A PROJECT REPORT on Construction of Balanced Portfolio Comprising of Equity and Debt at SCM

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Construction of Balanced Portfolio comprising of Equity and Debt

EXECUTIVE SUMMARY

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A stock market is a market for the trading of publicly held company stock and associated

financial instruments.

The stock market in India is very volatile and many investors are in a dilemma to invest in the

securities. Not surprisingly, recent market developments have once more focused attention on the

volatility that has come to characterise Indias stock markets. In volatile markets, domestic

speculators too attempt to manipulate markets in periods of unusually high prices.

Keeping in view the above observation about the Indian stock market, a project Construction of

Balanced Portfolio of Equity and Debt, with the problem statement being To test the

significance of excess return to beta and find out whether one can construct a portfolio whose

beta is equal to market beta (beta =1), with returns greater than market returns..

Ten sectors were picked randomly consisting of 6 companies I Cement and 4 Companies in each

sector. Also the 10 corporate bonds along with 5 govt. securities are taken. With the help of all,

the statistical measures were calculated and a TRI was constructed. Then again another portfolio

was constructed using a particular sector stocks and this portfolio was compared with the returns

on the index to look at the performance at different combinations.

The Project was carried out at SMC Solutions, stock broking firm situated in Hubli.

Analysis of cement sector and steel sector give an immense insight to invest in these these stocks.

The Report describes the analysis being carried out in project and results obtained.

At the las t , the portfo l io was constructed with h igher re turns than

index re turns with sys tematic r isk of 1


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THEORETICAL BACKGROUND


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Inflation: Along with the growth of GDP, if inflation also increases, then the real rate of

growth would be very little. The demand in the consumer product industry is significantly

affected. If there is a mid level of inflation, it is good to the stock market but high rate of

inflation is harmful to the stock market. Interest rates: The interest rate affects the cost of financing to the firms. A decrease in

interest rate implies lower cost of finance for firms and more profitability. More money is

available at a lower interest rate for the brokers who are doing business with borrowed

money. Availability of cheap fund, encourages speculation and rise in price of shares.

Budget: The budget draft provides an elaborate account of the government revenues and

expenditures. A deficit budget may lead to high rate of inflation and adversely affect the

cost of production. Surplus budget may result in deflation. Hence, balanced budget ishighly favorable to the stock market.

The tax structure: Concessions and incentives given to a certain industry encourages

investment in that particular industry. Tax reliefs given to savings encourage savings.

The type of tax exemption has an impact on the profitability of the industries.

The Balance of payment: The balance of payment is the record of a countrys money

receipts from and payments abroad. The difference between receipts and payments may

be surplus or deficit. BOP is the measure of the strength of rupee on external account. If

the deficit increases, the rupee may depreciate against other currencies, thereby, affecting

the cost of imports. The volatility of the foreign exchange rate affects the investment of

the foreign institutional investors in the Indian Stock Market. A favorable balance of

payment renders a positive effect on the stock market.

Infrastructure facilities: Infrastructure facilities are essential for the growth of industrial

and agricultural sector. A wide network of communication system is a must for the

growth of the economy. Regular supply of power without any power cut would boost the

production. Banking and financial sectors should also be sound enough to provide

adequate support to industry and agriculture.

Demographic factors: The demographic data provides details about the population by

age, occupation, literacy and geographic location. This is needed to forecast the demand

for the consumer goods. The population by age indicates the availability of able work

force. Population, by providing labour and demand for products, affects the industry and

stock market.


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Industry analysis

Industry analysis is a type of business research that focuses on the status of an industry or an

industrial sector (a broad industry classification, like "manufacturing"). A complete industrialanalysis usually includes a review of an industry's recent performance, its current status, and the

outlook for the future. Many analyses include a combination of text and statistical data.

Five Forces Affecting Competitive Strategy

Porter identifies five forces that drive competition within an industry:

The threat of entry by new competitors.

The intensity of rivalry among existing competitors.

Pressure from substitute products.

The bargaining power of buyers.

The bargaining power of suppliers.

Industry Life Cycle Model

This model is a useful tool for analyzing the effects of an industry's evolution on competitive

forces. Using the industry life cycle model, we can identify five industry environments, each

linked to a distinct stage of an industry's evolution: An embryonic industry environment

A growth industry environment

A shakeout industry environment

A mature industry environment

A declining industry environment

Company Analysis

In the company analysis the investor assimilates the several bit of information related to the

company and evaluates the present and future value of stock. The risk and return associated with

the purchase of the stock is analyzed to take better investment decision.

The present and future are affected by a number of factors. They are:-


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Factors Share values

The competitive edge of the company:- The competitive edge of the company can be studied

with the help of:-

The market share

The growth of annual sales

The stability of annual sales

The market shares:- The market share of the annual sales helps to determine a companys

relative competitive position within the industry. If the market share is high the company would

be able to meet the competition successfully.

Growth of sales:- The company would be the leading company, but if the growth of sales is

comparatively lower than another company, it indicates the possibility of the company losing the

leadership. The rapid growth in sales would keep the shareholder in a better position than one

with a stagnant rapid growth.

Stability of sales: - If a firm has stable sales revenue, other things being remaining constant will

have more stable earnings. Wide variation in sales leads to variation incapacity utilization,

financial planning and dividend.

Earnings of the company:- Sales alone do not increase the sales the earnings but the costs and

expenses of the companyalso influence the earnings of the company. Further, earnings do

not always increase with the increase in sales. The companys sales might have increased but

its per share may decline due to the rise in costs.

