Book & Market Value

A
STUDY ON
“RELATIONSHIP BETWEEN BOOK VALUE AND MARKET VALUE OF
SHARES IN BANKING AND CEMENT SECTOR”
A dissertation submitted in partial fulfillment of the requirements for the

award of MBA Degree of Bangalore University
BY
VARUN ARUR
Registration No. 06XQCM6083
UNDER THE GUIDANCE OF

Prof. Praveen Baghwan
M.P.BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan
Race course road, BANGALORE 560001
2006 - 2008
1 M P Birla Institute of Management

DECLARATION
I here by declare that the report titled
A STUDY ON RELATIONSHIP BETWEEN BOOK VALUE AND

MARKET VALUE OF SHARES IN BANKING AND CEMENT SECTOR
Submitted in partial fulfillment of requirements for the award of degree in MBA

course of Bangalore University is a record of independent work carried out by me
at M.P.Birla Institute of Management. The report has not been submitted in part
or full towards any other degree or diploma.
Place: Bangalore Varun Arur

Date: Reg No: 06XQCM6083

PRINCIPAL’S CERTIFICATE
This is to certify that the report titled

Submitted in partial fulfillment of requirements for the award of degree in MBA

course of Bangalore University is a record of bonafide work carried out by Mr.
Varun Arur bearing the registration no. 06XQCM6083 under the guidance and
supervision of Mr. Praveen Baghwan, professor, MPBIM, Bangalore.
PLACE: Bangalore Dr. N S Malavalli
DATE: (Principal)
GUIDE’S CERTIFICATE

This i s t o c e r t i f y th at t h e report titled

has been prepared by Mr. Varun Arur bearing the registration no.
06XQCM6083 is a bonafide work done, carried under my guidance and
supervision during the academic year 2007-08 in partial requirement for the award
of MBA degree by Bangalore University. To the best of my knowledge
this report has not formed the basis for the award of any other degree or diploma.
PLACE: Bangalore
DATE: Prof. Praveen Baghwan
ACKNOWLEDGEMENT
I am thankful to Dr.N.S.Malavalli, Principal, M.P.Birla institute of management,

Bangalore, for his valuable support and guidance.

I am extremely thankful to Prof. Praveen Baghwan, M.P.Birla institute of Management,
Bangalore, who has guided me to do this project by giving his valuable suggestions and advice.
Finally, I express my sincere gratitude to all my friends, family and well wishers who
helped me in doing this report.
Thank You.
VARUN ARUR
CONTENTS
Chapter No Contents Page No
Chapter 1 RESEARCH EXTRACT 1

INTRODUCTION
2.1 Back ground of the study
Chapter 2 2.2 Statement of the problem 3

2.3 Need for study
2.4 Objectives of study
2.5 Operational definitions of concepts
Chapter 3 LITERATURE REVIEW 19
METHODOLOGY
4.1 Type of Research
4.2 Sampling Technique
4.3 Sample Size
Chapter 4 4.4 Sample Description 22

4.5 Collection of data
4.6 Hypothesis
4.7 Tools for testing hypothesis
4.8 Other software used for data analysis
4.9 Limitations of the study
SECTOR ANALYSIS
Chapter 5 25
5.1 Banking Sector
5.2 Cement Sector
Chapter 6 ANALYSIS AND INTERPRETATION

29
6.1 Banking Sector
6.2 Cement Sector

FINDINGS, CONCLUSIONS AND
Chapter 7 69
SUGGESTIONS
LIST OF TABLES
Table Particulars Page No.

29
6.1 Table Showing Market Value, Book Value, F and P Value of Allahabad Bank
29
6.2 Table Showing Regression statistics of Allahabad Bank
31
6.3 Table Showing Market Value, Book Value, F and P Value of Andhra Bank
31
6.4 Table Showing Regression statistics of Andhra Bank
33
6.5 Table Showing Market Value, Book Value, F and P Value of Bank of Baroda
33
6.6 Table Showing Regression statistics of Bank of Baroda
35
6.7 Table Showing Market Value, Book Value, F and P Value of Bank of India
35
6.8 Table Showing Regression statistics of Bank of India
37
6.9 Table Showing Market Value, Book Value, F and P Value of Bank of Maharashtra
37
6.10 Table Showing Regression statistics of Bank of Maharashtra
39
6.11 Table Showing Market Value, Book Value, F and P Value of Canara Bank
39
6.12 Table Showing Regression statistics of Canara Bank
41
6.13 Table Showing Market Value, Book Value, F and P Value of Dena Bank
41
6.14 Table Showing Regression statistics of Dena Bank
43
6.15 Table Showing Market Value, Book Value, F and P Value of HDFC Bank
43
6.16 Table Showing Regression statistics of HDFC Bank
45
6.17 Table Showing Market Value, Book Value, F and P Value of ICICI Bank
45
6.18 Table Showing Regression statistics of ICICI Bank
47
6.19 Table Showing Market Value, Book Value, F and P Value of ING Vysya Bank
47
6.20 Table Showing Regression statistics of ING Vysya Bank
Tables Particulars Page No.

49
6.21 Table Showing Market Value, Book Value, F and P Value of Ambuja Cement
49
6.22 Table Showing Regression statistics of Ambuja Cement

51
6.23 Table Showing Market Value, Book Value, F and P Value of ACC Cement
51
6.24 Table Showing Regression statistics of ACC Cement
53
6.25 Table Showing Market Value, Book Value, F and P Value of JK Cement
53
6.26 Table Showing Regression statistics of JK Cement
55
6.27 Table Showing Market Value, Book Value, F and P Value of Mangalam Cement
55
6.28 Table Showing Regression statistics of Mangalam Cement
57
6.29 Table Showing Market Value, Book Value, F and P Value of Mysore Cement
57
6.30 Table Showing Regression statistics of Mysore Cement
59
6.31 Table Showing Share Price, EVA,MVA,& ROCE of Ultratech Cement
59
6.32 Table Showing Regression statistics of Ultratech Cement
61
6.33 Table Showing Share Price, EVA,MVA,& ROCE of Shree Cement
61
6.34 Table Showing Regression statistics of Shree Cement
63
6.35 Table Showing Share Price, EVA,MVA,& ROCE of Prism Cement
63
6.36 Table Showing Regression statistics of Prism Cement
65
6.37 Table Showing Share Price, EVA,MVA,& ROCE of JK Lakshmi Cement
65
6.38 Table Showing Regression statistics of JK Lakshmi Cement
67
6.39 Table Showing Share Price, EVA,MVA,& ROCE of Birla Corporation
67
6.40 Table Showing Regression statistics of Birla Corporation
LIST OF CHARTS
Chart Particulars Page No.

30
6.1 Chart Showing Market Value and Book Value of Allahabad Bank
32
6.2 Chart Showing Market Value and Book Value of Andhra Bank
34
6.3 Chart Showing Market Value and Book Value of Bank of Baroda
36
6.4 Chart Showing Market Value and Book Value of Bank of India
38
6.5 Chart Showing Market Value and Book Value of Bank of Maharashtra
40
6.6 Chart Showing Market Value and Book of Canara Bank
42
6.7 Chart Showing Market Value and Book Value of Dena Bank
44
6.8 Chart Showing Market Value and Book Value of HDFC Bank
46
6.9 Chart Showing Market Value and Book Value of ICICI Bank
48
6.10 Chart Showing Market Value and Book Value of ING Vysya Bank
50
6.11 Chart Showing Market Value and Book Value of Ambuja Cement
Chart Showing Market Value and Book Value of ACC Cement 52
6.12
54
6.13 Chart Showing Market Value and Book Value of JK Cement
56
6.14 Chart Showing Market Value and Book Value of Mangalam Cement
58
6.15 Chart Showing Market Value and Book Value of Mysore Cement
60
6.16 Chart Showing Market Value and Book Value of Ultratech Cement
62
6.17 Chart Showing Market Value and Book Value of Shree Cement
64
6.18 Chart Showing Market Value and Book Value of Prism Cement
66
6.19 Chart Showing Market Value and Book Value of JK Lakshmi Cement
68
6.20 Chart Showing Market Value and Book Value of Birla Corporation

