Strategic stakes by private corporate bodies/ individuals
Equity held by associate/group companies (cross-holdings)
Equity held by Employee Welfare Trusts
Locked-in shares and shares which would not be sold in the open market in normal course.

The remaining shareholders fall under the Free-float category.

S & P CNX NIFTY

S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a
variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.
S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint
venture between NSE and CRISIL. IISL is India's first specialised company focused upon the index as a core
product. IISL has a Marketing and licensing agreement with Standard & Poor's (S&P), who are world leaders in
index services.

The total traded value for the last six months of all Nifty stocks is approximately 65.68% of the traded
value of all stocks on the NSE

Nifty stocks represent about 65.34% of the total market capitalization as on Mar 31, 2009.

India Index Services & Products Ltd. (IISL)

India Index Services & Products Ltd. (IISL) is a joint venture between the National Stock Exchange of
India Ltd. (NSE) and CRISIL Ltd. (formerly the Credit Rating Information Services of India Limited).
IISL has been formed with the objective of providing a variety of indices and index related services and
products for the capital markets.
IISL has a licensing and marketing agreement with Standard and Poor's (S&P), the world's leading
provider of investible equity indices, for co-branding IISL's equity indices.

Products & Services

IISL offers a wide range of products and services which are key support tools for the equity markets.
We provide reliable, accurate and valuable data on indices and index related services to cater to the
needs of various segments of users. Our speciality is indices based on Indian equity markets, which

may be used for benchmarking, trading or research.

Financial products on IISL Indices
IISL maintains, develops, compiles and disseminates entire gamut of equity indices. Licensing is
mandatory for tracking the performance of an IISL Index. Licensing is also required for use of the
name of IISL or S&P CNX or CNX or any IISL Index. Fees for licensing would vary according to the
type of the product and the period.
CNX ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE and
CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE . The S&P prefix belongs to the US-based
Standard & Poor's Financial Information Services.
CNX indices are useful for fund managers, corporates, brokers and all such enterprises connected
with investments in the equity markets. These indices can be used for tracking the markets,
understanding the performance of a company vis-a-vis the market, determining how an investors
portfolio is performing as compared to the market, trading derivative products and most importantly for
development of index based funds by mutual funds.
Customized Indices
IISL undertakes development & maintenance of customized indices for clients for tracking the
performance of the client portfolio of stocks vis--vis objectively defined benchmarks, or for
benchmarking NAV performance to customized indices. The customized indices can be sub-sets of
existing indices or a completely new index viz. Sector Indices, Individual Business Group Indices,
Industry Indices etc. Charges for this service vary depending on the activity performed by IISL.
Consulting
IISL provides consulting services in areas of Index Funds, Exchange-traded-fund, derivatives, Index
options, alerting for rebalancing for index funds etc. This is a paid service.
What is the basic idea in an index?
Every stock price moves for two possible reasons: news about the company (e.g. a product launch, or
the closure of a factory, etc.) or news about the country (e.g. nuclear bombs, or a budget

announcement, etc.). The job of an index is to purely capture the second part, the movements of the
stock market as a whole (i.e. news about the country). This is achieved by averaging. Each stock
contains a mixture of these two elements - stock news and index news. When we take an average of
returns on many stocks, the individual stock news tends to cancel out. On any one day, there would be
good stock-specific news for a few companies and bad stock-specific news for others. In a good index,
these will cancel out, and the only thing left will be news that is common to all stocks. The news that is
common to all stocks is news about India. That is what the index will capture.

What is the portfolio interpretation of index movements?

It is easy to create a portfolio, which will reliably get the same returns as the index. i.e. if the index
goes up by 4%, this portfolio will also go up by 4%. Suppose an index is made of two stocks, one with
a market cap of Rs.1000 crore and another with a market cap of Rs.3000 crore. Then the index
portfolio will assign a weight of 25% to the first and 75% weight to the second. If we form a portfolio of
the two stocks, with a weight of 25% on the first and 75% on the second, then the portfolio returns will
equal the index returns. So if you want to buy Rs.1 lakh of this two-stock index, you would buy
Rs.25,000 of the first and Rs.75,000 of the second; this portfolio would exactly mimic the two-stock
index. A stock market index is hence just like other price indices in showing what is happening on the
overall indices -- the wholesale price index is a comparable example. In addition, the stock market
index is attainable as a portfolio.

Why are indices important?