Capital structure: - The equity holders return can be increased manifold with the help of

financial leverage, i.e. using debt financing along with equity financing. The effect of financial


Competitive edge

Earnings

Capital structure

Management

Operating efficiency

Financial performance

Historic price of stock

P/E ratio

Economic condition

Stock market condition

Present priceFuture price

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leverage is measured by computing leverage ratios. The debt ratio indicates the positions of long

term and short terms debts in the company finance. The debt may be in the form of debentures

and term loans from financial institutions.

Management: - Good and capable management generates profit to the investors. Themanagement of the firm should efficiently plan, organize, actuate and control the activities of the

company. The basic objective of management is to attain the stated objectives of the company for

the good of the equity share holders, the public and the employers. The good management

depends on the quality of the manager.

The following are special traits of an able manager:-

Ability to get along with people

Leadership

Analytical competence

Industry

Judgment

Ability to get things done

Operating efficiency: - The operating efficiency of a company directly affects the earnings of a

company. An expanding company that maintains high operating efficiency with a low break-evenpoint earns more than the company with high break-even points. If a firm has stable operating

ratio, the revenue will also be stable. Efficient use of fixed assets with a raw materials, labour and

management would lead to more income from sales. This leads to internal fund generation for the

expansion of the firm. A growing company should have low operating ratio to meet the growing

demand for its product.

Financial analysis:- the best source of financial information about a company is itsown financial

statements. This is a primary source of information for evaluating the investments prospect in theparticular companys stock. Financial statement analysis is the study of a companys financial

statement from various viewpoints. The statement gives the historical and current information

about the companys operations. Historical financial statements help to predict the future. The

current information aids to analyse the present status of the company. The two main statements

used in analysis are:-

Balance sheet

Profit and loss account


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Debt valuation techniques and concepts

In their simplest form bonds are pretty straightforward. After all, just about anybody cancomprehend the borrowing and lending of money. However, like many securities, bonds involve

some more complicated underlying concepts as they are traded and analyzed in the market.

Bond Pricing

It is important for prospective bond buyers to know how to determine the price of a bond because

it will indicate the yield received should the bond be purchased. Bonds can be priced at a

premium, discount, or at par. If the bonds price is higher than its par value, it would sell at a

premium because its interest rate is higher than current prevailing rates. If the bonds price is

lower than its par value, the bond would sell at a discount because its interest rate is lower than

current prevailing.

Bondholder's Expected Rate of Return (Yield to Maturity)

The bondholder's expected rate of return is the rate the investor will earn if the bond is held to

maturity, provided, of course, that the company issuing the bond does not default on the

payments.

Computing Yield-to-Maturity on a Bond (YTM)

( )

( )

++

+

=n

n

rI

r

rCMP

1

11

11

Solving the equation for r gives the YTM.

1) If the investor's required return is greater than the YTM, the investor should not buy the bond

2) If the investor's required return is less than the YTM, the investor should buy the bond

Three Important Relationships

First relationship

A decrease in interest rates (required rates of return) will cause the value of a bond to increase; an

interest rate increase will cause a decrease in value. The change in value caused by changing

interest rates is called interest rate risk.


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long in years it takes for the price of a bond to be repaid by its internal cash flows. It is an

important measure for investors to consider, as bonds with higher durations are more risky and

have higher price volatility than bonds with lower durations.

Factors affecting Duration

Besides the movement of time and the payment of coupons, there are other factors that affect a

bond's duration: the coupon rate and its yield. Bonds with high coupon rates and in turn high

yields will tend to have lower durations than bonds that pay low coupon rates, or offer a low

yield. This makes empirical sense, since when a bond pays a higher coupon rate, or has a high

yield, the holder of the security receives repayment for the security at a faster rate. The diagram

below summarizes how duration changes with coupon rate and yield.

Types of Duration

There are four main types of duration calculations, each of which differ in the way they account

for factors such as interest rate changes and the bond's embedded options or redemption features.

The four types of durations are Macaulay duration, modified duration, effective duration, and

key-rate duration.

Macaulay Duration

Macaulay duration is calculated by adding the results of multiplying the present value of each

cash flow by the time it is received, and dividing by the total price of the security. The formula

for Macaulay duration is as follows:

P

i

Mn

i

ct

DurMac

n

t

nt +

++

=1 )1(

*

)1(

*


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n = number of cash flows

t = time to maturity

C = cash flow

i = required yieldM = maturity (par) value

P = bond price

( )

( )

+

+

+

=n

n

r

Ir

rCMP

1

11

11

.

So the following is an expanded version of Macaulay duration:

n

n

n

t

nn

i

M

i

iC

i

Mn

i

ct

DurMac

)1(

)1(

1

1*

)1(

*

)1(

*

1

++

+

++

+=

Modified Duration

Modified duration is a modified version of the Macaulay model that accounts for changing

interest rates. Because they affect yield, fluctuating interest rates will affect duration, so this

modified formula shows how much the duration changes for each percentage change in yield. For

bonds without any embedded features, bond price and interest rate move in opposite directions, so

there is an inverse relationship between modified duration and an approximate one-percentage

change in yield. Because the modified duration formula shows how a bond's duration changes in

relation to interest rate movements, the formula is appropriate for investors wishing to measure

the volatility of a particular bond. Modified duration is calculated as the following:


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+

=

PeriodsCpnofNo

YTM

rartionmacaulayduDuratonModified

1

.