CHAPTER 1
Research Extract

CHAPTER 2
Introduction

CHAPTER 3
Literature Review

CHAPTER 4
Methodology

CHAPTER 5
Sector Analysis

CHAPTER 6
Analysis and Interpretation

CHAPTER 7
Findings, Conclusions and Suggestions

BIBLIOGRAPHY
1. ABSTRACT
The literature on fundamental analysis on valuing stocks is perhaps one of the earliest
developments in the literature on security analysis. It perhaps sought to find an answer to the age
old adage - ‘What explains stock prices?’ However, various limitations of the models used in
fundamental analysis led to the development of various alternative valuation models.
Share price is the most important factor readily available to the investors for their
decision to invest or not in a particular share. Theories suggest that share price changes are
associated with changes in fundamental variables with changes in valuation like payout ratio,
dividend yield, capital structure, earnings, size of the firm and its growth. Investigations of share

price changes appear to yield evidence that change in fundamentals variable(s) should jointly
bring about changes in share prices both in developed and emerging markets.
However the actual fundamental factors found to be relevant may vary from market to
market. The changes in asset growth of firms are significant in case of Japanese shares while
earnings appear to be universally a relevant factor. However, it is widely agreed that a set of
fundamental variables as, suggested by individual theories is no doubt relevant as possible
factors affecting share prices changes in the short and the long run. Knowledge of relative
influence of fundamental factors on equity share prices is helpful to corporate, management,
government and investors.
To the corporate management an understanding of the valuation mechanism in stock

market is essential for the sound financial management of the company. An understanding of
determinants of share prices is useful to dividend payment, bonus declaration, right issues, etc.
Investors can also form better judgments and make intelligent and rational investment decisions.
Investors in shares usually make constant use of these various variables for gauging the relative
merit of a script. These calculations are in no sense, final determinants of equality and value but
they are convenient indicators about the performance of equity shares.
The topic, “A study on relationship between Book Value and Market value of shares in
Banking and Cement sector” is chosen to understand the role played by book value towards the
market value and to study the relation between the same. The initial assumption that was made to
compare market value with book value of various companies is grouped into sectors.
The study was made for Ten companies, which are grouped into Two sectors. These
sectors are Banking sector and Cement sector.
Basically the topic was primarily chosen because, it would help me to comprehend in
depth one of my most fascinating investment concept-market price to book value which I feel is

a very complex human decision making phenomenon, and with some judicious blend of quality
and dedicated hard work will help unlock some of the investment strategies.
The study conducted on the market price to book value is analyzed by comparing the
market value and book value dependency. In the suggestion part the suggestions are made in
which companies to invest and where not to invest.
2. INTRODUCTION
The relationship between price and book value has always attracted the attention of
investors. Stocks selling for well below the book value of equity have generally been considered
good candidates for undervalued portfolios, while those selling for more than book value have
been targets for overvalued portfolios. This study aims at examining the relation between book
value and market value as an investment tool to identify the undervalued stocks.
2.1 Background of the study

Investors are currently demanding Shareholder value more strongly than ever. So the
value created by the company is more linked to the market price of the shares. This study is
undertaken to show the relationship that exists between the book value and the share prices as the
performance of the company is reflected in the share prices in the market.
2.1.1 Price to Book Equity
The market value of the equity of a firm reflects the market’s expectation of the firm’s
earning power and cash flows. The book value of equity is the difference between the book value
of assets and the book value of liabilities, a number that is largely determined by accounting
conventions. The book value of assets is the original price paid for the assets reduced by any
allowable depreciation on the assets. Consequently, the book value of an asset decreases as it
ages. The book value of liabilities similarly reflects the "at-issue" values of the liabilities. Since
the book value of an asset reflects its original cost, it might deviate significantly from market
value if the earning power of the asset has increased or declined significantly since its
acquisition.
There are several reasons why investors find the price-book value ratio useful in
investment analysis. The first is that the book value provides a relatively stable, intuitive measure
of value that can be compared to the market price. For investors who instinctively mistrust
discounted cash flow estimates of value, the book value is a much simpler benchmark for
comparison. The second is that, given reasonably consistent accounting standards across firms,
price-book value ratios can be compared across similar firms for signs of under or over
valuation. Finally, even firms with negative earnings, which cannot be valued, using price-
earnings ratios, can be evaluated using price-book value ratios; there are far fewer firms with
negative book value than there are firms with negative earnings.
There are several disadvantages associated with measuring and using price-book value
ratios. First, book values, like earnings, are affected by accounting decisions on depreciation and
other variables. Second, book value may not carry much meaning for service and technology
firms which do not have significant tangible assets.
2.1.2 Book Value:

Book value reflects a company’s worth. It can be defined as the company’s assets minus
its liabilities .If the company pulled its shutters, this number suggests how much would be left
after all the outstanding obligations are settled and assets sole off. A company that is performing
very well will always be worth more than its Book value for its ability to generate earnings and
growth. In essence, book value is what would be left over for shareholders if a company closes
its operations, pay off its creditors, collects from its debtors and liquidates it.
Neither the actual book value of any company vis-à-vis its market value does not take
into account the “going-concern” value, nor the value of its “goodwill” and all that it entails.
Nevertheless, the chart below shows what has happened to market values, when Market to Book
rose to an unrealistic ratio.
2.1.3 Uses:
1. Book value is used in the financial ratio price/book. It is a valuation metric that sets the
floor for stock prices under a worst-case scenario. When a business is liquidated, the book value
is what may be left over for the owners after all the debts are paid. Paying only a price/book = 1
means the investor will get all his investment back. Share of capital intensive industries trade at
lower price/book ratios because they generate lower earnings per dollar of assets. Business
depending on human capital will generate higher earnings per dollar of assets, so will trade at
higher price/book ratios.
2. Book value per share can be used to generate a measure of comprehensive earnings,
when the opening and closing values are reconciled.
2.1.4 Factors Influencing Book Value

1. The sale of shares per units by the business increases the total book value.
a. Book value per share will increase if the additional shares are issued
b. At a price higher than the pre-existing book value per share.
2. The purchase of its own shares by the business will decrease total book value.
3. Book value per share will decrease if more is paid for them than was received when
originally issued (pre-existing book value per share).
4. Dividends paid out will decrease book value and book value per share.

5. Comprehensive earnings/losses will increase/decrease book value and book value per
share. Comprehensive earnings, in this case, includes net income from the income
Statement, foreign exchange translation changes to Balance Sheet items, accounting
changes applied retroactively, and the opportunity cost of options exercised.
2.1.5 Market Value:

A security’s last reported sale price (if on an exchange) or its current bid and ask price (if
over-the –counter): i.e., the price as (determined dynamically by buyers and sellers in an open
market. It is also called as Market price.
There are three main areas of influence that move a stock’s price up or down. If you
understand these influences, it will help you decide whether the price movement is a buy, sit or
sit tight signal.
2.1.6 Factors influencing share price:

2.1.6.1 Fundamentals
Clearly, the most direct influence on a stock’s price is a change in the economic
fundamentals of the business.
If revenues and profits are on a steep upward trend with no indication of leveling off, you can
expect to see the stock price rise as investors bid up this attractive company.
On the other hand, if the profit picture is flat or, worse, declining with no change in sight,
look for investors to abandon the stock and the price to fall.
These are simple examples of changes in fundamentals. Other, more complex and subtle
changes can occur that may not dramatically affect the stock price immediately (increased debt, a
poor acquisition and so on can trigger price changes).
The point is that changes in the underlying business have a direct impact on the stock’s price.
2.1.6.2 Sector Changes
Changes in the stock’s sector can have positive or negative affects on price too. Some
sectors or industries are cyclical in nature and you should know that would affect price.
However, when whole sectors catch of fire (think dot.com stocks) or burn up (think
dot.com stocks, again), even these companies that have solid fundamentals are pulled along with
the rest of the sector. You may hold a stock that is a victim of “guilt by association” when an

industry falls out of favour. Likewise, stocks can see prices artificially inflated if they find
themselves in the right industry at the right time.
2.1.6.3 Market Swings

The market goes up and the market goes down. That’s about all you can say with
certainty concerning the stock market.
As the market moves up and down, your stock may move with or against it. Most large-
cap stocks will follow the market to some degree, but smaller companies may not get the same
push every time.
In general, a strong market move either up or down will carry more stocks with it than
not, so your stock may be up or down for no other reason than the market was up or down.
2.1.7 Can market value be more than the book value?
Yes, the market value can be more than the book value. Market value is determined by
the combination of all players in the market. This includes financial institutions, mutual funds,
foreign institutional investors, securities operators and the common investor. Since the market
price is the culmination of the demand and supply position in the market, one can conclude that
the expectations of the various players will get reflected in it. So much so, the market t value is
the net result of the perception regarding current earnings, future earnings, industrial growth,
competitive advantage, and so on. The book value of the shares would also be a factor that is
taken into account by the market in arriving at the price, but it is just another factor.
Therefore, it is possible for the market price to be more than the book value if the net
perception in the market is that the company has growth potential and that it is likely to perform
better than it is doing at present.
Can book value exceed the market value? Why not? Sometimes, a company may be
performing steadily and having a fair book value. However, because of the stagnation of growth
possibilities or the imminent force of competition or other factors affecting its future chances, the
market might have viewed the share in poor light. If so, we can have instances where the market
value is less than the book value.

