INTRODUCTION The Financial Administrator must recognize that every financial decision he makes will influence, in a very real

way the decision he will make subsequently, even though the decision may appear to be in unrelated areas and separated by a period of several months. His decision influence the way in which creditors, potential investors, suppliers and even prospective employees view the firm from their own points of view. In performing his various functions, therefore the financial administrator must equip himself with the appropriate tools of analysis so that he can determine his firm's immediate position and measure the effect of his decision on the future position it will occupy over time. Financial statements are an important source of information for evaluating the performance and prospects of firm, if properly analyzed and interpreted these statements can provide valuable insights into firms performance. Analysis of financial statements is of interest to lenders, investors, security analyst, manager and others. Financial statements analysis may be done for a variety of purposes, which may range from simple analysis of short term liquidity position of the firm to a comprehensive assessment of the strengths and weakness of the firm in various areas, it is helpful in assessing corporate excellence, judging creditworthiness, forecasting bond rating, evaluating intrinsic value of equity shares, predicting bankruptcy and assessing market risk..

Financial statements: Managers, shareholders, creditors and other interested groups seek answer to the following question about firm: What is the financial position of the firm at a given point of time? How has the firm performed financially over a given period of time? What have been the sources and uses of cash over a given period?

To answer these questions, accountant prepares two principle statements, the Balance sheet and the profit and loss account, ancillary statement, the Cash Flow statement. Analysis of financial statement: Analysis refers to the process of critical examination of the financial information contained in the financial statement in order to understand and make decisions regarding the operations of the firm. The analysis is basically study of the relationship among various financial facts and figure as given in a set of financial statements. Complex figures as given in these statements are dissected\broken up into simple and variable elements and significant relationship are established between the elements of the same statements or different financial statements. This is the process of dissection, establishing and identifying the financial weaknesses and strengths of the firm. It is indicative of two aspects of a firm i.e. the profitability and the financial position and are known as the objectives of the analysis.

OBJECTIVES OF THE STUDY: Broadly the objective of the Analysis of Financial statement is to understand the information contained in the financial statement with a view to the weakness and strengths of the firm and to make forecast about the future prospects of the firm and thereby enabling the financial analyst to take different decision regarding the operation of the firm. The objectives of the analysis can be identified as: a. b. c. d. e. f. To assess the present profitability and operating efficiency of the firm as a whole a well as for its different departments. To find out the relative importance of different components of the financial position of the firm. To identify the reasons for change in the profitability\financial position of the firm. To assess the short-term as well as the long-term liquidity position of the firm. To examine the solvency of the firm. To find out the ability of the firm to meet its current obligations.

SCOPE OF THE STUDY:

Analysis of financial statement can be undertaken by different persons and for different purposes, therefore, the scope of the Analysis of Financial Statements may be varying from one situation to another. However, the following are some the techniques of the Analysis of Financial Statements: a. b. c. d. e. f. Comparative financial statements. Common-size financial statements. Trend percentage analysis. Statement of changes in financial position. Cost-volume-profit relations, and Ratio analysis and others.

The last technique i.e. the ratio analysis is the most common, comprehensive and powerful tool of the Analysis of Financial Statements. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis. As such, this study focuses only on this (ratio) analysis.

METHODOLOGY

The methodology adopted for this study includes both Primary data and secondary data. The period selected for the study is five year i.e. from 2006 to 2010. More than this, personal interviews are conducted with the finance manager and other official to elicit the necessary information. Interviews are very effective and they have provided needed information particularly to complete this report discussions are held to verify the data obtained from secondary sources. Primary Data: Primary data will be through regular interaction with the officials of Share Khan Limited. Ratio relationship will be established basing on the theoretical literature available from the "Financial Management" textbooks and references. Secondary Data: a. b. c. d. Annual reports of company from 2006-2010. Collected the relevant information from the standard textbooks and financial Collected information available in online in the base of company fact sheets and The data updates collected from journals, news paper

magazines. information available in sharekhan securities

LIMITATIONS:

This study suffers from different limitations also. The ratios may not be taken for granted and accepted at faced values. These ratios are numerous and there are widespread variations in the same measure. One has to cope with these limitations while analyzing financial statements. 1. 2. 3. Lack of an Underlying Theory: The basic problem is that there is no theory that Window Dressing: Firms may resort to window dressing to project a favorable Price Level Change: There are changes in the price level from one year to another tells us which numbers to look at and how to interpret them. financial picture. which results balance sheet figures are distorted and the profit misreported. Hence, financial statement analysis can be vitiated. 4. Interpretation of Results: Though industry averages and other yardsticks are commonly used in financial ratios, it is difficult to judge whether a certain ratio is good/bad. A high ratio for example, may indicate a strong liquidity position or excessive inventories. 5. Correlation among Ratios: Financial ratios of a firm often show a high degree of correlation. In view of ratios correlations, it is redundant and often confusing to employ a large number of ratios in financial statement analysis. 6. This information regards under suggestions of sharekhan securities officials

GUIDELINES FOR FINANCIAL STATEMENT ANALYSIS:

From the foregoing discussion, it is clear that financial statement analysis cannot be treated as a simple, structured exercise. Following guidelines are to be beard while making analysis: 1. Use ratios to get clues to ask the right question: by themselves ratios rarely

provide answers, but they definitely help to raise the right questions. 2. Be selective in the choice of ratios: few ratios, apply chosen, would capture most

of the information that can derive from financial statement. 3. Employ proper benchmark: it is common practice to compare the ratios against

some benchmarks. This benchmark may be the average ratios of the industry or the ratios of the industry leaders or the historic ratios or the firm itself. 4. Know the tricks used by accountants: since firms tend to manipulate the reported

income, you should learn about the devices employed by them. 5. Read the footnotes: foot notes sometimes provide valuable information. They may

reveal things that management may try to hide. The more information-laden it may be.

RATIO ANALYSISTHEORITICAL BACKGROUND

Ratio Analysis is a widely used tool of financial analysis. The term ratio in it refers to the relationship expressed in mathematical terms between two individual figures or group of figures connected with each other in some logical manner and are selected from financial statements of the concern. The ratio analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when expressed as significant information. The relationship between two or more accounting figures/groups is called a financial ratio. A financial ratio helps to summarize a large mass of financial data into a concise form and to make meaningful interpretation and conclusions about the performance and positions of a firm. Their use as tools of financial analysis involves their comparison is single ratios, like absolute figures, are not of much use. Three type of comparison are generally involved, namely: 1. 2. 3. Trend Analysis Inter-firm comparison, and Comparison with Standard Averages or Industry.

1) Trend analysis involves comparison of ratios of a firm over a period of time, i.e. present ratios are compared with past ratios of the firm. The comparison of the profitability ratios of a firm say, year to year is an illustration of a trend analysis. It indicates the direction of change in the performance improvement, deterioration or constancy over the years. 2) Inter-firm comparison involves comparing the ratio of the firm with those others in the same lines of business or the industry as a whole. Thus, it reflects the firms performance in relation to its competition. 3) Other types of comparison may relate to the comparison of items within a single years financial statement of a firm and comparison with standards or plans.