Total Return Index

Nifty is a price index and hence reflects the returns one would earn if investment is made in the ind

portfolio. However, a price index does not consider the returns arising from dividend receipts. Only capit

gains arising due to price movements of constituent stocks are indicated in a price index. Therefore, to get

true picture of returns, the dividends received from the constituent stocks also need to be factored in t

index values. Such an index, which includes the dividends received, is called the Total Returns Index.

Total Returns Index reflects the returns on the index arising from (a) constituent stock price movemen

and (b) dividend receipts from constituent index stocks.

Methodology for Total Returns Index (TR) is as follows:

The following information is a prerequisite for calculation of TR Index:

1. Price Index close

2. Price Index returns

3. Dividend payouts in Rupees

4. Index Base capitalisation on ex-dividend date

Dividend payouts as they occur are indexed on ex-date.

1000)(

)(=

rsndexBaseCapofi

rsyoutDividendPaidendIndexedDiv

Indexed dividends are then reinvested in the index to give TR Index.

Total Return Index = [Prev. TR Index + (Prev. TR Index * Index returns)] +

[Indexed dividends + (Indexed dividends * Index returns)]

The base for both the Price index close and TR index close will be the same.


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An investor in index stocks should benchmark his investments against the Total Returns index

instead of the price index to determine the actual returns vis--vis the index.

Operational Definitions

Bond: A debt instrument sold by a company or government to raise money. One who buys a

bond is a creditor of the company, but not an owner, as a stockholder would be.

Par: The value of a bond assigned by the issuer; also called face value.

Original issue discount: A bond with an offering price that is below par value.

Coupon: A bond's interest rate.

Premium: The amount by which a security sells above its par value.

Maturity: The length of time before the principal amount of a bond is due to the bondholders. It

is the time until a bond may be surrendered to its issuer, called as term-to-maturity.

Maturity date: The date on which a bond is to be redeemed and its principal and interest

returned to the owner.

Callability: The feature of some bonds whereby the issuer can redeem it before it matures.

Issuers often call their bonds when interest rates are falling and they want to replace high-yielding

bonds with lower-yielding bonds. Call provisions must be made clear before a bond is sold. A

bond with this feature is a callable bond.

Debenture: A bond backed by the issuer's general credit and ability to repay and not by an asset

or collateral.

Investment-grade: A classification of the ability of a bond issuer to repay a bond.


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Discount bond: A bond that sells at a discounted value of its face value. If a bond has a Rs 1000

par value but sells for Rs 900, it is "sold at a discount" of Rs100. Adverse market conditions and

reductions in interest rates can convince sellers to discount the bonds they sell.

Premium bond: A bond selling for more than its stated value. If a bond is Rs1000 par but sells

for Rs1100, it is "sold at a premium" of Rs100. Market conditions and increases in interest rates

can convince sellers to raise the prices of the bonds they sell.

Yield: The rate of return on an investment, described as a percentage of the amount of the

investment. For example, a bond purchased for Rs1,000 with a 7% yield would pay out 7% of

Rs1,000, or Rs70.

Yield to maturity: The fully compounded annual rate of return paid out over a bond's life, from

purchase date to maturity, including appreciation/depreciation and earnings. It is the most

comprehensive measure of yield.

Accrued interest: The interest that has been accumulating on a bond since the last time interest

was paid on it.

Current yield: The expected rate of return calculated by dividing the most recent annualized

distribution by the selling price. For example, a Rs.2,000 par bond that pays Rs140 but is bought

for Rs1600 has a current yield of 8 3/4 percent. The formula for deriving current yield is annual

income divided by current price.

Coupon rate: The interest as a percent of par paid by a bond. It is called a coupon rate because

historically bonds included attached coupons that were clipped and surrendered for cash. Today,

most bonds come without the attached coupons.

Duration: The change in value of a bond (expressed in years) caused by a change in the

prevailing interest rates.

Floating-interest rate: A variable interest rate, one that changes periodically.


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Fundamental Analysis: A method of evaluating a stock by attempting to measure its intrinsic

value. Fundamental analysts study everything from the overall economy and industry conditions,

to the financial condition and management of companies.

Intrinsic value: the economic value of a company or its common stock based on internally-

generated cash returns. Intrinsic value can be thought of as the discounted stream of net cash

flows attributable to an investment asset.

Terminal value: Terminal value refers to the value of the firm (or equity) at the end of the high

growth period. Terminal Value in year n= Cash Flow in year n+1/(r - g) .This approach requires

the assumption that growth is constant forever, and that the cost of capital will not change over

time.

Total Return Index: Anindex that calculates the performance of a group of stocks assuming that

all dividends and distributions are reinvested. This method is usually considered a more accurate

measure of actual performance than if dividends and distributions were ignored.

Beta: Statistically, beta is the measure of systematic risk in the CAPM and is the ratio of two co

variances: the individual security divided by a proxy for the market as a whole or the so-called

market portfolio. The beta factor is the expected change in the security's rate of return divided by

the accompanying change in the rate of return to the market portfolio.


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DESIGN OF THE STUDY


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Title :


Statement of Problem:

To test the significance of excess return to beta and find out whether one can construct a portfolio

whose beta is equal to market beta (beta =1), with returns greater than market returns.

Objectives of the research:

To analyze the performance of the shares of cos in the steel and cement sector in

Indian stock market in light of the growth in infrastructure in India.

To study the factors influencing the share price of the company.

To analyze the companies based on Fundamental Analysis and TRI model

To construct a Portfolio (Balanced Fund) of Equities and Debt. The construction

would be based on Fundamental Analysis Model.

Research Methodology

Type of research

The study is a descriptive research, describing the construction of portfolios.