Investors often compare book value with market price. Usually, there is a disparity
between the two. For unfancied companies in a bear market, the book value generally tends to be
higher than the market price. What works against the ratio is that historically, it has been at great
variance with current values. While book value is calculated on the basis of the information
available in the last balance sheet, the market price of a share could be recorded as late as the last
minute (when trading is on)
2.1.8 Market Price to Book Value:

We can also compare a company's market value to its book value on a per-share basis.
Divide book value by the number of shares outstanding to get book value per share and compare
the result to the current stock price to help determine if the company's stock is fairly valued.
Most stocks trade above book value because investors believe that the company will grow and
the value of its shares will, too. When book value per share is higher than the current share price,
a company's stock may be undervalued and a bargain to investors.
The market to book ratio compares the book value of the shares of a company to its
market value. If a share’s market price is treble or quadruples its book value, it signifies that
investors have tremendous confidence in the growth prospects of the company. If, on the other
hand, the book value is more than the market value, the company may not be making profit.
Price to book (P/B) ratio is used to compare a stock’s Market value with its book value. It is
calculated by dividing the current closing price i.e., market price of the stock by the Book value
P/B is equal to share price divided by Book value per share.
P/B ratio = Market price of share

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

number of outstanding shares). How we interpret the results? The lower the P/B is, the better the
value. This means that value investors look for companies, which have low P/B indicators.
This ratio also gives some idea of whether an investor is paying too much for
what would be left if the company went bankrupt immediately. For companies in distress, the
book value is usually calculated without the intangible assets that would have no resale value. In
such cases, P/B should also be calculated on a 'diluted' basis, because stock options may well
vest on sale of the company or change of control or firing of management.
Value investors search for companies that have been overlooked by the market. This
means that they are not in the general attention of the other investors, but still provide
opportunities for high returns. The key to the success of value investors is that they manage to
find companies that are in their beginning of development and nobody else has yet noticed them.
Value investors make a long-term investment in the company and patiently wait until the
company develops to its full potential. This is the time when the other analysts also notice the
potential of the company and the big bidding begins. As a result of his/her perspicacity the value
investor collects his/her fat profits.
When deciding on a particular company, value investors look at such indicators as

earnings growth, price to book ratio (P/B) and several others.
2.1.9 What we can deduce from a low P/B

In absolute terms, a P/B ratio under 1.0 is considered low. Generally speaking, a low P/B can
indicate:
• That the assets are overstated on the balance sheet. In this case, we should avoid the
company because it may be destroying shareholder value. Ford (NYSE: F) is a good
example of this. According to MSN Money Central, Ford's P/B was 0.72 in 1997, and its
book value per share was $25.54. Today, Ford's P/B is 1.30, and its book value per share
is down to $7.66. During that time, the share price has fallen from nearly $50 to less than

$10. Clearly, Ford had other problems, but the low P/B certainly did not indicate value.
At Inside Value, we generally look for companies that have been increasing book-value-
per-share over a number of years because -- as Ford's plight shows -- the share price often
follows the book value per share.
• That the company will generally have a poor return on equity (ROE) and poor
return on assets (ROA). If earnings are negative, there will be a negative ROE and
ROA. Of course, if there is a solid management team that is turning around the
company's fortunes, then we may have an interesting value proposition.
• That the industry at large has a low P/B. Certain industries have low P/B ratios,
generally because they are cyclical or because the companies generate relatively low
ROE. Hurricane Katrina reminds us that insurance companies typically have low P/B
ratios because of the cyclicality of that industry. "Hard insurance markets" (i.e., those
with higher premiums) form after a major disaster. This attracts new capital in the short
term, when investment returns can be very good. After a while, however, competition
increases and the market softens. It's important to find insurance companies that maintain
discipline in a soft market. Otherwise, they'll take on risks that are not adequately
covered in the premiums. Eventually, claims will roll in, along with underwriting losses,
and the book value will be reduced.
2.1.10 Best use of P/B

P/B ratio is the most important, most after and most prevalent valuation ratio. Its is pre-
eminently published in the media and talked about in the financial markets. An investor wanting
to invest in the equity shares of a company will first find out what are the P/b of the share. This
ratio plays the most crucial role in the valuation of shares in the initial public offerings,
secondary capital markets. The ratio reflects the investor’s perception of the company. Even the
lenders, who do not have a direct interest in this ratio, evaluate it before taking financing

exposures in a listed company. P/B is best used for asset-heavy companies, such as financial
institutions, manufacturing companies, and other capital-intensive industries.
So what makes the P/B ratio so wonderful? For starters, it's easy to calculate. The price-
to-book ratio is simply a stock's market capitalization (stock price times shares outstanding)
divided by the book value of equity on its balance sheet. This provides investors with an easy
means of comparing the value the market has assigned to a stock with the accounting value of
the firm's equity. Stocks that trade at a P/B ratio of less than 1 are considered undervalued.
Proponents of the P/B ratio would argue that this conservative accounting approach to
assessing value (book value) is a better measuring stick than the market price (market
capitalization), which can often be irrational and volatile. Along these lines, it's commonly
believed that a stock's book value equals its liquidation value. If a private equity firm or wealthy
investor were to swoop in and buy out a company, they could then turn around and liquidate it by
paying off the debt and selling all the assets.
Price to book ratios is a popular method for gauging a stocks relative value. Just like
price to earnings ratios, P/B multiples that are relatively high usually signify that the stock is
overvalued. Investing in low P/B companies has forever been a staple strategy among value
investors. Yet, stocks trading at higher P/B ratios can still be good investments and actually be
undervalued.
Understanding the drivers of the P/B ratio helps determine whether the stock deserves a
high multiple. Often, the P/B multiples published are not forward looking. The share price is
forward looking, yet the book value (denominator) is a historical figure taken from the balance
sheet.
2.1.11 Price/book Ratio Disadvantages:
On the other hand, price/book value fails to reflect intangible assets such as intellectual
assets, which represent the basis of the functions of high-tech companies (e.g. Microsoft). As a
result, the balance sheets of such companies fail to reflect the intellectual assets of such
companies. In turn, this leads to low book values and artificially high price/book ratios.

Book value registers items at the price at which they were purchased. As a result book
value doesn't reflect the current market value, which leads to a lack of precision in measurement.
2.1.12 Company Market Capitalization:
You probably think that you have never heard of the term “market capitalization” before.
You have! When you are talking about “mid-cap”, “small-cap” and “large-cap” stocks, you are
talking about market capitalization!
Market cap or market capitalization is simply the worth of a company in terms of its
shares! To put it in a simple way, if you were to buy all the shares of a particular company, what
is the amount you would have to pay? That amount is called the “market capitalization”. When
you decide on the investment in a particular stock you should consider the size of the company
that issues it. Additionally, you should decide on the amount of the money you would allocate.
This is required since companies of different sizes react in a different way to market conditions
and changes.
Company size can be classified in one of the two ways:
1. by revenue
2. by market capitalization (also known as market cap)
The first classification, namely by revenue, is rarely used. This is so since the differences
observed from one industry to another usually distort the size of the company.
On the other hand, the most commonly used measure is the second one - market
capitalization.
2.1.13 Market Capitalization Calculation:
The following formula to estimate market cap:
Market cap = (number of outstanding shares) x (current stock price)

Example: Company X possesses 200,000,000 shares of common stock outstanding. The current
market price for one share is $40. So, company X's market cap is $8.0 billion (200,000,000 x $40
= $8.0 billion).
By applying this formula to any other real company you will be able to measure its
market cap to other companies' market cap.
Market capitalization can be easily found in the online resources by simply entering the
symbol. The market cap should appear somewhere among the reported data.
Companies can be included in one of the following categories depending on their market
capitalization:
$300 million and below……….Micro Cap
$1 billion and below..................Small Cap
$1 billion to $8 billion...............Mid Cap
$8 billion to $100 billion...........Large Cap
Above $100 billion....................Mega Cap
The categories listed above don't represent an obligatory classification. Many sources
prefer the usage of just three categories: small, medium and large.
Stocks from companies with micro and small market capitalization are most volatile.
They are also most susceptible to failure.
On the other hand, the high risk goes hand in hand with high potential reward. Finally,
the size of the company doesn't determine its potential for success. Small companies bring both
high risks and high returns. On the other hand, being a large company has its advantages in the
huge stock market.
2.1.14 Per-Share Price vs. Market Cap