It appears that Alexander Wall was the foremost proposal of ratio analysis, and he first presented it in 1919 in the Federal Reserve bulletin. Since then the ratio technique

has gained importance and many writers of financial analysis have explained this adding their views. Although many writers have exaggerated importance to ratio analysis, it is accepted now with its limitations only. Definition: It may be defined as the indicated quotient of two mathematical expressions. According to accountants handbook by Wixon, Kell and Bedford, a ratio is an expression of the quantitative relationship between two number. A ratio is the relation, of the amount a to another b, expressed as the ratio of a to b (a is to b); or as a simple fraction, integer, decimal, fraction or percentage Kohler Nature of Ratio Analysis: Ratio analysis is technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting, is for helping in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strengths and weakness of a firm. The ratios may be used as a symptom like blood pressure, the pulse rate or the body temperature and there interpretation depends upon the caliber and competence of the analyst. The following are the steps involved in the ratio analysis: 1. 2. 3. Selection of relevant data from the financial statements depending upon the Calculation of the appropriate ratios from the data. Comparison of the calculated ratios developed from projected financial statements

objective of the analysis.

or the ratios of some other firms or the comparison with the ratios of the industry to which the firm belongs. Application of ratio analysis in financial decision making:

A popular technique of analyzing the performance of a business concern is that of financial ratio analysis. As a tool of financial management, they are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis and enables drawing of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: Financial Ratios for evaluating performance: Liquidity position: With the help of ratio analysis one can draw conclusion regarding liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short-term maturing debt usually within a year as well as the principal. This ability is reflected in the liquidity ratios of a firm. The liquidity ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans. Longterm solvency: Ratio is equally useful for assessing the long-term financial validity of a firm. This aspect of the financial position of a borrower is of concern to the long-term creditors, security analyst and the present and potential owners of a business. The long-term solvency is measured by the leverage/capital structure and profitability ratios, which focus on earning power and operating efficiency. It reveals strength and weakness of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or whether heavily loaded with debt in which case it solvency is exposed to serious strain. Similarly, the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved. Operating efficiency: Ratio analysis throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios measure this kind of

10

operational efficiency. In fact, the solvency of a firm, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets - total as well as its components. Over all profitability: unlike the outside parties that are interest in one aspect of the financial position of a firm, the management is constantly concerned about the overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meet its short-term as well as long-term obligation to its creditors, to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken and all the ratios are considered together. Inter-firm comparison: Ratio analysis not only throws light on the financial position of a firm but also serves a stepping stone to remedial measure. This is made possible due to interfirm comparison/comparison with industry averages. A single figure of particular ratio is meaningless unless it is related to some standard or norm. An inter-firm comparison would demonstrate the relative position vis-a-vis its competitors. If the results are at variance either can seek to identify the probable reasons and, in the light, take remedial measure. Financial ratio for budgeting: In this field ratios are able to provide a great deal of assistance, budget is only as estimate of future activity based on past experience, in the making of which the relationship between different spheres of activities are invaluable. It is usually possible to estimate budget figures using financial ratios. They can also be made use of for measuring actual performance with the budgeted estimates. They indicate directions in which adjustments should be made either in the budget or in performance to bring them closer to each other.

CLASSIFICATION OF RATIOS:

11

The use of ratio analysis is not confirmed to financial management only. There are different parties interested in the ratio analysis for knowing the financial position of a firm for different purposes. In view of various uses of ratios, there are many types of ratios, which can be calculated from the information given in the financial statements. The particular purpose of the user determines particular ratios that might be for financial analysis. Various accounting ratios can be classified as follow: 1) According to significance: The British institute of management has recommended the classification of ratios according to their significance or importance for inter-firm comparison. These are: i. ii. Primary Ratio: These ratios are one, which is of the prime importance to a concern; return on capital employed is named as primary ratio. Secondary Ratio: The other ratios, which support or explain the primary ratios, are called as secondary ratios. 2) According to source: Financial ratios can be classified on the following basis according to source: i. ii. iii. Revenue Ratios: when two variables are taken from revenue statement the ratio so computed is called as revenue ratio. Balance Sheet Ratio: when two variables are taken from balance sheet the ratio is called Balance Sheet Ratio. Mixed Ratio: when one variable is taken from the revenue statement and the other from balance sheet the ratio is called as mixed ratio.

3. According to usage:

12

The Ratios, which covers different aspects of a Business Organization, are classified as below: i. Liquidity Ratios: These are the ratios, which measure the short-term solvency or financial position of the firm. These ratios are calculated to comment upon the short-term paying capacity of a firm or to meet its current obligations. ii. Capital Structure/Leverage Ratios: These are the ratios which convey a firms ability to meet the interest costs and repayment schedule of its long-term obligations. These ratios show the proportions of debt and equity in financing of the firm. These ratios measure the contribution of financing by owners as compared to financing by outsiders. iii. Activity ratios: These are calculated to measure efficiency with which the resources of a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into classes. iv. Profitability Ratios: These ratios measure the results of the business operations or overall performance and effectiveness of the firm. The result of the firm can be evaluated in terms of its earning with reference to a given level of assets or sales or owners interest etc.

Large numbers of financial ratios are used within each category and some of these may carry some information rather than focusing on any new light. Therefore, it is necessary to avoid duplicate of information. The analyst should be selective with regard to the use of financial ratios. For our analysis following important ratios are been dealt which are discussed in detail as below:

13

A) LIQUIDITY RATIOS: The terms liquidity and short-term solvency are used synonymously. Liquidity or short-term solvency means ability of the business to pay its short-term liabilities. Inability to pay-off short-term liabilities affects its creditability as well as its credit rating. Continues default on the part of the business leads to commercial bankruptcy. Eventually such commercial bankruptcy may lead sickness and dissolution. Short-term leaders and creditors of a business are very much interested to know its state of liquidity because of their financial stake. The important liquidity ratios are: I. Current Ratio: It measures the ability of the firm to meet its current liabilities. Current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities. Apparently, the higher the current ratio the greater the short-term solvency. It is defined as: Current Assets Current ratio = -------------------Current Liabilities Current assets include cash, current investment, debtors, inventories, loans, advances, and prepaid expenses. Current liabilities comprise short-term loan, creditors, bank overdraft, proposed dividend, provision for tax, outstanding expenses. The general norm in India is 1.33. Internationally it is 2. II. Acid-test Ratio: It is also called, as quick ratio is a fairly stringent measure of liquidity. It is based on those current assets which are highly liquid inventories are excluded from current assets as are deemed to be the least component of current assets. It is defined as: Quick Assets

14

Acid-test ratio= --------------------Current liabilities Quick assets are defined as current assets excluding inventories. The general rule is 1:1. III. Cash ratio: The cash ratio is perhaps the most stringent of liquidity. Indeed, one can argue that it is overly stringent. Lack of immediate cash may not matter if the firm can stretch its payments or borrow money at short notice. It is defined as: Cash and Bank balance + Current Investment Cash Ratio = -------------------------------------------------------Current liabilities The general norm is at 0.5:1 or 50%. B) LEVERAGE RATIOS: Financial leverage refers to the use of debt finance. While debt capital is a cheaper source of finance, it is also riskier source of finance. Leverage ratios help in assessing the risk arising from the use of debt capital. Two types of ratios are commonly used to analyze financial leverage, Structural ratio and Coverage ratio. Structural ratios are based on the proportions of debt and equity in the financial structure of the firm. Coverage ratios show the relationship between debt servicing commitments and the sources for meeting these burdens. The important ratios are: I. Debt-Equity Ratio: It is the basic and the most common measure of studying the indebtedness of the firm. It is based on the assumption that extent to which a firm employ. The debt should be viewed in terms of the size of the cushion provided by the shareholders funds, It is calculated as: Debt

15

Debt-Equity Ratio = -------------Debt +Equity Here the debt includes long-term loan, borrowing and debentures. Net worth includes equity share capital, preference share capital and all the accumulated reserves and surplus. II. Total Debt ratio: This depicts the proportion of total assets financed by the total liabilities. Impliedly, the remaining assets are financed by the shareholders funds. The higher the ratio the more risky is the situation because all liabilities are to be repaid sooner or later. Moreover, higher liabilities imply greater financial risk also. It is computed as: Total Debts Total Debt ratio = ---------------Total Assets Here total debts include long-term debt and current liabilities, while total assets include fixed assets and current assets.

III.