Tools for data collection:

The study involves collection of data from secondary sources and collected from internet,

magazines, news paper, and research reports.

Sampling:

Type of sampling:Non-probabilistic judgment sampling.

Sample size: Four stocks from the steel sector and six stocks from the cement sector; 10

companys Corporate debt; ten Government securities; and 364 day-T-bills


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Plan Of Analysis

After collecting financial data related to the entities, i.e. the sample selected from the selected

sectors, the various valuation ratios and other financial calculations which will help in thecompany valuation will be calculated. A portfolio will be constructed on the basis of fundamental

analysis and on the basis of risk-return analysis with different combinations of debt and equity to

maximize the returns and minimize the risk (beta).

Limitations of the Study

The study was confined only to the selected sectors.

The study was more confined with secondary data.

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

As the scope is defined by the researcher, it restricts the number of variables which

influence the industry.

Sales growth were assumed on the basis of change in sales of yr 2007 and 2006


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EIC ANALYSIS

ECONOMY ANALYSIS


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Economic growth includes a raft of supply side policies that have helped to increase

competitiveness and productivity. For example financial markets have become more

deregulated, allowing more flexible loans. These have helped to increase investment

which has led to increased capacity and competitiveness. There has also been increasedfocus put on training and education of at least part of the population. Despite the rapid

economic growth so far the Indian economy has managed to maintain relatively stable

prices, with inflationary pressures remaining subdued.

The success of the Indian economy shares several parallels with the Chinese economy. Like

China the Indian economy has a plentiful supply of cheap labour. This has enabled low labour

costs for firms which have made them particularly competitive in labour intensive industries. This

has often been at the expense of Western manufacturing sectors. For example recently Dysons

announced it would switch production of vacuum cleaners from the UK to Indian where labour

costs are cheaper.

The Indian economy has also benefited from the process of globalisation and improved

technology. A good example of this is in call centres, which benefit from the low labour costs.

Due to the internet and cheap telephone calls many Western companies have found it profitable to

switch their call centres to places in India where labour costs are significantly lower. India is at aparticular advantage for this growing market because compared to other developing countries

English is spoken to a reasonable standard by a high share of the population. The Indian economy

has also been able to diversify from its primarily agricultural roots. Mumbai has emerged as one

of the leading financial centres in Asia. India is also increasingly benefiting from foreign

investment into a variety of industries.

Strengths of Indian Economy.

After several decades of sluggish growth the Indian economy is now amongst the fastest growing

economy in the world. Economic growth is currently 8-9%, second only to China.


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Despite several problems facing the Indian economy many economists point to potential strengths

of the Indian economy which could enable it to continue to benefit from high levels of economic

growth in the future.

1. Demographics of India are favourable.

India still has a positive birth rate meaning that the size of the workforce will continue to

grow for the foreseeable future. (unlike India) A rising workforce helps to increase saving and

investment. It also enables increased productivity.

2. There is much scope for increases in efficiency.

The infrastructure of India is so bad in places that even moderate improvements could lead to

significant improvements in the productive capacity of the economy.

3. India is well placed to benefit from globalization and outsourcing.

A legacy of the British Empire is that India has one of the largest English speaking

populations in the world. For labour intensive industries like call centres India is an obvioustarget for outsourcing. This is an economic development likely to continue in the future.

4. Positive Growth Forecasts

A recent study from Goldman Sachs, forecast that India could growth at a sustainable rate of

8% growth until 2020.However it is worth noting that this assumed Indian would make

several supply side policies such as labour market deregulation and improvements in

education and training.


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Problems Facing Indian Economy

1. Inflation.

Fuelled by rising wages, property prices and food prices inflation in India is an increasing

problem. Inflation is currently between 6-7%. A record 98% of Indian firms report operating

close to full capacity .With economic growth of 9.2% per annum inflationary pressures are likely

to increase, especially with supply side constraints such as infrastructure. The wholesale-price

index (WPI), rose to an annualized 6.6% in Janu 2007

2. Poor educational standards.

Although India has benefited from a high % of English speakers. (important for call centre

industry) there is still high levels of illiteracy amongst the population. It is worse in rural areas

and amongst women. Over 50% of Indian women are illiterate

3. Poor Infrastructure.

Many Indians lack basic amenities lack access to running water. Indian public services are

creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before it

reaches the market; this is one example of the supply constraints and inefficiencys facing the

Indian economy.

4. Balance of Payments deterioration.

Although India has built up large amounts of foreign currency reserves the current account deficit

has deteriorate in recent months. This deterioration is a result of the overheating of the economy.

Aggregate Supply cannot meet Aggregate demand so consumers are sucking in imports.

Excluding workers remittances Indias current account deficit is approaching 5% of GD

5. High levels of debt.

Buoyed by a property boom the amount of lending in India has grown by 30% in the past year.

However there are concerns about the risk of such loans. If they are dependent on rising property

prices it could be problematic. Furthermore if inflation increases further it may force the RBI to


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increase interest rates. If interest rates rise substantially it will leave those indebted facing rising

interest payments and potentially reducing consumer spending in the future

6. Inequality has risen rather than decreased.

It is hoped that economic growth would help drag the Indian poor above the poverty line.

However so far economic growth has been highly uneven benefiting the skilled and wealthy

disproportionately. Many of Indias rural poor are yet to receive any tangible benefit from the

Indias economic growth. More than 78 million homes do not have electricity. 33% (268million)

of the population live on less than $1 per day. Furthermore with the spread of television in Indian

villages the poor are increasingly aware of the disparity between rich and poor.