Traditionally, indices have been used as information sources. By looking at an index we know how the
market is faring. This information aspect also figures in myriad applications of stock market indices in
economic research. This is particularly valuable when an index reflects highly up to date information (a
central issue which is discussed in detail ahead) and the portfolio of an investor contains illiquid
securities - in this case, the index is a lead indicator of how the overall portfolio will fare.
In recent years, indices have come to the fore owing to direct applications in finance, in the form of
index funds and index derivatives. Index funds are funds which passively `invest in the index'. Index
derivatives allow people to cheaply alter their risk exposure to an index (this is called hedging) and to
implement forecasts about index movements (this is called speculation). Hedging using index
derivatives has become a central part of risk management in the modern economy. These applications
are now a multi-trillion dollar industry worldwide, and they are critically linked up to market indices.
Finally, indices serve as a benchmark for measuring the performance of fund managers. An all-equity
fund should obtain returns like the overall stock market index. A 50:50 debt:equity fund should obtain
returns close to those obtained by an investment of 50% in the index and 50% in fixed income. A wellspecified relationship between an investor and a fund manager should explicitly define the benchmark
against which the fund manager will be compared, and in what fashion.

How does the S&P CNX Nifty work?

S&P CNX Nifty is based upon solid economic research. A trillion calculations were expended to evolve
the rules inside the S&P CNX Nifty index. The results of this work are remarkably simple: (a) the
correct size to use is 50, (b) stocks considered for the S&P CNX Nifty must be liquid by the `impact
cost' criterion, (c) the largest 50 stocks that meet the criterion go into the index. S&P CNX Nifty is a
contrast to the adhoc methods that have gone into index construction in the preceding years, where
indices were made out of intuition and lacked a scientific basis. The research that led up to S&P CNX
Nifty is well-respected internationally as a pioneering effort in better understanding how to make a

stock market index.

How did the S&P CNX Nifty come about?
Equities trading at NSE began in November 1994. By late 1995, NSE became India's largest equity
market and was looking for a market index to utilize this unique information source. NSE also wanted
to have a vehicle for the futures and options market. NSE approached the economists Dr. Ajay Shah
and Dr. Susan Thomas, ( then at Centre for Monitoring Indian Economy Pvt. Ltd.- CMIE
(www.cmie.com) and now at Indira Gandhi Institute of Development Research (IGIDR www.igidr.ac.in), to conduct research on methods in index construction. This work was funded by the
USAID FIRE project (www.usaid.gov) and led to the S&P CNX Nifty. Some of their research is visible
over the Internet at www.igidr.ac.in/~ajayshah

Where does IISL come in?

In 1998, NSE and CRISIL launched a joint venture named IISL to focus on index management. This
pools the index development efforts of CRISIL and NSE into a coordinated whole, India's first
specialised company focussed upon the index as a core product. Today, the S&P CNX Nifty is owned
and operated by IISL. It is a global phenomenon where an independent company calculates and
maintains the index.

Who is Standard & Poor's, and why does their name appear with the S&P CNX Nifty?
S&P owns the most important index in the world, the S&P 500 index, which is the foundation of the
largest index funds and most liquid index futures markets in the world.
When S&P came to India to look at market indices, they focused upon the S&P CNX Nifty as opposed
to alternative indices. They now stand behind the S&P CNX Nifty, as is evidenced by the name "S&P
CNX Nifty" This is a unique occasion; S&P has never endorsed a market index before.

What does 'CNX' in S&P CNX Nifty stand for?

CNX stands for CRISIL NSE Indices. CNX ensures common branding of indices, to reflect the
identities of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE
and X stands for Exchange or Index. The S&P prefix belongs to the US-based Standard & Poor's
Financial Information Services.

What's S&P CNX Defty?

S&P CNX Defty is S&P CNX Nifty, measured in dollars. If the S&P CNX Nifty rises by 2% it means that

the Indian stock market rose by 2%, measured in rupees. If the S&P CNX Defty rises by 2%, it means
that the Indian stock market rose by 2%, measured in dollars.

What's S&P CNX 500 ?

The S&P CNX 500 is Indias first broad based benchmark of the Indian capital market. The S&P CNX
500 represents about 86% of total market capitalization and about 78% of the total turnover on the
NSE. The S&P CNX 500 companies are disaggregated into 72 industries, each of which has an index
The S&P CNX Industry Index. Industry weightages in the index dynamically reflect the industry
weightages in the market. So for e.g. if the banking sector has a 5% weightage among the universe of
stocks on the NSE, banking stocks in the index would have an approx. representation of 5% in the
index. The S&P CNX 500 is a market capitalization weighted index. The base date for the index is the
calendar year 1994 with the base index value being 1000. Companies in the index are selected based
on their market capitalisation, industry representation, trading interest and financial performance. The
index is calculated and disseminated real-time.