Interest Coverage Ratio: It measures as how many times the interest liability of the firm covered with the operating profits of the firm. This ratio gives an idea as to how much fall in EBIT, the firm can sustain before it commits a default in payment of the interest liability. The higher the ratio, the better it is for the firm and for the lenders. It is calculated as:

16

EBIT IC= ----------------Fixed Interest Where EBIT is operating profit of the firm and interest is fixed interest liability of the firm. IV. Preference Divided Ratio: ratio attempts to measure the ability of the firm to pay the fixed preference dividend and tells as to how secure the preference dividend is in relation to the earning power of the firm. The higher the ratio, better the preference shareholders. It is calculated as: Profit after Tax PC Ratio= ----------------------Preference Dividend V. Fixed Payment Coverage Ratio: FC ratio incorporates the cover age of the

principal repayment of the liability. It shows the relationship between the operating profits of the firm and the fixed liabilities in respects of interest, preference dividend repayment etc. It may be calculated as: EBIT FC= ----------------------I+ (PR+PD) / (1-t) Here I interest liability, PR is principal repayment, PD is fixed preference dividend and t is tax rate. VI. Debt Service Coverage Ratio: financial institutions in India, the debt service coverage ratio is defined as: PAT+ depreciation +interest +other non-cash item DC= ---------------------------------------------------------

17

Interest +lease rentals +repayment of loan Financial institution calculation the average Debt Service Coverage ratio for the period during which the loan for the project is repayable. Normally, financial institution regards a debt service coverage ratio of 1.5:2 as satisfactory. VII. Capital Gearing Ratio: It calculated to show the proportion of fixed interest (dividend) bearing capital to funds belonging to equity shareholders. It is calculated as : Preference capital +debenture +loan CG Ratio = --------------------------------------------(Equity capital +Reserve & surplus)

VIII.

Proprietary Ratio: it is calculated as: Proprietary Fund Proprietary Ratio= -------------------Total Assets Proprietary fund includes Equity share capital, Preference share capital, reserve & surplus less fictitious assets. Total assets includes fictitious assets and losses. C) ACTIVITY RATIOS: The activity ratios are also called the turnover ratios or performance ratios. These are employed to evaluate the frequency of sales w.r.t its assets. These assets may be capital assets or working capital or average inventory. These ratios are usually calculated with reference to sales/cost of goods sold and are expressed in terms of rate or times. Several activity ratios are as follows:

18

I.

Capital Turnover Ratio: this ratio indicates the firms ability of generating sales per rupee of long-term investment. The higher the ratio, the more efficient the utilization of owners and long-term creditors fund. It is calculated as: Sales Capital Turnover Ratio = -------------------------Capital Employed Here Capital Employed includes shareholders fund and long-term loan.

II.

Fixed Assets Turnover Ratio: A high fixed assets ratio indicates efficient utilization of fixed assets in generating sales. A firm whose plant and machinery are old may show a higher fixed assets turnover ratio than the firm, which has purchased them recently. It is calculated as:

Sale Fixed Assets Turnover Ratio = ----------------------Capital Assets Where capital assets is all fixed assets.

III.

Total Assets Turnover Ratio: the ratio measures the rupee sales generated by rupee of tangible assets being maintained by the firm be calculated as: Sales Total Assets Turnover Ratio = ------------------Total Assets

19

IV.

Working Capital Turnover Ratio: it studies the velocity of utilization of the working capital of the firm during a year. The higher the ratio the lower is the investment in working capital and higher the profitability. It is calculated as: Sales Working Capital Turnover Ratio = ----------------------Working Capital

V.

Inventory Turnover Ratio: this ratio is known as stock turnover establishes the

relationship between the cost of good sold during the year and the average inventory held during the year. A high ratio indicates good liquidity, it is calculated as: COGS Inventory Turnover Ratio = ----------------------Average Inventory Where cost of good sold is opened stock, purchase less closing stock and gross profit. And average inventory is average of opening and closing stock.

VI.

Debtors Turnover Ratio: In case firm sells good on credit, realization of sales revenue is delayed and the receivable are created. The cash is realized from these receivables later on. The speed with which these receivables are collected affects the liquidity position of the firm. The debtors turnover ratio throws light on the collection and credit policies of the firm. It is calculated as:

Credit Sales Debtors Turnover Ratio = -------------------------------

20

Avg. Accounts receivable Here avg. account receivable is average of debtors & bills receivable. Evaluation of the ratio can be made better and meaningful in terms of average collection period, which is as follow:

365 Avg. Collection Period = ---------------------D/T Ratio The shorter the collection period implies quick payment by debtors. While longer the period larger the chance of bad debts.

VII.

Creditors Turnover Ratio: Ratio is calculated on the same lines as receivables ratio. This ratio shows the velocity of debt payment by the firm. It compares the annual credit purchases with the average payable as follow:

Credit Purchases Creditors turnover Ratio = ---------------------------Avg. Accounts Payable Where average accounts payable are creditors & bills payable. A low creditors turnover ratio reflects liberal credit terms granted by suppliers. While a

21

high ratio shows that accounts are settled rapidly. Evaluation of the ratio can be made better and meaningful in terms of average payment period, which is as follow: 365 Avg. Payment Period = --------------C/T Ratio By this firm can compare what credit period it receives from the suppliers. D) PROFITABILITY RATIOS: The profitability ratios measure the profitability or the operational efficiency of the firm. There are two groups of persons who may be specifically interested in the analysis of the profitability of the firm. These are (i) the management, which is interested in the overall profitability and operational efficiency of the firm, and (ii) the equity shareholders who are interested in the returns available to them. Both of these parties and any other party such as creditors can measure the profitability of the firm. The performance of the firm can be evaluated in terms of its earning with reference to a given level of assets or sales or owner interest etc. broadly the profitability ratio are calculated by relating the returns with reference to (i) sales of the firm, (ii) assets of the firm, (iii) the owners contribution. I. Profitability Ratio based on sales of the firm: profit is of sales and earned indirectly as a part of the sales revenue. This ratio analyses how much of profit is earned, how is it going to be used for meeting he of goods sold, depreciation indirect expenses, tax liability and return to shareholders. The important ratios are: a) Gross Profit Ratio: ratio is also called the average mark up ratio. This ratio reflects the efficiency with which the firm produces/purchase the goods. Higher the ratio better is the result. A low GP ratio, generally indicates high cost of goods sold due to unfavorable purchasing policies, lesser sales, lower selling Prices, excessive competition, over investment in plant and machinery etc. it is calculated as: Gross profit

22

GP Ratio = -----------------Net sales b) Net Profit Ratio: it measures the efficiency of management in generating

additional revenue over and above the total cost of operation. It shows the overall efficiency in manufacturing, administrative, selling and distributing the product. It is calculated as : Net profit NP Ratio = ------------------Net sales

c)

Operating Profit Ratio: refers to the pure operating profit of the firm i.e. the

profit generated by the operation of the firm and hence is calculated before considering any financial leverage, non-operating income/losses and tax liability. The operating profit is also known as earning before interest and tax (EBIT). The OP ratio is calculated as: EBIT OP Ratio = ---------------Net Sales d) Operating Ratio: this ratio establishes relationship between cost of good sold and other expenses on the one hand and the sales on the other hand. Thus, it measures the cost of operations per rupee of sales. It also indicates the percentage of net sales that is consumed by operating cost. The higher the ratio the less favorable it is, it would have a small margin to covert interest, income-tax, dividend and reserve. It is calculated as:

23

Total Operating Cost OR Ratio = ------------------------------Net Sales Here operating cost includes administrative cost, selling cost and financial cost.

II. Profitability Ratio based on Assets/Investment: the Profitability of a firm can also be analyzed with reference to assets employed to earn a return. Normally, the more the assets employed, greater should be the profit and vice-versa. The important ratios are: a) Return on Assets: This measure the profitability of the firm in terms of assets

employed in the firm. The ROA is measured by establishing the relationship between the profits and the assets employed to earn that profit. It is calculated as: Net Profit after Tax ROA = ------------------------------Avg. Total Assets b) Return on Capital Employed/Investment: this is pot-tax version of earning

power. It considers the effect of taxation, but not the capital structure. It is internally consistent. Its merit is that it is defined in such a way that it can be compared directly with the pot-tax weighted average cost of capital of the firm. It is calculated as:

24

EBIT ROCE = -------------------------Capital Employed Here capital employed includes share capital, reserve & surplus, debentures less miscellaneous expenses and nontrade investment.