7. Large Budget Deficit.

India has one of the largest budget deficits in the developing world. Excluding subsidies it

amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little

scope for increasing investment in public services like health and education.

8. Rigid labour Laws.

As an example Firms employing more than 100 people cannot fire workers without government

permission. The effect of this is to discourage firms from expanding to over 100 people. It also

discourages foreign investment. Trades Unions have an important political power base and

governments often shy away from tackling potentially politically sensitive labour laws.

CURRENT STATE OF AN INDIAN ECONOMY

The economy ofIndia, when measured in USDexchange-rate terms, is the tenth largest in the

world, with a GDP of US $1.50 trillion (2008). It is the third largest in terms ofpurchasing power

parity. India is the second fastest growing major economy in the world, with a GDP growth rate

of 9.4% for the fiscal year 20062007. However, India's huge population has a per capita income

of $4,542 at PPP and $1,089 in nominal terms (revised 2007 estimate). The World Bankclassifies

India as a low-income economy.


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expenditure, administrative expenditure, subsidies, debt relief to farmers,postaldeficit,pensions,

social and economic services (education, health, agriculture, science and technology), grants to

states and union territories and foreign governments.

Headquarters of India's central bank, the Reserve Bank of India, in Mumbai (It's the tall building

in the background. The building in the foreground is the Asiatic Library)

India's non-development revenue expenditure has increased nearly fivefold in 200304 since

199091 and more than tenfold since 19851986. Interest payments are the single largest item of

expenditure and accounted for more than 40% of the total non development expenditure in the

200304 budget. Defence expenditure increased fourfold during the same period and has been

increasing due to growing tensions in the region, the expensive dispute with Pakistan overJammu

and Kashmirand an effort to modernise the military. Administrative expenses are compounded

by a large salary andpensionbill, which rises periodically due to revisions in wages, dearness

allowance etc. subsidies on food, fertilizers, education and petroleum and other merit and non-

merit subsidies account are not only continuously rising, especially because of rising crude oil

and food prices, but are also harder to rein in, because of political compulsions.

Public receipts

India has a three-tier tax structure, wherein the constitution empowers the union government to

levy income tax, tax on capital transactions (wealth tax, inheritance tax), sales tax, service tax,

customs and excise duties and the state governments to levy sales tax on intrastate sale of goods,

tax on entertainment andprofessions, excise duties on manufacture of alcohol, stamp duties on

transfer of property and collect land revenue (levy on land owned). The local governments are

empowered by the state government to levy property tax, Octroi and charge users for public

utilities like water supply, sewage etc. More than half of the revenues of the union and state

governments come from taxes, of which half come from Indirect taxes. More than a quarter of the

union government's tax revenues is shared with the state governments.


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The tax reforms, initiated in 1991, have sought to rationalise the tax structure and increase

compliance by taking steps in the following directions:

Reducing the rates of individual and corporate income taxes, excises, customs and making

it more progressive

Reducing exemptions and concessions

Simplification of laws and procedures

Introduction ofPermanent account numberto track monetary transactions

21 of the 29 states introduced Value added tax (VAT) on April 1, 2005 to replace the

complex and multiple sales tax system.

The non-tax revenues of the central government come from fiscal services, interest receipts,

public sector dividends, etc., while the non-tax revenues of the States are grants from the central

government, interest receipts, dividends and income from general, economic and social services.

General budget

The Finance minister of India presents the annual union budget in the Parliament on the last

working day of February. The budget has to be passed by the Lok Sabha before it can come into

effect on April 1, the start of India's fiscal year. The Union budget is preceded by an economic

survey which outlines the broad direction of the budget and the economic performance of the

country for the outgoing financial year. This economic survey involves all the various NGOs,

women organizations, business people, old people associations etc.

Labour

The large population puts further pressure on infrastructure and social services. A positive factor

has been the large working-age population, which forms 45.33% of the population and is

expected to increase substantially, because of the decreasing dependency ratio. The national

labour market has been tightly regulated by successive governments ever since the Workmen's

Compensation Act was passed in 1923.


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Natural resources

India's total cultivable area is 1,269,219 km (56.78% of total land area), which is decreasing due

to constant pressure from an ever growing population and increased urbanisation.

India has a total water surface area of 314,400 km and receives an average annual rainfall of

1,100 mm.Irrigation accounts for 92% of the water utilisation, and comprised 380 km in 1974,

and is expected to rise to 1,050 km by 2025, with the balance accounted for by industrial and

domestic consumers. India's inland water resources comprising rivers, canals, ponds and lakes

and marine resources comprising the east and west coasts of the Indian ocean and othergulfs and

bays provide employment to nearly 6 million people in the fisheries sector. India is the sixth

largest producer of fish in the world and second largest in inland fish production.

India's major mineral resources include Coal (fourth-largest reserves in the world), Iron ore,

Manganese, Mica, Bauxite, Titanium ore, Chromite, Natural gas, Diamonds, Petroleum,

Limestone and Thorium (world's largest along Kerala's shores). India's oil reserves, found in

Bombay High off the coast of Maharashtra, Gujarat, and in eastern Assam meet 25% of the

country's demand.

Rising energy demand concomitant with economic growth has created a perpetual state of energy

crunch in India. India is poor in oil resources and is currently heavily dependent on coal and

foreign oil imports for its energy needs. Though India is rich in Thorium, but not in Uranium,

which it might get access to if a nuclear deal with US comes to fruition. India is rich in certain

energy resources which promise significant future potential - clean / renewable energy resources

like solar,wind, biofuels (jatropha, sugarcane).