What's CNX Nifty Junior?

S&P CNX Nifty is the first rung of the largest, highly liquid stocks in India. CNX Nifty Junior is an index
built out of the next 50 large, liquid stocks in India. It is not as liquid as the S&P CNX Nifty, which
implies that the information in the S&P CNX Nifty Junior is not as noise-free as that of the S&P CNX
Nifty. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100
most liquid stocks in India. S&P CNX Nifty is the front line blue-chips, large and highly liquid stocks.
The CNX Nifty Junior is the second rung of growth stocks, which are not as established as those in the
S&P CNX Nifty. A stock like Satyam Computers, which recently graduated into the S&P CNX Nifty, was
in the CNX Nifty Junior for a long time prior to this. CNX Nifty Junior can be viewed as an incubator
where young growth stocks are found. As with the S&P CNX Nifty, stocks in the CNX Nifty Junior are
filtered for liquidity, so they are the most liquid of the stocks excluded from the S&P CNX Nifty. Buying
and selling the entire CNX Nifty Junior as a portfolio is feasible. The maintenance of the S&P CNX
Nifty and the CNX Nifty Junior are synchronised so that the two indices will always be disjoint sets; i.e.
a stock will never appear in both indices at the same time. Hence it is always meaningful to pool the
S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock index or portfolio.

What is the CNX MidCap?

The medium capitalised segment of the stock market is being increasingly perceived as an attractive
investment segment with high growth potential. The primary objective of the CNX MidCap Index is to
capture the movement and be a benchmark of the midcap segment of the market. The CNX MidCap
Index is a market capitalisation weighted index with its base period of the index being the calendar
year 2003 and base value as 1000.The distribution of industries in the CNX MidCap Index represents
the industry distribution in the MidCap segment of the market. All companies are evaluated for trading
interest and financial performance

CHARACTERISTICS OF BLUE CHIP COMPANY

1. A nationally recognized, well-established and financially sound company.
2. Blue-chip companies are known to weather downturns and operate profitably in the face of adverse
economic conditions, which helps to contribute to their long record of stable and reliable growth.
3. The phrase (BLUE CHIP ) refers to a blue poker chip, which is the highest and most valuable piece. A
blue chip stock is classified as the stock of a large company that is an industry leader and provides
consistent, steady investment returns.
4. A blue chip stock is one that is well-established, financially sound, and historically secure, and have a
history of posting earnings and paying dividends, all while continuing to increase profits. While there
will always be some fluctuation in markets
5. Blue chip companies are known for their strong executive management teams that make intelligent
growth decisions, and for their high-quality products and services.
6. The return on blue chip stocks is close to a sure thing, the stocks tend to be very expensive and have
a low dividend yield.
7. It is easy for investors to track these companies and evaluate their advertising and marketing
strategies for themselves. Finally, they are a great tool for teaching kids about the stock market by
using brand names they recognize.
8. Even blue chips can take a nosedive, as every company makes a mistake at some point in its history.
9. Blue chip stocks are traditionally thought to be a safe investment since the prices do not tend to vary
wildly.
10. To compensate for slower growth, blue chip stocks pay investors dividends at regular intervals. Often,
the amount paid out in dividends increases over time.
11. Blue chip companies are industry leaders, the company is likely to have a long standing record of
successful business.
12. Most industry leaders have low debts and healthy balance sheets, which leads to consistent and
increased dividends for shareholders.
The state of the economy, industry news, and company mergers & acquisitions can all cause the price of a
stock to fall, regardless of how well established the company behind it is.

EQUITY ANALYSIS

______________________________________________________
_
Name of the company
Address: ( Regd. Off & Factory or Plant )
Sector ( Type of Business )
Share Holding Pattern

Financial Data (Latest Financial Year Completed )

Promoters

Equity (Paid UP)

------------------------

Institutional Investors

Sales

------------------------

Other Investors

Net Profit

------------------------

General Public

Dividend

------------------------

Share Price

------------------------

Face Value

------------------------

P/E Ratio

------------------------

________________________________________________________________________________________
_
Board of Directors:
Chairman: __________________

MD: __________________

ED: __________________

Director: __________________

About the company (Profile)

1.
2.
3.
4.
5.
6.
7.
8.
9.

