Winter Project Update RECENT

8/2/2019 Winter Project Update RECENT

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Winter Project Update

Santosh Naik

Roll No. 49

MMS II - Finance

Batch : 2010-12

Topic : Factors Affecting Stock Market.

MEANING of Stock Market Volatility

Stock market volatility is a measure of how far and fast stock prices move.

When the stock market goes up one day, and then goes down for the next

five, then up again, and then down again, that’s what you call stock marketvolatility. Stock price volatility is an indicator that is most often used by option

traders to find changes in trends in the market place. There are two main

types of stock volatility including historical volatility and implied volatility that

are used in the option markets. The increase or decrease in volatility results

from changes in investors emotions in the market place. More specifically

greed and fear in the market place are the two main factors that cause stock

prices to change. Stock price volatility tends to rise when there is new

information released in the markets however the extent to which it rises is

determined by the relevance of that new information as well as to the degree

in which the news surprises investors.

SIGNIFICANCE



Stock market volatility is significant and understanding it is imperative to

investing in stocks that suit your investment or trading style and risk tolerance

level. Stock prices rarely move in a straight line. Most of the time they move

up and down and, some of the time, they trend higher or lower. More volatile

stocks tend to chop more intensively and have a larger high-low range than

their less-volatile cousins. Some short-term traders prefer to trade volatile

stocks because they can make an impressive profit quickly, while conservative

longer-term investors usually like to stay away from volatile securities.

FEATURES

Stock market volatility is determined by calculating how far a particular stock

or index has moved over a set period of time. The more a stock has moved,

the more volatile it is. Stock market volatility is an especially critical statistic

for option traders because volatility has a huge effect on the price of options.

The more volatile a stock is, the more expensive its options are likely to be,and vice versa.

NEE D F OR THE S T UDY

Stock Markets are very volatile at times, and there are various factors which

affect the price movement. So this project aims at understanding the reasons

behind volatility in the Indian Stock Market.

OBJECTIVE OF THE STUDY

• To study volatility in Indian Stock Markets.

• To study the factors which are making Indian stock market volatile.

• To study the sectors which are affected by individual factors affecting

stock market.

HYPOTHESIS

Ho : There is no impact of external and internal environment on Stock Market.

H1 : There is impact of external and internal environment on Stock Market.



RESEARCH METHODOLOGY

The research methodology here includes:

• Research design

• Sampling design

• Sampling technique• Data collection method

RESEARCH DESIGN

Exploratory Research

Exploratory study will be conducted with an objective to gain familiarity with

the phenomenon and to achieve new insight into it. This study aims at

understanding the reasons behind volatility in the Indian Stock Market.

SAMPLING DESIGN

• Universe

In this study the universe is finite and will take into the consideration related

news and events that have happened in last 10 year.

• Sampling Unit

As this study revolves around the factors affecting Indian stock market. So for

these sampling unit is confined only to the Indian stock market.

SAMPLING TECHNIQUE

Convenient Sampling: Study will be conducted on the basis of availability of

the Data and requirement of the project. Study requires the events that have

impact on the Indian stock market.

DATA COLLECTION METHOD

Secondary data: For the secondary data various literatures, books, journals,

magazines, web links are used. As there are not possibilities of collecting data

personally so no questionnaire is made.



MONSOON RAIN

INTRODUCTION

Monsoon does play an important role on the economy of a country. Economy of a country depends

on Agricultural, Industrial sector especially in a country like India. In India, agriculture provides

around 70% of employment either directly or indirectly. This is the major reason for the economic

growth of India to depend on Monsoon season. Monsoon season in India starts from June and

continue till September. If the monsoon is good, it boosts up the economy of the country and helps

in maintaining GDP growth. But if monsoon rains get delayed even by 15 days, it becomes a cause

of worry for the government to maintain GDP growth. But as per the estimates given by India

Meteorological Department, rains this year in 2011 are expected to be normal as were in 2010,which could encourage government to ease curbs on export of wheat and rice, and good rainfall

will boost output of grain and oil seeds, and help calm inflation.

The monsoon accounts for more than two-thirds of the country’s requirements of rainfall.

Although the rise of services has made the Indian economy progressively less dependent on

agriculture, the state of the farm economy remains an important “balancing figure” driving GDP

growth.

This is particularly so this year when industrial growth has been sputtering in recent months and

market watchers are looking to agricultural growth to fill the gap.