Many beginning investors consider the per-share price of a stock as an indicator of its
value. However, this is not the case.
If you are to apply a fundamental analysis in evaluating a stock you consider purchasing,
per-share price is almost of no use.
The uselessness of a per-share price in fundamental analysis stems from the fact that
stock prices are very dynamic in their nature. Additionally, every company holds a different
number of shares outstanding. As a result our ability to gain an understanding of the real value of
a company is much hampered.
In order to determine the value of a company, we should identify its market capitalization
(also known as market cap).
Market cap = per-share price x outstanding shares
The market cap represents the money you will need in order to buy the whole company
on the open market.
Many times a stock that costs $40 is stated to be cheaper than a stock priced $15.
Consider the following example to see why this is so.
Stock A Stock B
Stock Price $40 $15
Outstanding Shares Number 30 million 400 million
Market Capitalization $1.2 billion $6 billion
As you can see, even though the price of stock B is lower than the price of stock A, its
market cap is higher. Therefore, the stock price alone doesn't tell you anything about the value of
the company in itself.
However, the market capitalization does convey a meaning. When deciding on the
investment in a particular stock it should not be evaluated out of the context. You should also

compare the stocks of companies of the same size and industry. Generally, stocks are divided
according to their size into small cap, mid cap and large cap. Different numbers are assigned to
the different categories by the analysts.
When you attempt to put in balance your investment portfolio, market cap is applied in
the stock screens. Market Capitalization represents a better choice when evaluating a stock. Per-
share price many times is useless because it may be misleading in assessing the real value of a
company.
2.1.15 Incorporation earnings and book value:

Using clean surplus accounting, one can replace the dividends in the Dividend Discount
model with earnings and book values. Price is restated in terms of earnings and book value, and
the valuation problem focuses on the fundamental process of creating wealth, rather than on the
distribution of wealth. Prices can then be interpreted in terms of the market’s expectations of
future earnings without severing the valuation link between price and future dividends.
The model incorporates distinct valuation roles for the two summary accounting
numbers, earnings and book value. In setting price, one starts with book value-the stock of (net)
assets-and adjusts it upward if one expects those assets to exceed average profitability levels and
downward if one expects them to fall short of average profitability. To estimate future
profitability, one starts with current profitability, or earnings divided by book value (ROE).
Earnings and book values are complementary, not competing, indicators of value. It
follows that Price/Earnings ratios (P/E) and Price/Book (P/B) should provide complementary
information about expected future profitability, and P/B is a function of the expected level of
future profitability. The P/E-P/B combination jointly reveals the market’s expectations regarding
future profitability relative to current profitability.
The empirical evidence supports the validity of the valuation model. The results also
indicate, paradoxically, that eliminating dividends from the empirical tests can actually validate
the role of dividends in valuation. Most importantly, the evidence confirms the primary role of
earnings prediction in determining firm value.
2.1.16 The underlying valuation model:

A valuation model developed in Ohison relies on the following two key assumptions.
First; market price equals the present value of future dividends.
Where,
Pt =price at time t,
K = the discount rate,
dt = dividends paid at time t, and
T = the date the liquidating dividend is paid.
Second, the clean surplus relation in accounting holds; that is ,end-of-period book value
equals beginning of-period book value plus earnings minus dividends (capital contributions are
incorporated as negative dividends):
Yt = yt-1 + xt – dt
Where,
Yt = book value at time t,
Xt = earnings for period t and
dt = dividends for period t.
The model requires one additional concept – abnormal earnings, defined as Earnings
adjusted for normal (risk – adjusted) rate of return on book value. Formally:
Xat = xt – kyt-1
The evolution of abnormal earnings is restricted in the following way:
Xat = wxa t-1 + et
Where, 0 less than 1, and et is the surprise in abnormal earnings in period t. whatever the
firm’s current earnings, competitive forces are assumed to reduce the firm’s abnormal earnings
over time. At some point, the firm will have only zero net present value opportunities and zero
abnormal earnings. Because of this convergence property, abnormal earnings play a central role
in the valuation function.

Further dividends do not appear in the valuation formula. If the return on new
investments is independent of their source of financing, future earnings retained by the firm and
future earnings are distributed, as dividends are equivalent in so far as determining firm value is
concerned. It is not necessary to estimate the stream of future dividends. Value is determined by
the creation of wealth, measured by aggregate accounting earnings, rather than the distribution of
wealth, measured as dividends.
By replacing dividends in the Dividend Discount Model formula with the clean surplus
formula and abnormal earnings, on restates price in terms of current book value and future
abnormal earnings. Iterative substitution of
dt = xat + (1 + k) yt-1 - yt
Into Equation 1 for r = t, t+1,……., yields:
2.1.17 The P/B Ratio
Dividing the above equation by book value, yt, gives an expression for the price-to-book
ratio:
P/B = 1+AX a/B,

Where AXa is the discounted stream of future abnormal earnings. If the firm is expected
to have zero abnormal earnings in the future, its market value will equal its book value. Any
premium (discount) to book value is attributed to the present value, defined as earnings in excess
of a normal rate of return divided by beginning book value. Although the valuation formula, like
the Dividend Discount Model, incorporates the sum of an infinite series, its power derives from
the fact that estimating abnormal earnings over a finite horizon can generate reasonable firm
valuations.
2.2 Statement of the problem:
Indian Capital Markets in the nineties has seen significant increase in the number of
scrip’s listed in the market as well as in the daily turnover of the market. Other than individual
investors and institutions like UTI, many new investment firms and mutual funds have also
started participating in the market.

There is also an increased awareness about the need for investment analysis and many
financial analysts are looking at various parameters for assessing the performance of corporate in
the stock market.
The Book value per share can be considered as an indicator of the value of the assets in
place, particularly in mature and capital intensive industries the asset values provide an indicator
to the amount of investment that a new entrant has to make to gain entry. To that extent, it is an
indicator of the inherent value of the firm.
To examine whether there is a relationship between Book Value and Market Value which
can be used to base the investment decisions.
2.3 Need For the Study:

The present scope of the study is to determine whether the relationship between book
value and the market value can be used as an investment tool to identify undervalued stocks in
the banking sector and cement sector also to determine the relevant relation to do the same.
This study will focus more into accounting concepts and values, thereby making it a
useful material for fundamental analysis.
2.4 Objectives of the study:

• To identify stocks whose market value mainly depends on book value.
• To determine the variance between Market value and Book value of stocks.
• To determine the variance between the Market value and Book value of a sector as
whole.
2.5 Operational definition of concepts:
Market price: The prevailing price at which merchandise, securities, or commodities are
sold.

Net Worth: The amount by which a company or individual’s assets exceed their
liabilities.
Book value: The monetary amount by which an asset is valued in business records, a
figure not necessarily identical to the amount the asset could bring on the open market.
Price-To-Book Ratio-P/B Ratio: A ratio used to compare a stock’s market value to its
book value. It is calculated by dividing the current closing price of the stock by the latest
quarter’s book value per share.
Price to Tangible Book Value – PTBV: A valuation ratio expressing the price of a
security compared to its hard, or tangible, book value as reported in the company’s
balance sheet. The tangible book value number is equal to the company’s total book
value less the value of any intangible assets. Intangible assets can be such items as
patents, intellectual property, goodwill etc.
Book Value per Common Share: A measure used by owners of common shares in a
firm to determine the level of safety associated with each individual share after all debts
are paid accordingly.
Present Value – PV: The amount that a future sum of money is worth today given a
specified rate of return.
Future Value- FV: The value of an asset or cash at a specified date in the future that is
equivalent in value to a specified sum today.
3. LITERATURE REVIEW
Traditionally, the Price to Earning ratio has been more popular as a valuation tool than
price to book value ratio, and is widely used in making investment decisions by both laymen and
analysts. Basu (1977) showed how the price-earnings ratio that is computed from reported