Physical infrastructure

Mumbai Airport


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Development of infrastructure was completely in the hands of the public sector and was plagued

by corruption, bureaucratic inefficiencies, urban-bias and an inability to scale investment.

Infosys Software Development Center in Pune.

India's low spending on power, construction, transportation, telecommunications and real estate,

at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates.

This had prompted the government to partially open up infrastructure to the private sector

allowing foreign investment which has helped in a sustained growth rate of close to 9% for the

past six quarters. India holds second position in the world in roadways' construction, more than

twice that of China. As of 2005 the electricity production was at 661.6 billion kWh with oilproduction standing at 785,000 bbl/day. India's prime import partners are : China 8.7%, US 6%,

Germany 4.6%, Singapore 4.6%, Australia 4% as of 2006 CIA FactBookAs of15 January2007,

there were 2.10 million broadband lines in India. Low tele-density is the major hurdle for slow

pickup in broadband services. Over 76% of the broadband lines were via DSL and the rest via

cable modems.

Financial institutions


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India has set up Special Economic Zones and software parks that offer tax benefits and better

infrastructure to set up business. Pictured here is the Infosys headquarters in Bangalore, one of

the largest software companies in India.

India inherited several institutions, such as the civil services, Reserve Bank of India, railways,

etc., from its British rulers. Mumbai serves as the nation's commercial capital, with the Reserve

Bank of India (RBI), Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)

located here. The headquarters of many financial institutions are also located in the city.

Cyber Greens Office Complex. Containing offices like ABN Amro, Microsoft.

The RBI, the country's central bankwas established on 1 April 1935. It serves as the nation's

monetary authority, regulator and supervisor of the financial system, manager of exchange

control and as an issuer of currency. The RBI is governed by a central board, headed by a

governor who is appointed by the Central government of India.

Cuffe Parade is an important business district in Mumbai, home to the World Trade Center as

well as other important financial institutions

The BSE Sensex or the BSE Sensitive Index is a value-weighted index composed of 30

companies with April 1979 as the base year (100). These companies have the largest and most

actively traded stocks and are representative of various sectors, on the Exchange. They account


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for around one-fifth of the market capitalisation of the BSE. The Sensex is generally regarded as

the most popular and precise barometer of the Indian stock markets. Incorporated in 1992, the

National Stock Exchange is one of the largest and most advanced stock markets in India. The

NSE is the world's third largest stock exchange in terms of transactions. There are a total of 23stock exchanges in India, but the BSE and NSE comprise 83% of the volumes.The Securities and

Exchange Board of India (SEBI), established in 1992, regulates the stock markets and other

securities markets of the country.

SECTORS

Agriculture

Composition of India's total production (million tonnes) of foodgrains and commercial crops, in

200304. India ranks second worldwide in farm output. Agriculture and allied sectors like

forestry, logging and fishing accounted for 18.6% of the GDP in 2005, employed 60% of the total

workforce[4] and despite a steady decline of its share in the GDP, is still the largest economic

sector and plays a significant role in the overall socio-economic development of India. Yields per

unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in

the five-year plans and steady improvements in irrigation, technology, application of modernagricultural practices and provision of agricultural credit and subsidies since Green revolution in

India. However, international comparisons reveal that the average yield in India is generally 30%

to 50% of the highest average yield in the world.

The low productivity in India is a result of the following factors:

Illiteracy, general socio-economic backwardness, slow progress in implementing land

reforms and inadequate or inefficient finance and marketing services for farm produce.

The average size of land holdings is very small (less than 20,000 m) and is subject to

fragmentation, due to land ceiling acts and in some cases, family disputes. Such small

holdings are often over-manned, resulting in disguised unemployment and low productivity of

labour.

Adoption of modern agricultural practices and use of technology is inadequate, hampered

by ignorance of such practices, high costs and impracticality in the case of small land

holdings.


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Irrigation facilities are inadequate, as revealed by the fact that only 53.6% of the land was

irrigated in 200001, which result in farmers still being dependent on rainfall, specifically the

Monsoon season. A good monsoon results in a robust growth for the economy as a whole,

while a poor monsoon leads to a sluggish growth. Farm credit is regulated by NABARD,which is the statutory apex agent for rural development in the subcontinent.

Industry

India is fourteenth in the world in factory output. They together account for 27.6% of the GDP

and employ 17% of the total workforce.However, about one-third of the industrial labour force is

engaged in simple household manufacturing only.

Economic reforms brought foreign competition, led to privatisation of certain public sector

industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the

production of fast-moving consumer goods.

Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family

firms and required political connections to prosper was faced with foreign competition, including

the threat of cheaper Chinese imports. It has since handled the change by squeezing costs,

revamping management, focusing on designing new products and relying on low labour costs and

technology.