A delay in the arrival of rains or a whimsical monsoon that alternates between deluges and dry

spells could have a big impact on the production of food grains as well as cash crops, prices of

which are now feeding the spiralling inflation numbers.

With a global shortage of food crops such as rice, wheat and corn, the acreage planted under

various food crops and the final harvests will be closely watched this year for cues on whether

we’ll b able to feed all those hungry mouths. Any shortfall, could fuel high food prices, leading to

a rise in the inflation index.

It is therefore quite easy to explain why stocks of companies manufacturing FMCGs, two wheelersand a host of agricultural inputs dance to reports of a good or a bad monsoon.

SECTOR BENEFITTING FROM GOOD MONSOON



1.Fertilizer:

A normal monsoon means the demand will be higher and the payment cycle will improve, which

will be marginally positive for fertilizer companies.Aries Agro, which makes nutrient-based

fertilizers that help improve crop yields, is looking at 25 per cent growth in turnover in 2010-11 to

Rs 175 crore (Rs 1.75 billion). Companies like Coromondel Fertilizers generate almost 90 per cent

of their revenues from the fertilizer segment. Deepak Fertilizers, which is largely into the chemical

business, has a marginal exposure to fertilizers. Tata Chemicals and Chambal Fertilizers are among

the most diversified players in this sector but still stand to gain.

2.Agri-inputs:

Irrigation

India's monsoon, the main source of irrigation for the nation's 235 million farmers. Companies like

Jain Irrigation the largest company in the drip irrigation segment, should benefit. This is due to the

fact that a normal monsoon will lead to improved demand and working capital cycle, as most of its

units are sold on credit.

3.Tractors :

Companies in the tractors segment like Mahindra & Mahindra will also benefit considering that thecompany's revenues from the segment are 30-35 per cent of its auto segment revenues.

4. Seed and crop protection segments:

A normal monsoon will also mean good demand for companies in seed and crop protection

segments.

These are the leading companies in these two segments

• Advanta India

• Monsanto India

• United Phosphorus

• Excel Crop Care

5. Automobiles :

While sales of larger vehicles may no longer be linked to the monsoon, two-wheeler sales could

see an upside if the monsoon turns out to be normal. Companies like Bajaj, Hero Honda, and TVS

Motor will benefit and possibly so, will their shares. Sometimes the positive effect is delayed and

registered around the time of Diwali, the main shopping season.

6. Consumer goods:

An ‘okay’ rainy season may mean that the rural populace will have higher disposable income. This

will give a fillip to sales of FMCG products such as toothpaste, toothpowder, soaps and shampoos,

which rely heavily on rural demand for growth. Companies that have substantial presence in semi-

urban and rural areas in this sector are Hindustan Unilever, Colgate, Dabur and Godrej Consumer.



With the broader markets already paying more attention to FMCG stocks as defensive plays in

times of stock slide, a good monsoon may just further their cause even more.

7. Lower Input Cost:

Many firms that use agricultural products as raw materials would also benefit from lower input

costs. A good production of sugar cane, for example, would benefit sugar producers such as Bajaj

Hindustan Ltd., Shree Renuka Sugars , and Balrampur Chini Mills Ltd.

WHO CAN BENEFIT OUT OF NO RAIN

Inadequate rains will fuel demand for pump sets, PVC pipes and drip irrigation systems fetching

companies’ high returns. Operators on the bourses betting on deficient rain are lapping up shares of

KSB Pumps, Kirloskar Brothers, Jain Irrigation, Bharat Bijlee and Finolex Industries faster.

SECTORS TO HAVE LEAST OR NO IMPACT OF MONSOON:

1. IT

(a) Infosys

(b) Wipro

2. POWER

(a) NTPC

(b) Tata Power

CONCLUSION

After last year's drought, (though a normal rainfall was predicted) this year's 'normal' monsoon

would help boost the agricultural output and bring down the rising inflation.

The monsoon accounts for 80 per cent of the rainfall in India. Even if the monsoon is delayed by

few days, it can have an adverse effect on the economy as about half of India's farm output comes

from crops sown during the June-September rainy season.

Monsoon is a key to determine agricultural output, inflation, consumer spending and overall

economic growth. While a normal rainfall signals growth and prosperity, a below normal rainfall

could spell disaster making food more expensive, aggravating the power, water shortage, hitting

industrial production which in turn will put more pressure on the government's kitty.