accounting earnings can be used to select stocks that have good appreciation potential. His
analysis showed that stocks with low P/E ratios earned risks – adjusted rate of returns that beat
the returns earned by a naïve buy – and – hold strategy. Evans (1993) finds that the usual stock
market rule of 20 – which says the P/E ratio plus the inflation rate should equal 20 – no longer
holds true. He suggests that the rule might have lost its validity and many are trading at much
higher P/E’s, but there still exists some fundamental relationship between the yield on stock and
bonds. A study in the Indian context pertaining to relevance of P/E ratio as investment criteria
indicates that the no firm conclusions can be drawn regarding the relevance of P/E as criteria for
investment in the stock market, since the returns are not significantly different between low P/E
and high P/E stocks.
Another valuation indicator for analysts is the ratio of Market value to Book value since
under theoretically ideal conditions the Market value of a firm should reflect its share has some
relationship to the stock’s economic worth. Example: if company is liquidated and its assets sold
for their book value, the book value per share will provide the floor on the stock’s price. But this
is not so in reality because the liquidation value of assets are generally much lower than their
values. The higher a company’s price to book ratio, the more likely it is overvalued whereas
lower the ratio the chances are that it is undervalued. Companies with a market to book ratio of
less than 1 are serious candidates for undervaluation and represent possibly good buys.
The P/B ratio has been used in the valuation of stocks because the assets of a bank have
similar book values and market values. Generally the assets of a bank include investments in
government securities, corporate bonds along with commercial or personal loans, which are
considered to be collectible. Under such conditions the P/B ratio should be close to 1.And the
banking industry is satisfying this level. In case of an industrial company P/B ratio can be
expected to be more than 1.Since the book value of assets based on historical records will almost
always be less than either their current replacement value or the firm’s break-up value.
Some have suggested that stocks with low P/B ratio should outperform high P/B ratios.
Marakon Associates (1980) suggested the following regarding the behavior of P/B ratio over a
time period. “One of the lesser known, but most interesting, principles of economics is that
whenever a company consistently earns a rate of Return on Equity(ROE) which exceeds its Cost

of Equity Capital(Ke), the company’s stock price will trade above book value that is, its market
to book ratio will exceed 1. Conversely, whenever a company consistently earns an ROE less
than Ke its M/B will equal 1.”
(Quoted in George Foster “Financial statement Analysis” second edition, Prentice Hall, New
Jersey 1986).
Wilcox (1984) showed that the P/B model appears to be a better valuation model than the
P/E model. A study by Rosenberg (1985) examined this aspect and found that stocks with low
P/B ratios experienced significantly higher risk adjusted returns than the average stocks.
A study by Fama & French (1992) provided even greater support for this ratio as a useful
measure of relative value. The purpose of the study was to examine alternative variables that
would explain the cross section rate of return on common stocks .One of the explanatory
variables was the well-known beta coefficient. Their results did not provide much support for
Beta as an explanatory variable but their results did reveal that both the size of firms and the ratio
of book value to market value of equity were significant explanatory variables .They also
contended that the Book value to Market value ratio was the single best variable.
Fairfield (1994) establishes that the Price/Earnings ratio is a function of expected changes
in future profitability, while the Price/Book value ratio is a function of expected levels of future
profitability.
Penman (1996) in his study explains that the P/E ratio indicates future growth in
earnings, which is positively related to expected future return on equity and negatively related
current return on equity. The P/B ratio indicates expected future return on equity. So, the two are
reconciled by a comparison of current and expected future return on equity. Empirical evidence
indicates that return on equity indicates differential P/B ratios but not P/E ratios except in the

extremes. This is because return on equity is strongly serially correlated and predicts future
profitability on which the P/B is based. Current return on equity is not a good indicator of P/E
since a given level of P/E can be associated with alternative combinations of current and
expected future return on equity. Cole et al(1996) examine the predictive power of traditional
market indicators like dividend yield and market to book ratio and addresses the claim that these
are no longer valid indicators. They find that share repurchase activity has not been especially
high through most of the 1990s and that after adjusting for buybacks the dividend yield remains
low. Likewise the markets to book ratio remains at a record high once charges for retiree health
liabilities have been taken into account.
4. METHODOLOGY
4.1 Type of Research:
The type of research adopted is Analytical Research as this type of research says that the
researcher has to use facts or information already available and analyze these to make a critical
evaluation.

4.2 Sampling Technique:
Simple Random Sampling technique is used to select the companies for the observation
from sectors namely Banking and Cement. The Simple Random Sampling technique is applied
so as to obtain a representative sample. As there is more number of companies that are traded on
the stock exchange, so it is difficult to select companies on some common parameters so,
randomly companies are selected.
4.3 Sample size:

A sample size of 20 companies is selected from two sectors namely Banking and Cement
sector. The research revolves over these companies to find out the result.
4.4 Sample description:

The sample consists of 20 stocks that are actively traded in the Bombay stock Exchange
and National Stock Exchange. These stocks belong to banking and cement sector. The stock sare
as follows:
1. Allahabad Bank
2. Andhra Bank
3. Bank Of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Dena Bank
8. HDFC Bank
9. ICICI Bank
10. Ing Vysya Bank
11. Ambuja Cements
12. ACC
13. JK Cements
14. Mangalam Cement
15. Mysore Cement

16. Ultratech Cement
17. Shree Cement
18. Prism Cement
19. JK Lakshmi Cement
20. Birla Corporation
4.5 Collection of data:
4.5.1 Data: Historical daily share prices and information of 20 companies are collected for the
study.
4.5.2 Data Type: Secondary data.
4.5.3 Data source: Historical share prices of the sample companies and the index points for the
period has been taken from the database of Capital Market Publishers (India) Ltd., Capitaline.
Financial statements of the sample companies have also been taken from the same source.
4.6 Hypothesis
H0: There is no significant relationship between Book Value and Market Value.
H1: There is significant relationship between Book Value and Market Value.
H0: There is no difference between population slope and sample slope.
H1: There will be difference between population slope and sample slope.
4.7 Tools for testing Hypothesis:

In attempting to arrive at a decision about the population on the basis of sample
information it is necessary to make assumptions or guesses about the populations parameter
involved. Such an assumption is called statistical Hypothesis, which may or may not be true. The
procedure that enables us to design on the basis of sample regards whether a hypothesis is true or

not is called test hypothesis or test of significance. In the test of hypothesis it begins with an
assumption or hypothesis is called Null Hypothesis.
The null hypothesis asserts that there is no significant difference between the statistics
and the population parameters and whatever observes difference is there is merely due to
fluctuations in sampling from the same population. Null hypothesis is usually devoted by the
symbol H0. Any hypothesis that contradicts the H0 (Null Hypothesis) is called alternate
hypothesis and is denoted by symbol H1.
The tests that were conducted on the samples are:
• ANOVA – Two way
• T – test
• Simple Linear Regression
4.8 Other software used for data analysis

For the data analysis and the subsequent interpretation the researcher has adopted
advanced version of MS Excel 2003. This application software has facilitated the researcher to
construct the ANOVA table, conduct regression tests and also to draw graphs.
4.9 Limitation of the study:
The Study is limited to the 20 companies that are listed in BSE.
Data collected from various databases are assumed to be accurate.
5. SECTOR ANALYSIS
5.1 Banking Sector
With the Indian economy moving on to a high growth trajectory, consumption levels
soaring and investment riding high, the Indian banking sector is at a watershed. Further, as

Indian companies globalize and people of Indian origin increase their investment in India,
several Indian banks are pursuing global strategies,
The industry has been growing faster than the real economy, resulting in the ratio of
assets of commercial banks to GDP increasing to 92.5 per cent at end-March 2007. The Indian
banks have also been doing exceptionally well in the financial sector with the price-to-book
value being second only to china, according to a report by Boston Consultancy Group.
Consequently, the degree of leverage enjoyed by the banking system, as reflected in the
equity multiplier (measured as total assets divided by total equity), has increased from 15.2 per
cent at end March 2006 to 15.8 per cent at the end of March 2007.
Growth
A burgeoning economy, financial sector reforms, rising foreign investment, favourable

regulatory climate and demographic profile has led to India becoming one of the fastest growing
banking markets in the world. The overall banking industry's business grew at a CAGR of about
20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007.
Aggregate bank deposits of banks increased by US$ 129.26 billion (22.1 per cent) at the
end of March 2007 over the corresponding in 2006. In the current fiscal, aggregate bank deposits
increased by 23.8 per cent, year-on-year, as of January 4, 2008 as against 21.5 per cent a year
ago. While aggregate demand deposits increased by 15.6 per cent, aggregate time deposits
increased by 25.3 per cent in the same period, indicating migration from small savings schemes
of the Government.
Similarly, aggregate deposits of the scheduled commercial banks (SCB), after growing by
17.8 per cent and 24.6 per cent in 2005-06 and 2006-07, rose by 25.2 per cent, year-on-year, as
on January 4, 2008.
Potential
While this growth has been very impressive, the potential banking market waiting to be
tapped in India is still fairly huge. Out of the 203 million Indian households, three-fourths, or

147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4 per
cent have no access to formal or informal sources of credit, while 73 per cent have no access to
formal sources of credit. In fact, according to a report by Boston Consultancy Group, India has
the second largest financially excluded households of about 135 million, which is next only to
china. Also, about 60 million new households are expected to be added to India's bankable pool
between 2005 and 2009. With such a large untapped market, the Indian banking industry is
estimated to grow rapidly, faster than even china in the long run.
Road Ahead
Banks aspiring to become global must have a presence in India and other merging
markets, says a report of consultancy major Ernst & Young, as they are set to become a major
source of financial sector revenue and profit growth.
As the Indian banking industry continues its rapid growth along with rise in financial
services penetration in the Indian economy, the industry's profit is likely to simultaneously surge
ahead. According to a report by Boston Consultancy Group, the profit pool of the Indian banking
industry is estimated to increase from US$ 4.8 billion in 2005 to US$ 20 billion in 2010 and
further to US$ 40 billion by 2015.
5.2 Cement Sector