III. Profitability Ratios based on Owners View: ultimately profit of the firm belongs to the owners who have invested their fund in the form of equity share capital or preference share capital or retained earnings. Therefore, the profits of a firm should be analyzed from the point of view of the owners. The important ratios are: a) Return on Equity: the ROE examines profitability of the firm from the

perspective of the equity investors by relating profits available for the equity shareholders with the book value of the equity investment. It is calculated as:

Equity Earnings ROE = -------------------------------Equity shareholders Fund b) Earnings per Share: The ROE measures the profitability in terms of the total

funds and explains the return as a percentage while EPS measure the same in terms of number of equity shares. It is calculated as:

25

Equity Earnings EPS = ---------------------------No. of Equity shares c) Dividend per Share: Sometimes Equity shareholders may not be interested in the

EPS but in the return which they are actually receiving from the firm in the form of dividends. The amount of profits distributed to shareholders per share is known as DPS and may be calculated as: Total Profits Distributed DPS = -------------------------------------No. of Equity shares d) Dividend Payout Ratio: this ratio is between the DPS and EPS of the firm i.e. it

refers to the proportion of the EPS which has been distributed by the company as dividend. It is calculated as: Dividend per Share DP Ratio = --------------------------------Earning per Share e) Price Earning Ratio: This is the ratio, which establishes the relationship between

the EPS and market price of a share. It indicates the expectations of the equity investors about the earning of the firm. The investors expectations are reflected in the marked price of the share and therefore the P/e Ratio gives an idea of investors perception of the EPS. It is thus the risk factor of the share. It is calculated as:

Market Price per Share P/E = ------------------------------------Earning per Share

26

Limitations of Ratio Analysis: The ratio analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations: Limited use of a single ratio: A single ratio, usually, does not convey much of a sense. To make a better interpretation a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any way meaningful condition. Lack of Adequate Standards: There are no well-accepted standards or norms of thumb for all ratios, which can be accepted as norms. It renders interpretation of the ratios difficult. Inherent Limitations of Accounting: Like financial statements, ratios also suffer from the inherent weakness accounting records such as there historical nature. Ratios of the past are not necessarily true indicators of the future. Change of Accounting Procedures: Change in accounting procedure by a firm often makes ratio analysis misleading, e.g.: a change in the valuation of methods of inventories 27

from FIFO to LIFO increases the cost of the sales and reduces considerably value of closing stocks which makes stock turnover ratio to be lucrative and unfavorable gross profit ratio. Personal Bias: Ratios are not only means of financial analysis and not an end in itself. Ratios have to be interpreted and different people may interpret the same ratio in different ways.

Incomparable: Not only industries differ in their nature but also the firms of the similar business widely differ in their size and accounting procedures, etc this makes comparison of ratios difficult and misleading. Moreover, comparisons are made difficult due to difference in definitions of various financial terms used in the ratio analysis.

Absolute figures Distort: Ratios devoid of absolute figures may prove distort, as ratio analysis is primarily a quantitative analysis and not a qualitative analysis.

Price level Changes: While making ratio analysis, no consideration is made to the changes in price level and this makes the interpretation of ratios invalid.

28

COMPANY PROFILE: SHARE KHAN SSKI, a veteran equities solutions company with over 8 decades of experience in the Indian stock markets. The SSKI Group companies of Institutional Broking and Corporate Finance. The institutional broking division caters to domestic and foreign institutional investors, while the Corporate Finance Division focuses on niche areas such as infrastructure, telecom and media, SSKI has been voted as the Top Domestic Brokerage House in the research category, by the Euro Money survey and Asia Money survey. Share khan is also about focus. Share khan does not claim expertise in too many things. Share khans expertise lies in stocks and thats what he talks about with authority. So when he says that investing in stocks should not be confused with trading in stocks or a portfolio-based strategy is better than betting on a single horse, it is some thing that is spoken with years of focused learning and experience in the stock markets. And these beliefs are reflected in everything Share khan does for you! Share khan Indias leading stockbroker is the retail arm of SSKI, An organization with over eighty years experience in the stock market. With over 240 share shops in 110 Cities, and Indias premier online trading destinations-www.Share Khan.com, ours

29

customer enjoy multi-channel access at the stock markets, share khan offer u trade execution facilities for cash as well as derivatives on the BSE &NSE and most importunity we bring you investment advice tempered by eighty years of broking experience. Through our portal Share Khan.com, weve been providing investors a powerful online trading platform, the latest news, research and other knowledge-based tools for over 5years now. We have dedicated terms for fundamental and technical research so that you get all the information your need to take the right investment decisions. With branches and outlets across the country, our ground network is one of the biggest in India. We have a talent pool of experienced professionals specially designated to guide you when you need assistance, which is why investing with us is bound to be a hassle-free experience for you!

REASON WHY YOU SHOULD CHOOSE SHARE KHAN 1. Experience: SSKI has more than eight decades of trust and credibility in the

Indian stock market. In the Asia Money Brokers poll held recently, SSKI won the Indias best broking division in February 2000, it has been providing institutional-level research and broking services to individual investor. 2. Technology: With our online trading account you can buy and sell shares in an instant from any PC with an Internet connection. You will get access to our powerful inline trading tools that will help you take complete control over your investment in share. 3. Accessibility: In addition to our online and phone trading services, we also have a

ground network of 240 share shops across 110 cities in India where you can get personalized services.

30

Knowledge: In a business where the right information at the right time can translate into direct profit, you get access to wide range of information on our content- rich portal, Share Khan.com. You will also get a useful set of knowledge-based tools that will empower you to take informed decisions. Convenience: You can all our Dial-n-Trade number to get investment and execute your transaction. We have a dedicated call-center to provide this service via a toll-free number from anywhere in India. Customer service: Our customer service team will assist you for any help that you need relating to transactions, billing, Demat and other queries, our customer service can be contacted via a toll-free number, email or live chat on Share Khan.com.

31

Investment Advice: Share khan has dedicated research teams for fundamental and technical research. Our analysts constantly track the pulse of the market and provide timely investment advice to you in the form of daily research emails, online chat, printed reports on SMS on your phone. Customers of Share Khan Experience language, presentation style, content or for that matter the online trading facility find a common thread; one that helps the customers make informed decisions and simplifies investing in stocks. The common thread of empowerment is what Share khans all about! Share khan is also about focus. Share khan does not claim expertise in too many things. Share khans expertise lies in stocks and thats what he talks about with authority. So when he says that investing in stocks should not be confused with trading in stocks or a portfolio-based strategy is better than betting on a single horse, it is something that is spoken with years of focused learning and experience in the stock markets. And these beliefs are reflected in everything Share khan does for customers. To sum up, Share khan brings to customers a user-friendly online trading facility, coupled with a wealth of content that will help customers stalk the right shares. Those of customers who feel comfortable dealing with a human being and would rather visit a brick-and-mortar outlet than talk to a PC; Share khan offers customers the facility to visit (or talk to) any of Share khans share shops across the country. In fact Share khan runs Indias largest chain of share shops with over hundred outlets in 80 cities!

32

SHARE KHAN SERVICES: Share khan, one of Indias leading brokerage houses, is the retail arm of SSKI. With over 510 share shops in 170 cities, and Indias premier online trading portal www.Share Khan.com, Share Khans customers enjoy multi-channel access to the stock markets.