34 Indian companies have been listed in the Forbes Global 2000 ranking for 2008.


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The 10 leading companies are:

World

Rank Company Logo Industry

Revenue

(billion

$)

Profits

(billion

$)

Assets

(billion

$)

Market

Value

(billion

$)

193Reliance

IndustriesOil & Gas Operations 26.07 2.79 30.67 89.29

198Oil and Natural

Gas CorporationOil & Gas Operations 18.90 4.11 33.79 54.11

219State Bank of

IndiaBanking 15.77 1.47 188.56 33.29

303Indian Oil

CorporationOil & Gas Operations 42.68 1.82 25.39 16.36

374ICICI Bank Banking 9.84 0.64 91.07 29.85

411NTPC Utilities 7.84 1.60 20.34 41.57

647Steel Authority of

India LimitedMaterials 7.88 1.45 8.05 26.37

738Tata Steel Materials 5.83 0.97 11.48 14.63

826Bharti Airtel TelecommunicationsServices

4.26 0.94 6.61 39.16

846Reliance

Communications

Telecommunications

Services3.13 0.65 13.08 29.63

Services

India is fifteenth in services output. It provides employment to 23% of work force, and it is

growing fast, growth rate 7.5% in 19912000 up from 4.5% in 195180. It has the largest share in

the GDP, accounting for 53.8% in 2005 up from 15% in 1950. Business services ( information

technology, information technology enabled services, business process outsourcing) are among

the fastest growing sectors contributing to one third of the total output of services in 2000. The

growth in the IT sector is attributed to increased specialisation, availability of a large pool of low

cost, but highly skilled, educated and fluent English-speaking workers. On the supply side and on

the demand side, increased demand from foreign consumers interested in India's service exports

or those looking to outsource their operations. India's IT industry, despite contributing


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significantly to its balance of payments, accounted for only about 1% of the total GDP or 1/50th

of the total services.

Banking and finance

The Indian money market is classified into: the organised sector (comprising private, public and

foreign owned commercial banks and cooperative banks, together known as scheduled banks);

and the unorganised sector (comprising individual or family owned indigenous bankers ormoney

lenders and non-banking financial companies (NBFCs)). The unorganised sector and microcredit

are still preferred over traditional banks in rural and sub-urban areas, especially for non-

productive purposes, like ceremonies and short duration loans.

Prime MinisterIndira Gandhinationalised 14 banks in 1969, followed by six others in 1980, and

made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture,

small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social

and developmental goals. Since then, the number of bank branches has increased from 10,120 in

1969 to 98,910 in 2003 and the population covered by a branch decreased from 63,800 to 15,000

during the same period. The total deposits increased 32.6 times between 1971 to 1991 compared

to 7 times between 1951 to 1971. Despite an increase of rural branches, from 1,860 or 22% of thetotal number of branches in 1969 to 32,270 or 48%, only 32,270 out of 5 lakh (500,000) villages

are covered by a scheduled bank.

Since liberalisation, the government has approved significant banking reforms. While some of

these relate to nationalised banks (like encouraging mergers, reducing government interference

and increasing profitability and competitiveness), other reforms have opened up the banking and

insurance sectors to private and foreign players.

Socio-economic characteristics

Poverty


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Large numbers of India's people live in abject poverty. Wealth distribution in India is improving

since the liberalization and with the end of the socialist rule termed as the license raj. While

poverty in India has reduced significantly, official figures estimate that 27.5% of Indians still

lived below the national poverty line in 2004-2005. A 2007 report by the state-run NationalCommission for Enterprises in the Unorganised Sector (NCEUS) found that 70% of Indians, or

800 million people, lived on less than 20 rupees per day with most working in "informal labour

sector with no job or social security, living in abject poverty."

Since the early 1950s, successive governments have implemented various schemes, under

planning, to alleviate poverty, that have met with partial success. All these programmes have

relied upon the strategies of the Food for work programme and National Rural Employment

Programme of the 1980s, which attempted to use the unemployed to generate productive assets

and build rural infrastructure. In August 2005, the Indian parliament passed the Rural

Employment Guarantee Bill, the largest programme of this type in terms of cost and coverage,

which promises 100 days of minimum wage employment to every rural household in 200 of

India's 600 districts. The question of whether economic reforms have reduced poverty or not has

fuelled debates without generating any clear cut answers and has also put political pressure on

further economic reforms, especially those involving the downsizing of labour and cutting

agricultural subsidies.

Occupations and unemployment

Agricultural and allied sectors accounted for about 57% of the total workforce in 19992000,

down from 60% in 199394. While agriculture has faced stagnation in growth, services have seen

a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which are in

the public sector. The NSSO survey estimated that in 19992000, 106 million, nearly 10% of the

population were unemployed and the overall unemployment rate was 7.32%, with rural areas

doing marginally better (7.21%) than urban areas (7.65%).

Unemployment in India is characterised by chronic underemployment or disguised

unemployment. Government schemes that target eradication of both poverty and unemployment,

(Which in recent decades has sent millions of poor and unskilled people into urban areas in search

of livelihoods.) attempt to solve the problem, by providing financial assistance for setting up

businesses, skill honing, setting up public sector enterprises, reservations in governments, etc.


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The decreased role of the public sector after liberalisation has further underlined the need for

focusing on better education and has also put political pressure on further reforms.

Regional imbalance

One of the critical problems facing India's economy is the sharp and growing regional variations

among India's different states and territories in terms of per capita income, poverty, availability of

infrastructure and socio-economic development.

The five-year plans have attempted to reduce regional disparities by encouraging industrial

development in the interior regions, but industries still tend to concentrate around urban areas and

port cities. After liberalization, the more advanced states are better placed to benefit from them,

with infrastructure like well developed ports, urbanisation and an educated and skilled workforce

which attract manufacturing and service sectors. The union and state governments of backward

regions are trying to reduce the disparities by offering tax holidays, cheap land, etc., and focusing

more on sectors like tourism, which although being geographically and historically determined,

can become a source of growth and is faster to develop than other sectors.