The cement industry is experiencing a boom on account of the overall growth of the
Indian economy. The demand for cement, being a derived demand, depends primarily on the

industrial activity, real estate business, construction activity, and investment in the infrastructure
sector. India is experiencing growth on all these fronts and hence the cement market is
flourishing like never before. Indian cement industry is globally competitive because the industry
has witnessed healthy trends such as cost control and continuous technology up gradation.
Global rating agency, Fitch Ratings, has commented that cement demand in India is expected to
grow at 10% annually in the medium term buoyed by housing, infrastructure and corporate
capital expenditures.
Current Scenario
The Indian cement industry is the second largest producer of quality cement, which meets
global standards. The cement industry comprises 130 large cement plants with an installed
capacity of 156. 26 million tonnes and more than 300 mini cement plants with an estimated
capacity of 11.10 million tonnes making a total installed capacity of 167.36 million tonnes.
Keeping in view the trend of growth of the industry, a production target of 142 million tonnes
was fixed for the year 2005-2006. Cement production during April to December 2005 was
106.83 million tonnes, registering a growth of 9.31 percent. During November 2006, cement
production was 12.43 Million tonnes, registering a growth of 11.98% as compared to 11.10
million tonnes in November 2005.
Exports
Indian cement industry meets entire domestic demand and is able to export cement and
clinker. The export of cement and clinker during April- December 2005 was 4.24 Million Tonnes
and 2.53 million tonnes respectively. During November 2006, cement export showed a decline of
36.92% (from 0.65 million tonnes in November 2005 to 0.41 million tonnes in November 2006),
whereas clinker export grew by 40.74% (from 0.27 million tonnes in Nov 2005 to 0.38 million
tonnes in November 2006).
Future growth will be driven by expected GDP growth of more than 8 percent, growth of
the housing sector and the development of roads, ports, airports and other infrastructure
Concerns
Cement industry going through a consolidation phase in the last few years

Transportation
• Transportation costs high - freight accounts for 17% of the production cost
• Road preferred mode for transportation for distances less than 250kms.
• Industry is heavily dependant on roads as the railway infrastructure is not adequate
• Shortage of wagons.
Capacity additions
• Acquisitions have been the mainstay of the business

• Regional imbalance resulting in cross regional movement
• limestone availability in pockets has led to uneven capacity additions
• Capacity additions have slowed down
Industry inputs
• Highly capital intensive industry

• Nearly 55-60% of the inputs controlled by the government
• Facing problems due to power shortage
• Coal availability and quality affecting production
• Mini plants realisation of revenue lower than large plants, survival difficult
6. ANALYSIS AND INTERPRETATION

6.1 Banking Sector

6.1.1 Allahabad Bank
Allahabad Bank BV MV F P Value

2003 – 2004 27.06 39.59 Rows 12.41886 0.015833
2004 – 2005 38.1 84.31 Columns 22.62244 0.008929
2005 - 2006 49.82 78.95
2006 – 2007 68.27 90.61
2007 - 2008 80.44 103
Table 6.1
Interpretation:
Since value of P is lesser than 5% Level of significance; there is significant relationship between
Book Value and Market value.
Therefore, Null Hypothesis is rejected.
Alternative Hypothesis is accepted.
Regression Statistics:
Multiple R R2 Intercept Slope T stat for Slope P value
0.854893 0.730842 -8.83389 0.776521 2.854094 0.064891
Table 6.2
Interpretation:
Since the Multiple R is 85.48% for Book value and Market Value. It shows that there is a
highly positively Correlation between Book Value and Market Value.
Since the Value of R square is 73%, this shows that the market value is dependent on
book value by 73% and 27% due to other factors.
If the book value of the share is -8.83, then the market value is 0.
If the book value increases by 0.78, then the market value increases by 1.
Since the probability of getting t – stat for slope is higher than 5%, null hypothesis is
accepted.

Allahabad Bank
120
100
80
60 BV
40 MV
20
0
2004 2005 2006 2007 2008
Chart 6.1
Interpretation:
From the above chart it can be seen that, there has been a constant rise in the book value
of the share, which in turn is reflected in the market value.

6.1.2 Andhra Bank
Andhra Bank BV MV F Value P Value

2003 – 2004 27.89 52.22 Rows 3.773293 0.11328
2004 – 2005 36.31 97.14 Columns 26.92264 0.006567
2005 - 2006 45.93 82.94
2006 – 2007 59.67 87.7
2007 - 2008 65.08 90.8
Table 6.3
Interpretation:

0.585081581 0.342320456 4.274651583 0.519734036 1.249597 0.300058
Table 6.4
Interpretation:
positive Correlation between Book Value and Market Value.
If the book value of the share is 4.27, then the market value is 0.
accepted.

Andhra Bank
2008
2007
2006 MV
BV
2005
2004
0 50 100
Chart 6.2
Interpretation:
of the share, which in turn is reflected in the market value, how ever there has been an
abnormal increase in the market value in the year 2005.

6.1.3 Bank of Baroda
Bank of Baroda BV MV F Value P Value

2003 – 2004 149.04 195 Rows 8.04652 0.033956
2004 – 2005 174.21 221 Columns 18.53814 0.01259
2005 - 2006 191.08 240
2006 – 2007 214.6 283
2007 - 2008 236.64 365
Table 6.5
Interpretation:

0.958799 0.919296 64.79556 0.492019 5.845753 0.009977
Table 6.6
Interpretation:
Since the Value of R square is 91.9%, this shows that the market value is dependent on
book value by 91.9% and 8.1% due to other factors.
Since the probability of getting t – stat for slope is lesser than 5%, null hypothesis is
rejected.

Bank of Baroda
400
300
200 BV
MV
100
0
2004 2005 2006 2007 2008
Chart 6.3
Interpretation:
of the share, which in turn is reflected in the market value, how ever there has been an
abnormal increase in the market value in the year 2008.

6.1.4 Bank of India
Bank of India BV MV F Value P Value

2003 – 2004 68.78 60.78 Rows 1.005169 0.498067
2004 – 2005 78.57 107.8 Columns 2.070379 0.223583
2005 - 2006 88.07 139
2006 – 2007 98.48 240
2007 - 2008 117.71 339
Table 6.7
Interpretation:
Since value of P is greater than 5% Level of significance; there is no significant relationship
between Book Value and Market value.
Therefore, Null Hypothesis is accepted.
Alternative Hypothesis is rejected.

0.990463 0.981018 60.67042 0.167224 12.45159 0.001116
Table 6.8
Interpretation:
rejected.

Bank of India
2008
2007
2006 MV
BV
2005
2004
0 50 100
Chart 6.4
Interpretation:
of the share, which in turn is reflected in the market value for the periods 2004 and 2005,
how ever there has been an abnormal increase in the book value in the year 2006, which is
not reflected in the market value.

6.1.5 Bank of Maharashtra
Bank of Maharashtra BV MV F Value P Value

2003 – 2004 28.69 29 Rows 2.364268 0.212533
2004 – 2005 32.63 34 Columns 1.813284 0.249356
2005 - 2006 95.15 29.94
2006 – 2007 35.88 52.51
2007 - 2008 39.85 64.9
Table 6.9
Interpretation:

0.289819 0.083995 67.53581 0.50145 -0.52449 0.636224
Table 6.10
Interpretation:
positively Correlation between Book Value and Market Value.
Since the Value of R square is 8.39%, this shows that the market value is dependent on
book value by 8.39% and 91.61% due to other factors.
accepted.

Bank of Maharashtra
100
80
60
BV
40 MV
20
0
2004 2005 2006 2007 2008
Chart 6.5
Interpretation:
From the above chart it can be seen that, there has been a constant rise in the book value of
the share, which in turn is reflected in the market value for the periods 2004 and 2005, how ever
there has been an abnormal increase in the book value in the year 2006, which is not reflected in
the market value.

6.1.6 Canara Bank
Canara Bank BV MV F Value P Value

2003 – 2004 98.15 146.75 Rows 19.50692 0.006902
2004 – 2005 125.14 213.56 Columns 81.57854 0.000832
2005 - 2006 146.15 249.33
2006 – 2007 171.19 259.51
2007 - 2008 197.83 279
Table 6.11
Interpretation:

0.941594 0.8866 -13.5478 0.702172 4.843032 0.016795
Table 6.12
Interpretation:
rejected.