EXAMPLE : CHAMBAL FERTILISER

During monsoon period June to September, Chambal fertilizer was in a bullish trend, the stock in a

mid June was at around Rs. 72 which till the end of September reached to a high of Rs. 117.

EXAMPLE : HUL

Good Monsoon has also help Consumer Goods Company HUL to flourish during and after

monsoon period as rural people also will be having higher disposable income



INTEREST RATE

Interest Rate in simple words means the cost of borrowing funds. It is the payment we make to the

lender for the facility of using his money for our own purpose. Many times our spending decisions

are also guided by the interest burden that we would be bearing.

We as a country save more because we get higher interest rate on our savings than other countries

like US. But, more than the returns we should be concentrating on real returns on our savings (real

return = interest rate- inflation)

Even as consumers, interest rate is an integral part of our spending habit as we borrow from

the bank for buying house, cars, house old items etc. For the business community interest rate is

also very imp0rtant as they borrow money from bank for investment activities like capacityexpansion, setting up of plants, acquisitions, modernization etc.

It is quite well established by now that interest rate is crucial for everyone in the economy but who

controls this crucial macroeconomic variable?

TWO MAIN REASONS FOR THE FLUCTUATION IN INTEREST RATE

Government alters interest rate to affect the investments- When an economy goes into

recession it does not come back by its own. The US government during the recent downturn of

2008-09 lowered its interest rate to around 1-2% in order to propel private investment & for

consumers to borrow and spend more.

Inflation- Interest Rate Linkage- When the inflation in a country starts rising the central bank or

the RBI responds by increasing the interest rate in the economy to reduce the money supply in the

economy. Over the last 1 year RBI has been tackling inflation by increasing the interest rate.

Interest rate does not have a direct impact on stock prices but its indirect impact cannot be

undermined. As you can see from the diagram there are two sides of the economy a) The Business

Side b) The Consumer Side.



A continuous rise in interest rate affects the stock price from both the investment and consumption

side. Combining the effects from both the sides, it spells a gloomy situation for the economy. The

overall future revenue growth of the companies would be adversely effected which would lead tonegative sentiments in the market leading to deflated stock prices. Also, at higher interest rate,

people tend to invest more in fixed deposits and bonds as it would be offering higher returns at

very low risk. Hence it moves funds out of stock market affecting the stock prices adversely.

SECTORAL IMPACT OF FLUCTUATION IN INTEREST RATE

• In the short term: The immediate impact of rise in interest rate is on companies with high

debt in their balance sheet .The interest payment made by them rises which reduces their

EPS. Thus there would be negative sentiments for such stock; resulting into depleted stock price.

• Over a longer term, high interest rate would have more sector specific impact. The

sectors which are most impacted by high interest rate is the real estate, automobile and all

the capital intensive industries. So, any investment by you in these sectors must be taken

with a lot of caution during the situation of high interest rates.

• Banking sector is likely to benefit most due to high interest rates. The Net Interest

Margins (It is the difference between the interest they earn on the money they lend and the

interest they pay to the depositors) for banks is likely to increase leading to growth in

profits & the stock prices.

• Other sectors like pharmaceuticals, FMCG, IT etc are some of the least affected

sector, look towards directing your investment in such sectors.



• If interest rate continues to rise for a longer duration then it will have an all-round

negative impact on the economy, leading it into a recessionary mode.

• When the interest rate is very low, you would be obviously saving less and consuming

more. This would leave the banks with much lower money to lend out to the borrowers,

and their profit margins would also be affected by lower interest rate. Thus there would be

fall in consumption & investment activities in the economy. The government in this

situation would resort to printing of currency to infuse more money in the economy. This

would lead to inflationary situation in the country. Also, FIIs and FDIs pace their

decision on the basis of difference in interest rates between economies among other

things. At very low interest rate the inflows are likely to be reduced.

• Thus, for a developing country like India, the right path would be maintaining a

moderate inflation & interest rate over a period of time which keeps both the banks,

business community and the consumers happy which is very crucial for the smooth running

of the economy.

• Sectors like Real estate, automobiles, and capital intensive industries would be most

affected by high interest rates but when the interest rates are lower they would be gaining

the most. Check your investment in such sectors and avoid it if interest rate keeps rising.

• Sectors like IT and pharmaceutical are less affected by interest rate change, look for

some amount of your total investment in such sectors.

• During high interest rates, avoid the companies with high debt situation as their

interest cost on existing debt would go up affecting their EPS and ultimately the stock

prices. But during low interest rate the leveraged companies would stand to gain.