Online Services to Suit customers Needs:

33

With a Share Khan online trading account, customers can buy and sell shares in an instant! Anytime customers like trading account that suits customers trading habits and preferences the Classic Account for most investors and Speed trade for active day traders. Customers Classic Account also comes with Dial-n-Trade completely free, which is an exclusive service for trading shares by using customers telephone. When beginning customers foray in investing in shares, customers need a lot of things from the right information at customers disposal, to assistance when customers need it and advice on investing. Share Khan have been in this business for over 80 years now, and with Share Khan customers get a host of services and tools that are difficult to fing in one place anywhere else. The Share khan First Step program, built specifically for new investors. All customers have to do is walk into any of Share Khans 510 share shops across 170 cities in India to get a host of trading related services Share Khans friendly customer service staff will also help customers with any accounts related queries customers may have. A Share khan outlet offers the following services: Online BSE and NSE execution (through BOLT & NEAT terminals) Free access to investment advice from Share Khan value line (a monthly publication with reviews of recommendations, stocks to watch out for etc) Daily research reports and market review (High Noon & Eagle Eye) Pre-market Report (Morning Cuppa) Daily trading calls based on Technical Analysis Cool trading products (Darling Derivatives and Market Strategy) Personalized Advice Live Market Information Depository Services: Demat & Remat Transactions Derivatives Trading (Futures and Options) Commodities Trading IPOs & Mutual Funds Distribution Internet-based Online Trading: Speed Trade

34

INDUSTRY PROFILE

ORGANIZATION ON INDIAN STOCK EXCHANGES The recognized stock exchanges in India vary from voluntary non-profit making organizations(Bombay, Ahmadabad, Indore) to Joint stock Companies Limited by shares (Calcutta, Delhi, Bangalore) and companies limited by guarantee (Madras & Hyderabad). There is a broad uniformity in the organization of stock exchanges, since the Article of Association defining the constitution of the recognized stock exchanges is approved by the central government. BSE was the first Stock Exchange to get permanent recognition followed by Calcutta, Delhi, Madras, Ahmadabad, Hyderabad, Indore and Bangalore. The other exchanges were official recognition will renew for another term. As per the present guidelines, the proposed region in which the stock exchange is to be set up must be industrially developed with a sizeable number of industrial units and should be able to attract at least 50 companies independently.

FACTORS AFFECTING THE PRICES IN THE STOCK MARKET: Important factors affecting to the Prices in the Stock Market are 1. 2. 3. 4. 5. 6. 7. Monetary Policy Inflation FII (Foreign institutional investors) Political Influence Company Announcements SEBI Regulation Annual Budget 35

1.

MONETARY POLICY:

It is the process by which the government, central bank, or monetary authority manages the supply of money, or trading in foreign exchange markets. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is generally referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy has the goal of raising interest rates to combat inflation (or cool an otherwise overheated economy). Monetary policy should be contrasted with fiscal policy, which refers to government borrowing, spending and taxation. Overview: Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.

36

There are several monetary policy tools available to achieve these ends. Increasing interest rates by fiat, reducing the monetary base, and increasing reserve requirements all have the effect of contracting the money supply, and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy. And even prior to the 1970s, the BrettonWoods system still ensured that most nations would form the two policies separately.

History of monetary policy: Monetary policy is associated with interest rate and credit. For many centuries there were only two forms of monetary policy: (i) Decisions about coinage; (ii) Decisions to print paper money to create credit. Interest rates, while now thought of as part of monetary authority, were not generally coordinated with the other forms of monetary policy. The advancement of monetary policy as a pseudo scientific discipline has been quite rapid in the last 150 years, and it has increased especially rapidly in the last 50 years. Monetary policy has grown from simply increasing the monetary supply enough to keep up with both population growth and economic activity. It must now take into account such diverse factors as: Short term interest rates; Long term interest rates; Velocity of money through the economy; Exchange Rates; Bonds and equities (corporate ownership and debt); Government versus private sector spending/savings; International capital flows of money on large scales; Financial derivatives such as options, swaps, futures contracts, etc.

37

2. INFLATION: Inflation is a rise in the general level of prices of goods and services in a given economy over a period of time. It may also refer to the rise in the prices of some more specific set of goods or services. In either case, it is measured as the percentage rate of change of a price index. Mainstream economists overwhelmingly agree that high rates of inflation are caused by high rates of growth of the money supply. Views on the factors that determine moderate rates of inflation, especially in the short run, are more varied: changes in inflation are sometimes attributed mostly to changes in real demand for goods and services or fluctuations in available supplies (i.e. changes in scarcity), and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation (at moderate rates): the "monetarists" argued that money supply dominated all other factors in determining inflation, while "Keynesians" argued that real demand was often more important than changes in the money supply. A variety of inflation measures are in use, because there are many different price indices, designed to measure different sets of prices that affect different people. Two widely known indices for which inflation rates are commonly reported are the Consumer Price Index (CPI), which measures nominal consumer prices, and the GDP deflator, which measures the nominal prices of goods and services produced by a given country or region A movie ticket was for a few paisas in my dads time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over the years it has now become Rs.75000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up. Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indian economy undergoes structural changes, the causes of domestic inflation too have undergone tectonic changes.

38

Needless to emphasis, causes of today's inflation are complicated. However, it is indeed intriguing that the policy response even to this day unfortunately has been fixated on the traditional anti-inflation instruments of the pre-liberalization era. Global imbalance the cause for global liquidity: The reason for this imbalance in the global economy is the fact that after the Asian currency crisis; many countries found the virtues of a weak currency and engaged in 'competitive devaluation.' Under this scenario, many countries simply leveraged their weak currency vis-a-vis the US dollar to gain to the global (read US) markets. This mercantilist policy to maintain their competitiveness is achieved when their central banks intervenes in the currency markets leading to accumulation of foreign exchange, notably the US dollar, against their own currency. Naturally, as the players fear a fall in the value of the dollar and reach out to various assets and commodities, the prices of these commodities and assets too will rise. The psychological dimension But as the imbalance shows no sign of correcting, players seek to shift to commodities and assets across continents to hedge against the impending fall in the US dollar. Thus, it is a fight between central banks and the psychology of market players across continents. As a corrective measure, economists are coming to the conclusion that most of the currencies across the globe are highly undervalued vis-a-vis the dollar, which, in turn, requires a significant dose of devaluation. For instance, a consensus exists amongst economists and currency traders that the Yen is one of the most highly undervalued currencies (estimated at around 60%) along with the Chinese Yuan (estimated at 50%) followed by other countries in Asia. This artificial undervaluation of currencies is another fundamental cause for increasing global liquidity. 39

In 2005, international crude oil prices gained another 35 per cent and global demand for oil grew by only 1.6 per cent. Nonetheless, the world's supply of dollars increased by a further $460 billion.

Naturally, with all currencies refusing to be revalued, this leads to increased global liquidity. While one is not sure as to whether the increase in the prices of crude led to the increase of other commodities or vice versa, the fact of the matter is that, in the aggregate, increased liquidity has led to the increase in commodity prices as a whole.

This Reserve Bank of India's strategy of dealing with excessive liquidity through the Market Stabilization Scheme (MSS) has its own limitations. Similarly, the increase in repo rates (ostensibly to make credit overextension costly) and increase in CRR rates (to restrict excessive money supply) are policy interventions with serious limitations in the Indian context with such huge forex inflows. A consumer price index (CPI) is an index number measuring the average price of consumer goods and services purchased by households. It is one of several price indices calculated by national statistical agencies. The percent change in the CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, or regulated or contracted prices. The CPI is, along with the population census and the National Income and Product Accounts, one of the most closely watched national economic statistics.