Canara Bank
300
250
200
150 BV
100 MV
50
0
2004 2005 2006 2007 2008
Chart 6.6
Interpretation:
of the share, which in turn is reflected in the market value.

6.1.7 Dena Bank
Dena Bank BV MV F Value P Value

2003 – 2004 24.73 27.52 Rows 4.000915 0.103965
2004 – 2005 24.61 32.35 Columns 2.121379 0.218975
2005 - 2006 34.61 32.55
2006 – 2007 37.15 52.38
2007 - 2008 43.24 66.02
Table 6.13
Interpretation:

0.891351 0.794506 14.27998 0.440851 3.405725 0.042283
Table 6.14
Interpretation:
rejected.

Dena Bank
2008
2007
2006 MV
BV
2005
2004
0 20 40 60 80
Chart 6.7
Interpretation:
From the above chart it can be seen that, there has been a constant rise in the book value of
the share, which in turn is reflected in the market value for the periods 2004 and 2005, how ever
there has been an abnormal increase in the book value in the year 2006, which is not reflected in
the market value.

6.1.8 HDFC Bank
HDFC Bank BV MV F Value P Value

2003 – 2004 79.59 392.65 Rows 1.579714 0.334297
2004 – 2005 24.52 611.75 Columns 19.51877 0.011529
2005 - 2006 145.86 845
2006 – 2007 169.24 1217
2007 - 2008 201.42 1,474.00
Table 6.15
Interpretation:

0.866439 0.750717 -3.6365 0.140695 3.005746 0.057406
Table 6.16
Interpretation:
accepted.

HDFC Bank
1600
1400
1200
1000
800 BV
600 MV
400
200
0
2004 2005 2006 2007 2008
Chart 6.8
Interpretation:
From the chart it can be seen that the market values are constantly increasing irrespective
of the book values.

6.1.9 ICICI Bank
ICICI Bank BV MV F Value P Value

2003 – 2004 75 291.14 Rows 3.099276 0.149494
2004 – 2005 75 452 Columns 23.13539 0.008586
2005 - 2006 170.34 635
2006 – 2007 249.55 977
2007 - 2008 270.35 1054
Table 6.17
Interpretation:

0.980536 0.961451 -20.4097 0.276401 8.649995 0.00325
Table 6.18
Interpretation:
rejected.

ICICI Bank
2008
2007
2006 MV
BV
2005
2004
0 500 1000 1500
Chart 6.9
Interpretation:
From the chart it can be seen that with increase in the book value, the market value have been
increasing.

6.1.10 ING Vysya Bank
ING Vysya Bank BV MV F Value P Value

2003 – 2004 256 128.41 Rows 0.071949 0.987089
2004 – 2005 277 162 Columns 7.51E-05 0.993502
2005 - 2006 260.65 142.8
2006 – 2007 100.1 235
2007 - 2008 109.19 338
Table 6.19
Interpretation:

0.865847 0.749691 377.3211 -0.87821 -2.99753 0.057783
Table 6.20
Interpretation:
If the book value decreases by 0.872, then the market value increases by 1.
accepted.

ING Vysya
350
300
250
200
BV
150 MV
100
50
0
2004 2005 2006 2007 2008
Chart 5.10
Interpretation:
From the chart it can be seen that there exits no relationship between the book value and the
market value.

6.2 Cement Sector
6.2.1 Ambuja Cement
Ambuja Cement BV MV F P Value

2003 – 2004 104.09 42.55 Rows 0.050603 0.993264
2004 – 2005 112.69 64.73 Columns 0.95898 0.382891
2005 - 2006 16.11 108.61
2006 – 2007 23.01 131.06
2007 - 2008 30.6 123.26
Table 6.21
Interpretation:
0.736093 0.541834 38.08998 0.14415 1.883571 0.156143
Table 6.22
Interpretation:
accepted.

Ambuja Cements
140
120
100
80
BV
60 MV
40
20
0
2004 2005 2006 2007 2008
Chart 6.11
Interpretation:
From the chart it can be seen that with increase book value the market value market value
is increasing, how ever for the years 2004 and 2005 the book value is greater than the market
value.

6.2.2 ACC
ACC BV MV F Value P Value

2003 – 2004 76.28 264.31 Rows 1.768612 0.297137
2004 – 2005 89.36 420.62 Columns 20.0464 0.011012
2005 - 2006 115.63 849.6
2006 – 2007 167.63 980.6
2007 - 2008 221.3 813
Table 6.23
Interpretation:

0.736093 0.381834 38.08998 0.184415 1.883571 0.156143
Table 6.24
Interpretation:
accepted.

ACC
1000
900
800
700
600
500 BV
400 MV
300
200
100
0
2004 2005 2006 2007 2008
Chart 6.12
Interpretation:
From the chart it can be seen that with increase in the book value there has been an
increase in the market value. How ever for the year 2008 in spite of increase in book value there
has been a drop in market value.

6.2.3 J K Cement
J K Cement BV MV F Value P Value

2003 – 2004 10 140 Rows 3.392504 0.131889
2004 – 2005 10.01 143 Columns 190.2151 0.00016
2005 - 2006 22.84 170.49
2006 – 2007 36.06 172.48
2007 - 2008 73.7 166.54
Table 6.25
Interpretation:

0.620277 0.384744 -135.005 1.044321 1.369678 0.264303
Table 6.26
Interpretation:
If the book value of the share is -135, then the market value is 0.
accepted.

JK Cement
200
180
160
140
120
BV
100
MV
80
60
40
20
0
2004 2005 2006 2007 2008
Chart 6.13
Interpretation:
From the chart it can be seen that with the increase in the book value there has been
increase in the market value.

6.2.4 Mangalam Cement
Mangalam Cement BV MV F Value P Value

2003 – 2004 -74.78 36.29 Rows 8.309119 0.032139
2004 – 2005 13.42 75.86 Columns 47.23948 0.002348
2005 - 2006 13.42 165
2006 – 2007 37.85 177
2007 - 2008 50.4 141
Table 6.27
Interpretation:

0.802847 0.644564 -69.2541 0.649552 2.332452 0.10192
Table 6.28
Interpretation:
accepted.

Mangalam Cement
2008
2007
MV
2006
BV
2005
2004
-100 -50 0 50 100 150 200
Chart 6.14
Interpretation:
From the chart it can be seen that with increase in the book value there has been increase
in the market value, how ever in the year 2008 there has been a decrease in the market value in
spite of an increase in the book value.

6.2.5 Mysore Cement
Mysore Cement BV MV F Value P Value

2003 – 2004 -1.08 12.23 Rows 5.21463 0.069344
2004 – 2005 -6.03 25.93 Columns 13.52365 0.021251
2005 - 2006 14.35 47.17
2006 – 2007 20.87 50.88
2007 - 2008 37.6 40.34
Table 6.29
Interpretation:

0.680858 0.463568 -13.1333 0.744131 1.610126 0.20575
Table 6.30
Interpretation:
accepted.

Mysore Cement
60
50
40
30 BV
20 MV
10
0
2004 2005 2006 2007 2008
-10
Chart 6.15
Interpretation:

6.2.6 Ultra Tech Cement
Ultra Tech Cement BV MV F Value P Value

2003 – 2004 10 288.8 Rows 1.582267 0.333751
2004 – 2005 86.41 385 Columns 23.84611 0.008142
2005 - 2006 85.78 735
2006 – 2007 83.45 928
2007 - 2008 141.7 858
Table 6.31
Interpretation:

0.707239 0.500188 7.505887 0.115754 1.732701 0.181571
Table 6.32
Interpretation:
accepted.

UltraTech Cement
1000
900
800
700
600
500 BV
400 MV
300
200
100
0
2004 2005 2006 2007 2008
Chart 6.16
Interpretation:
in the market value, how ever in the year 2008 there has been a decrease in the market value
in spite of an increase in the book value.

6.2.7 Shree Cement
Shree Cement BV MV F Value P Value

2003 – 2004 63.83 175.52 Rows 1.159482 0.444712
2004 – 2005 72.16 358.28 Columns 10.78078 0.030403
2005 - 2006 83.09 952
2006 – 2007 85.05 1277
2007 - 2008 130.5 1197
Table 6.33
Interpretation:

0.714249 0.510151 57.60355 0.037025 1.76758 0.175293
Table 6.34
Interpretation:
accepted.