• Look for companies with very low or zero debt situation as they won’t be affected by

changes in interest rate.

• High interest rate usually leads to rise in Net interest Margins for the banks.This is the

time you could see their profits, EPS and stock prices rising. But lower interest rate has an

adverse impact on banking stocks.

Looking at the current situation, it becomes even more important to understand the impact of macro-economic variables like interest rate and make an informed decision by investing infundamentally strong companies with good future prospects and at the right price.



EXAMPLE : STATE BANK OF INDIA

SBI has shown a tremendous growth in his stock prices during rise in interest rate (Jan 2010 – Dec

2010) from Rs. 1896 to a high of Rs. 3497

EXAMPLE : STATE BANK OF INDIA vs SENSEX



Comparing SBI Stock (Blue) with BSE SENSEX (Orange) it can be seen that SENSEX has shown

less response to hike in interest rate as compared to SBI

EXAMPLE : STATE BANK OF INDIA vs BSE REALTY

Also looking at the chart it can be seen that hike in interest rate in the year 2010 has shown a

positive trend in Banking Sector Stock SBI (Blue) whereas BSE REALTY (Orange) has reacted

negatively to the change.



CRUDE OIL

Crude oil is one of the most necessitated worldwide required commodity. Any slightest fluctuation

in crude oil prices can have both direct and indirect influence on the economy of the countries. The

volatility of crude oil prices drove many companies away and its impact the stock market also.

Crude oil prices act like any other product cost with more variation taken place during shortage

and excess supply. Studies have conducted to analyze the impact of rise in crude oil price to the

economic growth in the OPEC (Organization of Petroleum Exporting Countries) countries. Any

massive increase or decrease in crude oil has its impact on the condition of stock markets in

throughout the world. The stock exchanges of every country keep a close eye on any up and

downward movement of the crude oil price.

India fulfills its major crude oil requirements by importing it from oil producing nations. India

meets more than 80% of its requirement by importing process. Therefore, any upward and

downward motions of prices are closely tracked in the domestic marketplace. Many times it has

been recorded that prices of essential products like crude also acts as a prime driver in becoming

reason of up and down movement of price.

Any fluctuation in crude oil affects the other industrial segments also. Higher crude oil price

implies to the higher price of energy, which in turns negatively affects other trading practices that

are directly or indirectly depends on it. Crude Oil has been traded in throughout the world and

there prices are behaving like any other commodity as swinging more during shortage and

excessiveness

In the short term, price of crude oil is influenced by many factors like socioand political events,

status of financial markets, whereas from medium tolong run it is influenced by the fundamentals

of demand and supply whichthus results into self price correction mechanism

The crude oil prices have been buffeted by many factors, which are summarized as below -• Production: The OPEC nations are the major producer of world's crude oil. Therefore, every policy made by such countries related to the crude oil prices has their influence on crude oil prices.Any decision taken by OPEC nations for increasing or decreasing production of crude oil impactsthe price level of crude oil in international commodity markets.

• Natural Causes: In prevent years, global community have witnessed many events which in turnshave volatility effects on the price level of crude oil. Like hurricane katrina and other type of tropical cyclone have hit the major portion of globe, which as a result driven the crudeoil prices to reach at its peak.

• Inventory: In throughout the world, oil producers and consumers get stock their crude oil for their future requirements. This gives rise to speculation on price expectations and sale chances incase any unexpected thing cracks during supply and demand equations. Anyupward or downward movement in inventory level shoots up volatility in price index of crude oil,which generates lot of changing movement in Sensex.



• Demand & supply: With a sharp rise in economic demand, requirement of crude oil isincreasing to manifold in context to the limited supply.

For the last few years it has been seen time and again that increase in the price of the crude oil had

a direct impact on the stock market. Though it is hard to imagine but it is fact that a rise in the oil

price has negative effect on the stock prices at the stock exchanges all over the world.

The main reason behind this is the fear of the investors that the profit margin of the companies willdecrease because of the increase in the oil price. As an increase in the oil price directly increases

the operational cost, fuel cost, transportation cost of the companies, it is quite natural that the profit

margin of these companies will decrease. This is the reason that the buyers become susceptible

about the future of the companies that are hugely dependent on oil. This uncertainty restricts the

buyers to invest in these companies and as a result the price of the stocks falls that ultimately has a

negative effect on the overall market scenario. But this phase is temporary as the companies adjust

in the price level to make up for the increased price in the oil and maintain the profit margin.