40

Introduction: Two basic types of data are required to construct the CPI: price data and weighting data. The price data are collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times. The weighting data are estimates of the shares of the different types of expenditure as fractions of the total expenditure covered by the index. These weights are usually based upon expenditure data obtained for sampled periods from a sample of households. Although some of the sampling is done using a sampling frame and probabilistic sampling methods, much is done in a commonsense way (purposive sampling) that does not permit estimation of confidence intervals. Therefore, the sampling variance is normally ignored, since a single estimate is required in most of the purposes for which the index is used. Stocks greatly affect this cause. The coverage of the index may be limited. Consumers' expenditure abroad is usually excluded; visitors' expenditure within the country may be excluded in principle if not in practice; the rural population may or may not be included; certain groups such as the very rich or the very poor may be excluded. Black market expenditure and expenditure on illegal drugs and prostitution are often excluded for practical reasons, although the professional ethics of the statistician require objective description free of moral judgments. Saving and investment are always excluded, though the prices paid for financial services provided by financial intermediaries may be included along with insurance. The index reference period, usually called the base year, often differs both from the weight-reference period and the price reference period. This is just a matter of rescaling the whole time-series to make the value for the index reference-period equal to 100. Annually revised weights are a desirable but expensive feature of an index, for the older the weights the greater is the divergence between the current expenditure pattern and that of the weight reference-period.

41

Month-wise Consumer Price Index of Metros 2009 (BASE YEAR 2001=100) Month January February March April May June July August September October Delhi 124 125 125 128 128 128 130 131 132 131 Mumbai 131 131 130 132 132 134 136 135 136 138 Kolkata 125 126 128 130 130 130 133 135 136 138 Chennai 122 122 121 122 123 125 126 126 125 126 All India 127 128 127 128 129 130 132 133 133 134

A Whole sale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation. Indian WPI: The Indian WPI was first published in 1902, and was used by policy makers until it was replaced by the producer price index (PPI) in 1978. The Wholesale Price Index (WPI) is the most widely used price index in India. It is the only general index capturing price movements in a comprehensive way. The index is used to measure the change in the average price level of goods traded in wholesale market. A total of 435 commodity prices make up the index. It is available on a weekly basis, with the shortest possible measurement lag being two weeks. Because of this, it is widely used in business and industry circles and in Government, and is generally taken as an indicator of the inflation rate in the economy 42

3. FOREIGN INSTITUTIONAL INVESTORS

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. Investopedia Says... The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing a resolution to that effect. Global linkages for Indian stocks have been on the rise since 2002-03, when foreign institutional investments began to gain traction. In the five years before 2002, the Indian market (represented by the MSCI India Index) shared a relatively low correlation of 0.34 with the global market (represented by the MSCI All-Countries World Index). This indicates that the two indices did not move in the same direction very often. Over the next five years, however, the correlation has climbed to 0.49, suggesting a strengthening relationship between the two. The past two years have seen a significant increase in the global influence on Indian stocks, with a high correlation of over 0.80 between India and the rest of the world.

43

Monitoring Foreign Investments: The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the `caution and the `stop purchase in these companies through a press release.

44

P-NOTES (PARTICIPATORY NOTES) These are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India. Financial instruments used by hedge funds that are not registered with SEBI to invest in Indian securities, Indian-Based brokerages to buy India-based securities / stocks and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. WHY P-NOTES? Since international access to the Indian capital market is limited to FIIs. The market has found a way to circumvent this by creating the device called participatory notes, which are said to account for half the $80 billion that stands to the credit of FIIs. Investing through P-Notes is very simple and hence very popular. A Securities and Exchange Board of India proposal to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note route took the breath away of the Indian stock market and it suffered its biggest fall in history

LIST OF COMPANIES Companies where NRI investment has reached 8% and further purchases are allowed only with prior approval RBI 1. Astra IDL Ltd. 2. M/s. Codura Exports Ltd. 3. IDL Industries Ltd. 4. Nexus Software Ltd. 5. Dalmia Cement (Bharat) Ltd.

45

Companies where NRI investment has already reached 10% and no further purchases can be allowed 1. DSQ Biotech Ltd 2. Global Trust Bank Ltd. 3. Madras Aluminum Co. Ltd 4. SPL Ltd 5. Sierra Optima Ltd Companies in which FII Investment is allowed upto 30% of their paid up capital 1. Aptech Ltd 2. Asian Paints (India) Ltd 3. Capital Trust Ltd 4. Container Corporation of India 5. Ferro Alloys Corporation Ltd 6. Garware Polyester Ltd Companies in which FII Investment is allowed upto 40% of their paid up capital 1. Balaji Telefilms Ltd. 2. M/s. Burr Brown (India) Ltd. 3. M/s. Elbee Services Ltd. 4. Hero Honda Motors Ltd. 5. Jyoti Structures Ltd Companies in which FII Investment is allowed upto 49% of their paid up capital 1. Blue Dart Express Ltd 2. CRISIL 3. HDFC Bank Ltd 4. Hindustan Lever Ltd 5. Himachal Futuristic Communications Ltd 6. Infosys Technologies Ltd. 7. NIIT Ltd. 8. Dr. Reddy's Laboratories 9. Reliance Petroleum Ltd.

46

Companies in which NRI/FII Investment is allowed upto 49% of their paid up capital 1. ICICI Bank Ltd. Companies in which FII Investment is allowed up to sectoral cap/statutory ceiling of their paid-up capital 1. GTL Ltd. - (74%) 2. Housing Development Finance Corporation Ltd. - (74%) 3. Infosys Technologies Ltd. - (100%) 4. Pentamedia Graphics Ltd. - (100%) 5. Pentasoft Technologies Ltd. - (100%) Companies where 22% FII investment limit has been reached and further purchases are allowed with prior approval of RBI 1. ACC Ltd. 2. Digital GlobalSoft Ltd. Public Sector banks including SBI in which 20% limit has been reached. 1. State Bank of India Companies falling under 24% None Companies in which the Ban limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investment as stipulated by Government has been reached 1. ICICI Ltd. Companies in which the Caution limit (47%) in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached None

47

Mumbai: in a bid to boost investors confidence, the reserve bank hiked investment limit in companies for foreign institutional investors to the level of foreign direct investment set in various sectors. Now, FII investment in companies will be governed by investment ceiling for FDI for specific sectors, RBI said in a statement. shareholders and board approval would be necessary for such proposals, the statement added. at present the investment ceiling in companies for fiis is 49 per cent. Now the ceiling has been hiked to 74 per cent and beyond on par with the ceiling for FDI in various sectors. For instance, in case of pharmaceutical, it will be 74 per cent for fiis as in the case of FDIs. This measure comes a day after finance minister yashwant sinha assured fiis in a tele-conference that the government would come out with a slew of investment friendly measures to boost investors confidence. At present, fiis could automatically buy up to 24 per cent in companies which can be increased to 49 per cent with shareholder approval. FDI limit is generally higher for various sectors and fii investment limit is now on par with FDI. in the case of petroleum refining and exploration, airports, trading, roads, highways, ports, hotels and tourism, film industry and mass rapid transport system, the FDI investment limit was 100 per cent. In these sectors, investment by fiis will be allowed up to 100 per cent. The statement said todays decision was taken in consultation with the centre. While the investment limit for civil aviation is 40 per cent, for private sector banking, telecommunication and broadcasting it would be 49 per cent. in case of defense and strategic industries and insurance, it would be 26 per cent.

48

4. POLITICAL INFLUENCE: The presence of political risk is a worldwide phenomenon that has affected most national stock markets in the twentieth century. Within this context, it is often said that returns of the stock markets are affected by the Parliamentary happenings. I found that stock index returns are significantly lower and volatility is higher when Parliament is insession as compared to Parliament in-recess. Put another way, using an out-of-session investment strategy by investing in BSE Sensex over the last 14 years would have led to growth in portfolio value by over nine times compared to an in-session investment strategy. The study concludes by discussing the influence of coalition governments, coalition politics, and gradual weakening of parliament among important factors driving these results Since the early 1990's, when the Indian economy was liberalized, India has emerged as the world leader in information technology and business outsourcing, with an average growth of about 6 percent a year. Growing foreign investment and easy credit have fueled a consumer revolution in urban areas. With their Starbucks-style coffee bars, Blackberrywielding young professionals, and shopping malls selling luxury brand names, large parts of Indian cities strive to resemble Manhattan. For decades now, India's underprivilegeds have used elections to register their protests against joblessness, inequality and corruption. In the 2004 general elections, they voted out a central government that claimed that India was "shining," bewildering not only most foreign journalists but also those in India who had predicted an easy victory for the ruling coalition. Among the politicians whom voters rejected was Chandrababu Naidu, the technocratic chief minister of one of India's poorest states, whose forward-sounding policies, like providing Internet access to villages, prompted Time magazine to declare him "South Asian of The Year" and a "beacon of hope."