External trade and investment

Global trade relations

Until the liberalization of 1991, India was largely and intentionally isolated from the world

markets, to protect its fledging economy and to achieve self-reliance. Foreign trade was subject to

import tariffs, export taxes and quantitative restrictions, while foreign direct investment was

restricted by upper-limit equity participation, restrictions on technology transfer, export

obligations and government approvals; these approvals were needed for nearly 60% of new FDI

in the industrial sector. The restrictions ensured that FDI averaged only around $200M annually

between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid,

commercial borrowing and deposits ofnon-resident Indians.


Share of top five investing countries in FDI inflows. (20002007)[79]

Rank CountryInflows

(Million USD)Inflows (%)

1 Mauritius 85,178 44.24%[80]

2 United States 18,040 9.37%

3 United Kingdom 15,363 7.98%

4 Netherlands 11,177 5.81%

5 Singapore 9,742 5.06%

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result, India's foreign currency reserves stood at $285 billion in 2008, which could be used in

infrastructural development of the country if used effectively.

India is a net importer: Per the CIA factbook in 2007, imports were $224bn and exports $140bn.

India's reliance on external assistance and commercial borrowings has decreased since 199192,

and since 200203, it has gradually been repaying these debts. Declining interest rates and

reduced borrowings decreased India's debt service ratio to 4.5% in 2007. In India, External

Commercial Borrowings (ECBs) are being permitted by the Government for providing an

additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates

these borrowings (ECBs) through ECB policy guidelines.

Foreign direct investment in India

As the third-largest economy in the world in PPP terms, India is a preferred destination for

foreign direct investments (FDI); India has strengths in information technology and other

significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery.India has always held promise for global investors, but its rigid FDI policies were a significant

hindrance in this regard. However, as a result of a series of ambitious and positive economic

reforms aimed at deregulating the economy and stimulating foreign investment, India has

positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has

a large pool of skilled managerial and technical expertise. The size of the middle-class population

at 300 million exceeds the population of both the US and the EU, and represents a powerful

consumer market.


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India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.

Industrial policy reforms have substantially reduced industrial licensing requirements, removed

restrictions on expansion and facilitated easy access to foreign technology and foreign direct

investment FDI. The upward moving growth curve of the real-estate sector owes some credit to abooming economy and liberalized FDI regime. In March 2005, the government amended the rules

to allow 100 per cent FDI in the construction business. This automatic route has been permitted in

townships, housing, built-up infrastructure and construction development projects including

housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational

facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors.

Restrictions will be relaxed in sectors as diverse as civil aviation, construction development,

industrial parks, petroleum and natural gas, commodity exchanges, credit-information services

and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in

politically sensitive areas such as insurance and retailing.

FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March),

according to the government's Secretariat for Industrial Assistance. This was more than double

the total of US$7.8bn in the previous fiscal year. Between April and September 2007, FDIinflows were US$8.2bn.

INDUSTRY ANALYSIS

Indian Money Market

Whenever a bear market comes along, investors realize that the stock market is a risky place for

their savings, a fact we tend to forget while enjoying the returns of a bull market! This,

unfortunately, is part of the risk/return tradeoff. That is, to get higher returns, you have to take on

a higher level of risk. But for many investors, a volatile market is too much to stomach - an

alternative is the money market. The money market is better known as a place for large

institutions and government to manage their short-term cash needs. However, individual investors

have access to the market through a variety of different securities.

The money market is a subsection of the fixed income market. Many people think of the term

"fixed income" as synonymous with bonds, but technically, a bond is just one type of fixed


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Debentures

These are the normal types of bonds. It is unsecured debt, backed only by the name and goodwill

of the corporation. In the event of the liquidation of the corporation, holders of debentures are

repaid before stockholders, but after holders of mortgage bonds.


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INDIAN CEMENT INDUSTRY

Background

The Indian cement industry (120 million tons per annum) is the fourth largest in he world afterChina, Japan and USA. However, per capita consumption in the country is only around 80-90 kg

compared to the world average of approximately 250 kg.

Historically, the Indian cement sector has been highly fragmented comprising 54 players that

operate 124 plants. The majority of the plants are small-sized and well spread through out the

country. The cement industry is cyclical and capital intensive. A new plant typically has a

gestation period of 3-4 years.

Overview of The Indian cement industry

The Indian cement industry with a total capacity of 144 m tonnes (including mini plants) in FY07,

has surpassed developed nations like USA and Japan and has emerged as the second largest

market after China. Although consolidation has taken place in the Indian cement industry with the

top six players controlling almost 60% of the capacity, the remaining 40% of the capacity remains

pretty fragmented with around 40 players in the fray.

Despite the fact that Indian cement industry has clocked a production of more than 100 m

tonnes for the second year in succession, the per capita consumption of 110 kgs compares poorly

with the world average of 260 kgs. This, more than anything underlines the tremendous scope for

growth in the Indian cement industry in the long term.

Cement, being a bulk commodity, is a freight intensive industry and transporting cement

over long distances can prove to be uneconomical. This has resulted in cement being largely a

regional play with the industry divided into five main regions viz. north, south, west, east and the

central region. While the southern region is excess is capacity owing to the availability of

limestone, the western and northern region are the most lucrative markets. Therefore, players like

Grasim, L&T and Gujarat Ambuja enjoy high price realisations compared to the all India average.

Although the government has reduced the import duty on cement, imports do not pose a

threat since prices of cement in India are lower than those prevailing in the international markets.

Moreover, the storage facilities on the Indian ports are inadequate for large-scale imports.


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Constru

A PROJECT REPORT on Construction of Balanced Portfolio Comprising of Equity and Debt at SCM

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Transcript of A PROJECT REPORT on Construction of Balanced Portfolio Comprising of Equity and Debt at SCM