In other words, the stock market tends to move in the opposite direction to oil prices. Oil up,

stocks down. Oil down, stocks up. This is a one-way street, however; stock market returns do notdrive crude oil prices. So you can expect oil to be the primary force driving the stock markets untilfurther notice. But the effects of oil prices are more subtle than that. All sectors are not affectedequally, or at the same time. Here is what the authors found as to U.S. sectors when oil prices rise:

• Most negatively influenced: Cyclical Services.• Next most negatively influenced: Cyclical Consumer Goods.• Third most negatively influenced: Financials.

Cyclical Services includes general retailers, support services, leisure and hotels, entertainment andmedia, and transport. Cyclical Consumer Goods include household goods and textiles,

automobiles and parts. Financials are investment companies, banks, specialty and other finance,life assurance, insurance, real estate. Increase in Oil prices will be positive for Oil ExplorationCompanies like Cairn India and Negative for Oil marketing companies like BPCL, HPCL, andIndian Oil etc.

Month Crude Price (US $ / Barrel)

Jan 2008 91.92

Feb 2008 94.82

Mar 2008 103.28

Apr 2008 110.44

May 2008 123.94

Jun 2008 133.05Jul 2008 133.90

Aug 2008 113.85

Sep 2008 99.06

Oct 2008 72.84

Nov 2008 53.24



EXAMPLE : BPCL

Crude Oil price and BPCL Stock moves inversely to each other. As on july 2008 when crude oil

price hiked till US $ 133.90 / Barrel the stock has hit a low of Rs. 211 in the year 2008

EXAMPLE : Cairn India

Crude Oil price and Cairn India Stock has direct relationship.



EXAMPLE : BPCL (Blue) vs Cairn India (Orange)

EXCHANGE RATE



Exchange rate means how much one currency is worth in terms of another currency. If we can buy

$ 1 with Rs. 46, the exchange rate of the two currencies would be $1 = Rs. 46.

There are two types of exchange rate: Fixed and Floating. Some countries have fixed exchange

rate systems while some have floating. The fixed exchange rate doesn’t fluctuate because of

government intervention. The floating exchange rate on the other hand keeps on changing

continuously just likes the stock market. Thus the government intervention is almost negligible.

In India, we have a Managed Floating Exchange Rate System. This means that the Indian

government intervenes only if the exchange rate seems to go out of hand by increasing or reducing

the money supply as the situation demands.

When rupee is said to be appreciating it means that our currency is gaining strength and its

value is increasing with respect to dollar. However, when rupee depreciates it means our

currency is getting weaker & its value is falling with respect to dollar.

Example:

Suppose, currently, the exchange rate is Rs. 45 = $1

10 months later, either of the following two cases can happen

Case1: The exchange rate is say Rs. 40 = $1. This means rupee has appreciated or gotten stronger by approx. 11% and you would be paying less to for a dollar

Case2: The exchange rate is at Rs. 50 = $1. This means rupee has depreciated or gotten weaker by

approx. 11% and you end up paying more for a dollar.

Rupee’s appreciation or depreciation against the dollar depends on the change in demand and

supply for both the currencies. If the demand for rupee is comparatively high, rupee appreciates; if

low, it depreciates.

Factors which drive the demand for a currency are:

• Interest Rate: A demand for a currency is hugely dependent on the interest rate

differential between two countries. A country like India where int. rate is around 7-8%

experiences greater capital inflow as investors get better return than what they might get in

US. (With interest rates of 2-3%). This results into rupee appreciation.

• Inflation Rate: The demand for a country’s goods & services by the foreign buyers would

be more if the inflation rate is lower in that country compared to other countries. Higher

demand for goods & services would mean higher demand for that currency resulting in the

appreciation of that currency. For instance if India’s inflation rate is lower than that of

Zimbabwe then the demand for our goods, services and currency would be higher than thatfor Zimbabwe’s.

• Export-Import: If a country is exporting more than its imports from other countries, then

this would mean higher demand for that currency, causing appreciation of that currency

against others.



• Trading in currencies in the Forex market: The exchange rate fluctuates minute by

minute because of speculative trading in the Forex market.

Though trading in Forex market causes fluctuations in the exchange rate, over a period the change

is backed by the fundamental factors like the growth potential in the economy, interest rate

differential and the inflation rate existing in different countries.