49

But the anti-India insurgency in Kashmir, which has claimed some 80,000 lives in the last decade and a half, and the strength of violent communist militants across India, hint that regular elections may not be enough to contain the frustration and rage of millions of have-nots, or to shield them from the temptations of religious and ideological extremism. Most privatization programs begin with a period of partial privatization in which only non-controlling shares of firms are sold on the stock market. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. Using data on Indian state-owned enterprises we find that partial privatization has a positive impact on profitability, productivity, and investment. This paper investigates the influence of incumbent firms on the decision to allow foreign direct investment into an industry. Based on data from Indias economic reforms, the results suggest that firms in concentrated industries are more successful at preventing foreign entry that state-owned firms are more successful at stopping foreign entry than similarly placed private firms, and that profitable state-owned firms are more successful at stopping foreign entry than unprofitable state-owned firms. These findings continue to hold after controlling for industry characteristics such as the presence of natural monopolies and the size of the workforce. The pattern of foreign entry liberalization supports the private interest view of policy implementation. Using panel data on industries in emerging markets, we investigate the effect of the stock market liberalization on industry growth. Consistent with the view that liberalization reduces financing constraints, we find that industries that are more externally dependent and face better growth opportunities grow faster following liberalization. However, this increase in industry growth appears to come from an expansion in the size of existing firms rather than through new firm entry, which is puzzling since new firms are typically more financially constrained. To reconcile these conflicting results we examine whether barriers to entry arising out of institutional and regulatory frictions affect the impact of liberalization on new firms. We find that liberalization leads to new firm growth at the industry level in countries that allocate capital more efficiently, and in industries that 50

privatize government-owned firms. From a policy perspective these results suggest that stock market liberalization will have a larger and more uniformly distributed growth impact if it is accompanied by complementary reforms that enhance competition. We investigate the influence of financial and political factors on the decision to privatize government-owned firms using firm-level data from India. Based on data from all elections held since the start of the privatization process, we find that the government is reluctant to privatize firms located in regions where the governing party faces more political competition from opposition parties. This result is robust to political ideology; industry and time effects; and state-level differences in income, literacy, and growth opportunities, as an indication that political patronage is important, no governmentowned firm located in the home state of the politician in-charge of that firm is ever privatized. Using political variables as an instrument for the endogenous privatization decision, we find that privatization has a positive and significant impact on firm performance. We examine whether bilateral political relations can explain investment and trade flows between the United States and other countries. We treat political relations as endogenous using instrumental variable analysis and investigate whether an exogenous shock to political relations, the 2003 war in Iraq, leads to a shift in economic flows. The results suggest that deterioration in bilateral relations is followed by a significant decrease in economic flows between the United States and that country. These results are robust to country fixed effects, income, industry growth, financial market development, and risk.

51

DATA ANALYSIS

1)

CURRENT RATIO: Current Ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as working capital ratio, is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position or liquidity of a firm. It is calculated by dividing total current assets by total of the current liabilities.

C urrent

R tio = a

C rre u nt A ts sse C rre t L ilitie s u n iab

2)

QUICK RATIO: Quick ratio is a ratio of assets to quick liabilities. Quick assets are assets that can be converted into cash very quickly without much loss. Quick liabilities are liabilities, which have to he necessarily paid with in one year. The acid test ratio is a measure of liquidity designed to over come of firms ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is measure of quick or acid liquidity. The acid test ratio is the ratio between current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities.
Quick Assets Current Liabilitie s

Quick Ratio =

Quick Assets = Current Assets (Inventory + Prepaid Expenses)

52

3)

CASH RATIO (SUPER QUICK RATIO): Definition Total dollar value of cash and marketable securities divided by current liabilities. For a bank this is the cash held by the bank as a proportion of deposits in the bank. The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors, also called liquidity ratio or cash asset ratio.

Cash Ratio =

cash & bankbalanc es Current Liabilitie s

4)

WORKING CAPITAL TURNOVER RATIO: Working capital of a concern is directly related to sales. The working capital is taken as: Working capital = Current assets Current Liabilities
Working Capital Turnover Ratio =
Sales x100 Net Working Capital

The working capital turnover ratio indicates the velocity of the utilization of net working capital.

53

DEBTORS TURNOVER RATIO: Definition: Debtors turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. Formula of Debtors Turnover Ratio: Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors The two basic components of the ratio are net credit annual sales and average trade debtors. The trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills Receivables. The average receivables are found by adding the opening receivables and closing balance of receivables and dividing the total by two. It should be noted that provision for bad and doubtful debts should not be deducted since this may give an impression that some amount of receivables has been collected. But when the information about opening and closing balances of trade debtors and credit sales is not available, then the debtors turnover ratio can be calculated by dividing the total sales by the balance of debtors (inclusive of bills receivables) given and formula can be written as follows. Debtors Turnover Ratio = Total Sales / Debtors 5) STOCK TURNOVER/INVENTORY TURNOVER RATIO: Definition: Stock turn over ratio and inventory turn over ratio are the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turn over ratio/Inventory turn over ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency

54

with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not. Formula of Stock Turnover/Inventory Turnover Ratio: The ratio is calculated by dividing the cost of goods sold by the amount of average stock at cost. a) Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost generally, the cost of goods sold may not be known from the published financial statements. In such circumstances, the inventory turnover ratio may be calculated by dividing net sales by average inventory at cost. If average inventory at cost is not known then inventory at selling price may be taken as the denominator and where the opening inventory is also not known the closing inventory figure may be taken as the average inventory. b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost] c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price] d) [Inventory Turnover Ratio = Net Sales / Inventory]

55

STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2009-2010 (Rupees in lakhs) Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities & Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2 )] Increase in Working Capital 23659.86 23659.86 110487.34 110487.34 Source: annual reports of INDIA SHARE KHAN for the year 2009-10 110487.34 86827.48 62687.38 25563.52 52077.46 9853.2 2 150181.58 7107.69 202529.67 2745.53 52348.09 61718.05 44903.20 88800.73 969.33 19339.68 36723.27 260668.92 289357.15 28688.23 31-3-2009 26239.45 165665.88 3710.39 49400.06 15655.14 31-3-2010 39388.49 148917.78 3982.41 93617.55 3450.92 274.02 44217.49 12204.22 Increase 13149.04 16748.10 Decrease

STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2008-2009 56

(Rupees in lakhs)

Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities & Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ] Increase in working capital

31-3- 2008 28885.48 197944.41 7072.47 29846.01 8703.41 272451.78

31-3-2009 26239.45 165665.88 3710.39 49400.06 15655.14 260668.92

Increase

Decrease 2646.03 32278.03 3364.10

19554.0 5 6951.73 11782.86

39994.47 19860.10 45820.78 8724.02 115710.51 156741.27

62687.38 25563.52 52077.46 9853.22 150181.58 110487.34 46253.93 46253.9

22692.91 5703.44 6256.68 1129.2 34471.07

156741.27

156741.27

Source: annual reports of INDIA SHARE KHAN for the year 2008-09

57

STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2007-2008

Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities & Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ] Decrease in working capital

31-3- 2007 22831.69 203161.62 1681.45 10242.06 9722.43 247639.25

31-3-2008 28885.48 197944.41 7072.47 29846.01 8703.41 272451.78

Increase 6053.79

Decrease

5217.21 5391.02 19603.95 1019.02 24812.53

49046.67 17691.49 43097.96 8289.46 118776.14 128863.11 27878.16

39994.47 19860.10 45820.78 8724.02 115710.51 156741.27

2168.59 9052.2 2722.82 434.56 3065.63

27878.16

156741.27 156741.27 Source: annual reports of INDIA SHARE KHAN for the year 2007-08