Establishment year & History of the company

Products or Types of services of the company
Specialized product or Brand in the market
Order book position Present & Future
Merger & Acquisition if any?
Expansion plans
Domestic Business or Exports?
If exports, then how much % from the total sales & to which countries?
Diversification

Financial Data
Profit & Loss A/c ( Year Wise Latest 4 years )

Mar 08

Mar 07

Sales or (Operating Income)

Other Income
EBIDTA
PBT
PAT
Debt : Equity Ratio

Conclusions:
1. Is there any growth in Top-Line ( Sales ) Y-O-Y?
2. Is there any growth in Bottom Line (PAT) Y-O-Y?
3. Type of growth Organic or Inorganic?
4.
Case I

Growth in Sales & Growth in Net Profit

Case II

Growth in Sales & No Growth in Net Profit

Case III

No Growth in Sales & Growth in Net Profit

Mar 06

Mar 05

Case IV

No Growth in Sales & No Growth in Net Profit

Profit & Loss A/c (Quarterly Latest 4 Quarters)

Comparison
June 09

June 08

Sales or (Operating Income)

Other Income
EBIDTA
PBT
PAT

Conclusions
1. Is there any growth in Top-Line ( Sales ) Q-O-Q?
2. Is there any growth in Bottom Line (PAT) Q-O-Q?
3. Type of growth Organic or Inorganic?
Case I

Growth in Sales & Growth in Net Profit

Case II

Growth in Sales & No Growth in Net Profit

Case III

No Growth in Sales & Growth in Net Profit

Case IV

No Growth in Sales & No Growth in Net Profit

Valuation of the Share Price

1. Current valuation of share price on the basis of P/Ex
2. Sector P/Ex

Mar 08

Dec08

Sep 08

3. Comparison of share price P/E with Sector P/E

4. Find the stock Undervalued OR Overvalued OR Fairly Priced
5. Abnormal P/Ex: Too high OR Too Low
6. What are the Forward Earnings?
7. Stock Category Growth Stock / Trading Stock / Dividend Yield Stock

P/E Ratio
The most commonly used valuation metric by investors is the price to earnings ratio or commonly referred to
as the P/E Ratio. Though commonly used, it is also misunderstood for various reasons. Here is an attempt to
simplify this valuation metric.
How is P/E Calculated?
It is calculated by dividing market price of stock by EPS ( Earnings Per Share ). EPS in turn is calculated by
dividing the net profit of the company by the number of shares outstanding.
Net Profit
EPS

--------------------------------------Number of Shares Outstanding

Market Price
P/E Ratio

-------------------------------------EPS

Lets assume a stock is trading at Rs.100 and its EPS is Rs.20. The P/E multiple is 5 ( 100 upon 20 )
Market Price = P/E multiple by EPS. Stock prices reflect future earnings potential and not past performance.
Discounting the current price with historical EPS is not right way to analyze companies.
Take hypothetical case. If Tata Steels EPS for the next year is expected at RS.50 and the growth in EPS is
around 15%, the market price is calculated by multiplying Rs.50 with 15 times i.e. Rs.750. When determining
the stock price, one does not discount earnings but multiply earnings.
What is the Right P/E multiple for a stock?

The answer to this question is not easy. In the previous example, we have assigned multiple of 15 times
because EPS is expected to grow by 15% in the immediate year. Is this right way? Not necessarily. Here, it is
important to understand characteristics of the company.
For a commodity stock like Tata Steel, EPS tends to grow at a faster rate when steel prices recovering or are
at the peak and the EPS is likely to decline at a faster rate during downturns. To qualify this statement, if we
look at EPS growth of Tata Steel from 1994 to 2004, the compounded growth in earnings is 17%. However, the
CAGR growth in the last three years was 193%. So, if one believes that steel demand is likely to trace long
term economic growth and that 15% growth is sustainable, the P/E multiple should be ideally much lower than
15 times. Similarly, the long term growth prospects for software companies could be much higher than
commodities.
Determining the P/E multiple for a stock / sector also depends on:
1. Historical performance Why does Infosys trade at a higher P/E multiple compared to Satyam?
By historical performance, we mean, focus of the management (without unrelated diversification)
ability to outperform competitors in down / upturns and promise vs performance. This can be gauged if
one looks at the last three to five years annual reports of a company.
2. The sector characteristics Margin profile, whether it is asset intensive and intensity of competition.
Less asset intensive sectors ( say FMCG ) are considered defensive and therefore, could be trade a
premium to the overall market.
3. And more importantly, expectations. Take the case of Textile stocks. Expectations of significant growth
opportunities post the 2005 quote regime phase out has resulted in up-gradation of P/E multiple of the
textile sector.
When P/E is not useful?
1. Economic cycle: In FY02, Tata Steel was trading at P/E multiple of 20.5 times its FY02 earnings. Was
it expensive? Based on FY05 expected earnings, Tata Steel is trading at a P/E multiple of 5 times its
earnings ( at Rs.50 ). Is it cheap? If one ignored Tata Steel in FY02 on the basis that it was expensive
stock, the opportunity loss is as much as 350%. Business operate in cycles. During downturn, EPS will
be low but P/E will be inflated and vise versa. At the same time, during expansionary phase, corporate
invest in capacities. In this case, high depreciation costs suppress earnings. P/E in this context, may
mislead investors.
2. Not actively tracked: There are number of companies in the Indian Stock Market that are not actively
tracked by the investors, analysts and institutions.