Shree Cement
2008
2007
2006 MV
BV
2005
2004
0 500 1000 1500
Chart 6.17
Interpretation:

6.2.8 Prism Cement
Prism Cement BV MV F Value P Value
2003 – 2004 5.75 11.63 Rows 1.952285 0.266471
2004 – 2005 5.55 21.92 Columns 16.00766 0.016117
2005 - 2006 6.41 32.23
2006 – 2007 8.49 47.6
2007 - 2008 13.8 49.62
Table 6.35
Interpretation:

0.799177 0.638685 2.508723 0.168444 2.302823 0.104717
Table 6.36
Interpretation:
accepted.

Prism Cement
50
40
30
BV
20 MV
10
0
2004 2005 2006 2007 2008
Chart 6.18
Interpretation:
From the chart it can be seen that with the increase in the book value there has been an
increase in the market value.

6.2.9 JK Lakshmi Cement
JK Lakshmi Cement BV MV F Value P Value

4.09457 0.10046
2003 – 2004 25.67 19.36 Rows
2 1
10.5895 0.03125
2004 – 2005 18.12 62.62 Columns
4 3
2005 - 2006 36.06 121.2
2006 – 2007 68.2 148.51
2007 - 2008 68.2 137
Table 6.37
Interpretation:

0.835625 0.698269 8.052614 0.36012 2.634889 0.077997
Table 6.38
Interpretation:
accepted.

JK Lakshmi Cement
160
140
120
100
80 BV
60 MV
40
20
0
2004 2005 2006 2007 2008
Chart 6.19
Interpretation:
From the chart it can be seen that with increase in the book value there has been an increase in
market value. How ever for the year 2004 the book value is more than the market value.

5.2.10 Birla Corporation
Birla Corporation BV MV F Value P Value

2003 – 2004 28.8 101.09 Rows 1.406194 0.374594
2004 – 2005 31.99 199.98 Columns 27.65204 0.006261
2005 - 2006 39.28 297
2006 – 2007 48.66 283.53
2007 - 2008 85.3 227.05
Table 6.39
Interpretation:

0.314139 0.098683 26.5001 0.091579 0.573117 0.606706
Table 6.40
Interpretation:
accepted.

Birla Corporation
300
250
200
150 BV
MV
100
50
0
2004 2005 2006 2007 2008
Chart 6.20
Interpretation:
From the chart it can be seen that with increase in the book value there has been an
increase in the market value for the years 2004, 2005 and 2006. How ever for the years 2007 and
2008 there has been a drop in the market value in spite of growth in the book value.

7. FINDINGS, CONCLUSION AND SUGGESTIONS
7.1 Findings
¾ Allahabad Bank: There exists a significant relationship between book value and market
value of the share. Market Value of the share depends 73% on book value and 27% on other
factors.
¾ Andhra Bank: There exists a significant relationship between book value and market value
of the share. Market Value of the share depends 34% on book value and 66% on other
factors.
¾ Bank of Baroda: There exists a significant relationship between book value and market
value of the share. Market Value of the share depends 91.9% on book value and 8.1% on
other factors.
¾ Bank of India: There is no significant relationship between book value and market value of
the share. Market Value of the share depends 98% on book value and 2% on other factors.
¾ Bank of Maharashtra: There is no significant relationship between book value and market
value of the share. Market Value of the share depends 8.39% on book value and 91.61% on
other factors.
¾ Canara Bank: There exists a significant relationship between book value and market value
factors.
¾ Dena Bank: There is no significant relationship between book value and market value of the
share. Market Value of the share depends 79% on book value and 21% on other factors.
¾ HDFC Bank: There exists a significant relationship between book value and market value of
¾ ICICI Bank: There exists a significant relationship between book value and market value of
¾ ING Vysya Bank: There is no significant relationship between book value and market value
factors.

¾ Ambuja Cement: There is no significant relationship between book value and market value
factors.
¾ ACC Cement: There exists a significant relationship between book value and market value
factors.
¾ JK Cement: There exists a significant relationship between book value and market value of
¾ Mangalam Cement: There exists a significant relationship between book value and market
factors.
¾ Mysore Cement: There exists a significant relationship between book value and market
factors.
¾ Ultratech Cement: There exists a significant relationship between book value and market
factors.
¾ Shree Cement: There exists a significant relationship between book value and market value
factors.
¾ Prism Cement: There exists a significant relationship between book value and market value
factors.
¾ JK Lakshmi Cement: There exists a significant relationship between book value and market
factors.
¾ Birla Corporation: There exists a significant relationship between book value and market
factors.

Sensitivity of Market value
Company Book Value Increases by Market Value Increases by

Allahabad Bank 0.780 1
Andhra Bank 0.519 1
Bank Of Baroda 0.492 1
Bank of India 0.167 1
Bank of Maharashtra 0.501 1
Canara Bank 0.702 1
Dena Bank 0.440 1
HDFC Bank 0.140 1
ICICI Bank 0.276 1
Ing Vysya Bank 0.872 1
Ambuja Cements 0.144 1
ACC 0.184 1
JK Cements 1.044 1
Mangalam Cement 0.649 1
Mysore Cement 0.744 1
Ultratech Cement 0.155 1
Shree Cement 0.037 1
Prism Cement 0.167 1
JK Lakshmi 0.360 1
Birla Corporation 0.091 1

7.2 Conclusions
¾ It can seen from the above findings that, shares of banks like Bank of India, Bank of
Maharashtra, Dena Bank and ING Vysya Bank do not have a significant relationship
between Book value and Market value.
¾ It can be noticed from the findings that market value of almost all bank depend
significantly on Book value except for Andhra bank where the Market value depends on
Book value by 34%.
¾ It can be concluded that Book value can be considered as a factor for investment decision
in banking sector.
¾ It can be seen from the above findings that shares of Ambuja Cement does not have a
significant relationship between book value and market value.
¾ Further it can be noticed that market value all the cement sector shares equally depend on
various other factors.

7.3 Suggestions
¾ Bank of India, HDFC Bank and ICICI Bank are the best stocks to buy on the basis of
book value as the slope value are less when compared to other banks.
¾ All the shares of cement sector considered in the study except for JK cement and Mysore
cement have low slope and can be considered for investment.
¾ For any investment decision in banking sector, the book value should be considered.
¾ For any investment decision in cement sector, book value and also various other
fundamental factors should be considered.

BIBLIOGRAPHY
Text Books:
• Prasanna Chandra, Investment Analysis and Portfolio Financial Management,
Sixth Edition, New Delhi Tata McGraw-Hill Publishing Company Limited.
• Richard A Barealey, Principles of Corporate Finance, Eighth Edition, New Delhi
Tata McGraw-Hill Company Limited.
• Bodie-Kane-Marcus, Investments, Fifth Edition, New Delhi Tata McGraw-Hill
Company Limited.
Database:
• Capitaline
• NSE India
Websites:
• www.moneycontrol.com
• www.jstor.com

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A

A dissertation submitted in partial fulfillment of the requirements for the

UNDER THE GUIDANCE OF

M.P.BIRLA INSTITUTE OF MANAGEMENT

1 M P Birla Institute of Management

I here by declare that the report titled

A STUDY ON RELATIONSHIP BETWEEN BOOK VALUE AND

Submitted in partial fulfillment of requirements for the award of degree in MBA

Place: Bangalore Varun Arur

2 M P Birla Institute of Management

This is to certify that the report titled

A STUDY ON RELATIONSHIP BETWEEN BOOK VALUE AND

Submitted in partial fulfillment of requirements for the award of degree in MBA

PLACE: Bangalore Dr. N S Malavalli

3 M P Birla Institute of Management

A STUDY ON RELATIONSHIP BETWEEN BOOK VALUE AND

DATE: Prof. Praveen Baghwan

I am thankful to Dr.N.S.Malavalli, Principal, M.P.Birla institute of management,

4 M P Birla Institute of Management

Chapter 1 RESEARCH EXTRACT 1

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Chapter 2 2.2 Statement of the problem 3

Chapter 3 LITERATURE REVIEW 19

Chapter 4 4.4 Sample Description 22

Chapter 6 ANALYSIS AND INTERPRETATION

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Table Particulars Page No.

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Tables Particulars Page No.

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Chart Particulars Page No.

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To the corporate management an understanding of the valuation mechanism in stock

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2.1 Background of the study

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2.1.1 Price to Book Equity

2.1.2 Book Value:

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2.1.4 Factors Influencing Book Value

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2.1.5 Market Value:

2.1.6 Factors influencing share price:

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2.1.6.3 Market Swings

2.1.7 Can market value be more than the book value?

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2.1.8 Market Price to Book Value:

P/B ratio = Market price of share

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When deciding on a particular company, value investors look at such indicators as

2.1.9 What we can deduce from a low P/B

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2.1.10 Best use of P/B

Book & Market Value

Book & Market Value