58

STATEMENT OF CHANGES IN WORKING CAPITAL FOR 2006-2007

Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Bills Receivables Loan and Advances Total Current Assets (1) Current Liabilities Sundry Creditors Deposits Other Liabilities and Provisions Interest Total Current Liabilities (2) Working Capital [ (1) - (2) ] Decrease in working capital

31-3-2006 28791.65 186198.50 6202.27 12467.18 12739.87 246399.47

31-3-2007 22831.69 203161.62 1681.45 10242.06 9722.43 247639.25

Increase

Decrease 5959.96

16963.12 4520.82 2225.12 3017.44 1239.78

86965.65 17163.61 25337.85 6112.18 136171.60 110227.87

49046.67 17691.49 43097.96 8289.46 118776.14 128863.11

37918.98 527.88 17760.11 2177.28 17395.46

18635.24

18635.24

128863.11 128863.11 Source: annual reports of INDIA SHARE KHAN for the year 2006-07

SALES REVENUE FOR 2006-2010 59

YEAR 2006-07 2007-08 2008-09 2009-10

SALES REVENUE 417255.56 388868.06 419999.51 461703.22

Source: annual reports of INDIA SHARE KHAN for the year 2006-10

STATEMENT OF WORKING CAPITAL FOR 2006-2010

Year

Current assets

Current liabilities

Working Capital

N et Working Capital Increase Decrease

2006-07 2007-08 2008-09 2009-10

247639.25 272451.78 260668. 92 289357.1 5

118776.14 115710.51 150181.58 202529.6 7

128863.11 156741.27 110487.34 86827.48 46253.93 23659.86

18635.24 27878.16

60

Interpretation:
low. In the year 2009-10 the current liabilities are very low & current assets are high, so the working capital is increased. For the periods 2006-07 and 2007-08 the net working capital is decreased due to For the periods 2008-09 and 2009-10 increase in working capital due to remaining

high of current assets and current liabilities. year figures, because in these 2 years current assets are high and current liabilities are

61

COMPARISION OF INCREASE AND DECREASE OF WORKING CAPITAL Year N et Working Capital Increase /Decrease

2006-07 2007-08 2008-09 2009-10

(-)18635.24 (-)27878.16 (+)46253.93 (+)23659.86

Interpretation: For the periods 2006-07 and 2007-08 the net working capital is decreased due to For the periods 2008-09 and 2009-2010increase in working capital leads to major

lower investments in acquisition of fixed assets and making less payments to the payables investments in fixed assets as well as capital expenditure.

1. Calculation of Current Ratio:

62

Principle Current Ratio = Current Assets / Current Liabilities

2006-07 247639.2 5 118776.1 4 =2.104

2007-08 272451.7 8 115710.5 1 =2.354

2008-09 260668.9 2

2009-10 289357.15 202529.67

150181.5 8 =1.735 =1.428

Interpretation: Variance of current ratio in the year 2007-08 shows that increase in For the year 2008-09 and 2009-10the current ratio has been declined due The above ratio clearly indicates that for the period 2008-09 and 2009current assets as well as decrease in current liabilities when compare to 2006-07 figures. to increase in current liabilities and decrease in current assets. 2010the current ratio is below 2 hence it indicates that the firm has not maintaining sufficient current assets to meet current liabilities.

63

2. Calculation of Quick Ratio: Principle Quick Ratio = Liquid Assets / Current Liabilities 2006-07 224807.5 6 118776.1 4 =1.892 2007-08 243566.3 0 115710.5 1 =2.104 2008-09 234429.4 7 150181.5 8 =1.560 2009-10 249968.66 202529.67 =1.234

Interpretation: For the years 2006-07 and 2007-08 the firm has maintained sufficient Due to the increase in current liabilities for the year 2008-09 and 2009current assets (excluding inventory of stock) in order to meet its current liabilities. 2010 it leads to decrease in Quick ratios when compare to 2006-07 and 2007-08 figures.

3. Calculation of Cash Ratio: Principle 2006-07 2007-08 64 2008-09 2009-10

Cash Ratio = Cash & Bank Balances / Current Liabilities 118776.1 4 =0.014 115710.5 1 =0.061 150181.5 8 =0.024 202529.67 =0.019 1681.45 7072.47 3710.39 3982.41

Interpretation:

The cash ratio of the organization clearly indicates that the firm has maintaining In order to maintain sufficient cash balance the firm has to maintain control over

moderate cash balances to meet its current liability obligations its credit sales (Debtors) and making payments to the suppliers

65

1.
Principle

Calculation of Working Capital Turn Over Ratio:

Working Capital Turn Over Ratio = Sales(Turn Over) / Working Capital 417255.56 128863.11 =3.237 388868.0 6 156741.2 7 =2.480 419999.5 1 110487.3 4 =3.801 461703.22 86827.48 =5.317

Interpretation: periods For the period 2007-08 the sales turn over of the firm has been decreased when compare to 2006-07 figures due to this the working capital turn over ratio is declined. 66 The overall position of the working capital turn over ratio is positive For the year 2008-09 and 2009-2010 there is a substantial growth in sales turn

over due to this the firm has huge working capital turn over ratio for the above said

2.

Calculation of debtors Turn Over Ratio:

Principle Debtors Turn Over Ratio = Sales (Turn Over) / Accounts receivable

417255.5 6 203161.6 2 = 2.053

388868.0 6 197944.4 1 = 1.964

419999.5 1 165665.8 8 = 2.535

461703.22 148917.78 = 3.100

Account receivable includes sundry debtors and bills receivable

Interpretation: years figure. The debtors turn over ratio of the firm is ideal for the year 2006-07 There is substantial decrease in sundry debtors for the year 2007-08 due to

this the debtors turn over ratio is decreased when compare to 2006-07 and remaining

67

For the year 2008-09 and 2009-2010the firm has maintained sufficient

debtors turn over ratio.

3.

Calculation of stock or inventory Turn Over Ratio:

Principle Stock Turn Over Ratio = Sales (Turn Over) / inventory

417255.5 6 22831.69 = 18.275

388868.0 6 28885.48 = 13.462

419999.5 1 26239.45 = 16.006

461703.22 39388.49 = 11.721

Interpretation: years figures . ratio. In the year 2006-07 the firm has maintained sufficient stock turn over The stock turn over ratio of the firm is ideal for the year 2009-10 There is substantial decrease in stock for the year 2006-07 due to this the

stock turn over ratio is decreased in 2009-2010 when compare to 2006-07 and remaining

68

FINDINGS & CONCLUSIONS: After analyzing the financial position of India share khan evaluating its financial performance in respect of ratio analysis, the following conclusion is drawn from the study:1. The liquidity position of the company has shown significant improvement during the study period. The current assets of the firm are increased from 247639.25 lakhs in 200607 to 260668.92 lakhs in 2008-09. 2. The progress of INDIA SHARE KHAN shows that there is an increasing trend in production, Productivity sales, Profit and investments during the last Five years (200610). 3. The sales have also been continuously increasing during the study period. The percentage in 2009-10 is Rs. 461703.22 lakhs as compared to Rs. 417255.56 lakhs in 2006-07. 4. During the study period the INDIA SHARE KHAN is efficiently administering in controlling the operation expenses. 5. Working capital turnover ratio increased, it indicates that the company has utilized the working capital efficiently. 6. The debtors turnover ratio increased, it indicates that the company has efficiently managed the collection of debtors receivables.

69

On the whole, the financial performance of INDIA SHARE KHAN has improved much during the study period.

BIBLIOGRAPHY
1. Investment Analysis and portfolio Management - Prasanna Chandra 2. Principles of Financial Management -R.P. Rustagi

3. Website: WWW.INVESTOR-WORLD.COM

70