3. Expectations: On the downside, some stocks may be trading at a significant premium because
earnings are higher. High P/E also does not means a good stock to buy. What if the expectations are
unrealistic?
4. Means little a standalone number P/E, as a standalone number, means little. Besides P/E, it is also
important to look at margins, return on net worth, cash generating ability and consistency in
performance over the years to assign a value to a stock.
5. Market sentiment: During bear phase or when interest in stock is low, valuations could be depressed.
Since equities are considered, less attractive during these periods, valuations are likely to be below
historical average or below earnings growth prospects.
6. To conclude valuations of stocks involves subjectively. A person X may assign a higher P/E to the
stock as compared to person Y depending on the risk profile and growth expectations. In the end, it all
boils down to how the company is likely to perform.
P/E Ratio Across the sectors:
Price Earnings Ratio can vary widely across the sectors and what comprises a low PE Ratio in one sector can
be high PE in another.
What are the reasons for the vast divergence in PE Ratio across the sectors?
The sectors with the lowest P/E offer not only lowest expected growth, but also have low returns on equity
(ROE).
The sectors with the highest P/E offer higher expected growth & higher returns on equity, with more risk.
You have three measures of the P/E Ratio for each company. The P/E based earnings in the most recent
financial year (Current P/E), the P/E based on earnings in the most recent four quarters ( Trailing P/E ) and the
P/E based expected earnings in the next financial year ( forward P/E ). Each measure has its adherents &
there is information in each.
Low Growth & P/E Ratios
One reason for Low P/E Ratio for a stock would be low expected growth. May Low P/E companies are
immature business for which the potential for growth is minimal. If you invest in stocks with Low P/E Ratios,
you run the risk of holding stocks with anemic or even negative growth rates. Therefore, you have to consider
whether the trade off of a Lower P/E Ratio for lower growth works in your favor.
P/E Ratio Relationship
Company

Share Price

Current P/E

Sector P/E

ABC Industries

100

10

15

Example:
Formula
Sector P/E Ratio - Current P/E Ratio
---------------------------------------------------

X 100

Current P/E Ratio

Therefore,

Apply to

15 10
----------

ABC Industries
100 X 50% = 50

X 100 = 50%

10

100 + 50 = 150
Target Price can be 150

Interpretation of P/E Ratios

1. HIGH P/E
2. LOW P/E
3. ABNORMAL P/E
4. NO P/E

HIGH P/E
* Company is showing high growth in the business
* Investors are ready to pay high for the earnings of the company.

Scrip

Share Price

P/E Ratio

L&T

1656

20.7

BHEL

2217

31.3

HDFC BANK

1833

30.9

INFOSYS

2446

22.2

LOW P/E
* Company is showing low growth in the business
* Investors are not ready to buy the stocks as the future earnings are
expected to be low.
Scrip

Share Price

P/E Ratio

Allahabad Bank

113

4.8

Chambal Fertili.

56

8.5

Asian Electronics

46

6.1

GSFC

168

3.6

ABNORMAL P/E
* Generally after listing the share Profit remains the same & number
of shares increase so, EPS goes down drastically.
* The earnings are very low for the year or a particular quarter.
Scrip

Share Price

P/E Ratio

Bharat Forge

269

102

GMR INFRA

72

157

JINDAL COTEX

102

66

JAYBHARAT TEL

398

497

NO P/E
* There are no earnings to the company as on date
* For a specific quarter company has declared loss
Scrip

Share Price

P/E Ratio

Tata Steel

560

--

Aditya Birla Nuvo

850

--

Chennai Petro

225

--

Jet Airways

563

--

Dividend Yield %

Yield is the returns calculated on annualized basis.

Dividend Yield is the returns from dividend calculated on annualized basis.

Formula
Dividend
------------

X 100

= Dividend Yield %

Share Price

Example:

HDFC

Pays dividend 200% for Face Value of Rs.10

That means Rs. 20 per share dividend

HDFC Share Price is Rs.3000
Therefore,
20
------- X 100
3000

0.66% ( Dividend Yield % )