In a manage floating exchange rate system like India the government purchases rupee in exchangefor the foreign currency to increase money supply in the economy which leads to depreciation of

the home currency. Conversely, it purchases foreign currency in exchange for rupee to reduce the

money supply in the economy leading to appreciation of the home currency.

Impact of rupee appreciation/ Depreciation

Impact on economy: Exchange rate fluctuation has a significant impact on the overall economy of

a country. Rupee appreciation against US dollar is an indication of the strengthening of Indian

economy with respect to US economy.

Impact on foreign investors: If a foreign investor invests in Indian stock market and even if its

value doesn’t change in 1 year, he’ll earn profit if rupee appreciates and make a loss if itdepreciates.

Example:Suppose an FII Invests Re. 1 Cr. in the Indian stock market and at an exchange rate of $1 = Rs. 50.So, the amount invested is $200,000.Suppose, after 1 year, even if the value of investment doesn’t appreciate the foreign investor canearn a profit if the exchange rate has changed to $1 = Rs. 40 (Rupee appreciation)If the investor sells his investment and converts the currency, he would get $ 250,000. So, hewould earn $ 50,000 as a profit thanks to a change in the exchange rate i.e. rupee appreciationSo, a continuously appreciating rupee would lead to greater investment by the FIIs.

Impact on industry/companies

Appreciation of the rupee makes imports cheaper and exports expensive. So, it can spell good

news for companies who rely on import of goods like heavy machinery, technology, microchips

etc. According to reports by Associated Chambers of Commerce and Industry of India

(ASSOCHAM) sectors like Petro & Petro Products, Drugs & Pharma and Engineering

Goods which have import inputs of as much as 77%, 19% and 21% respectively would stand to

gain the most if rupee appreciates. They would have to pay less for the imported raw materials

which would increase their profit margins.



Similarly, a depreciating rupee makes exports cheaper and imports expensive. So, it iswelcome news for sectors like IT, Textiles, Hotel & Tourism etc. which generates revenue mainly

from exporting their products or services. Rupee depreciation makes Indian goods & services

cheaper for the foreign buyers thus leading to increase in demand and higher revenue generation.

The foreign tourist would find it cheaper to come to India thus increasing the business of hotel,

tours & travel companies.

Indian IT sector is dependent on foreign clients, especially US, for more than 70% of its revenue.

When an IT company gets a project from a client it pre-decides on the length of the contract and

the cost of the project. The contracts with US clients are usually quoted in dollars term. So, the

fluctuation in the exchange rate can bring a considerable difference in the performance of a

company.

Example: Infosys results between 2007 and 2008 to understand the impact that the fluctuation in

exchange rate can have on the performance of a company. The income of Infosys, in 2008,

increased by 34.1% to $ 3912 million but because of rupee appreciation of 11.2%, from Rs. 45.06

to Rs. 40, in rupee terms, its income increased only by 19%.

“Every 1% movement in the Rupee against the US Dollar has an impact of approximately 50

basis points on operating margins” – Infosys Annual Report



However the IT sector does not just sit idle and let exchange rate play the spoil sport. It undertakes

various measures like hedging exchange risks using forward and future contracts. This helps them

in mitigating some of the loss due to exchange rate fluctuation but none the less the impact is

substantial.

Exchange rate is thus an important tool that can be used to analyze many key industries like IT,

Textiles etc. Fluctuating exchange rate has a significant impact on the economy, industries,

companies, foreign investors etc. Rupee appreciation is beneficial for industries which rely heavilyon imported inputs while depreciation of rupee is good news for industries which are exporting

majority of their production.

An important feature of the development of stock market in India in the last 15 years has been the

growing participation of Institutional Investors. Institutional investors comprise both foreign

institutional investors and the domestic institutions like (mutual funds, insurance companies etc).

In India, these institutional investors manage large amount of funds which constitutes a significant

share of the entire market capitalization. The role of these investors especially FIIs (also known as

foreign portfolio investors) in Indian stock market has been a matter of debate. FII investments

seem to have influenced the Indian stock market to a considerable extent. Looking at the direction

of the funds flow from these investors, we can explain the market movement.

EXAMPLE : INFOSYS

Also on 15th

dec 2011 when Re/Dollar has touched a high of 54, it has helped IT companies likeInfosys from Rs. 2660 to Rs. 2870 within a month



STRIKES

What are strikes?

Strike action, also called Labour strike, on strike or simply strike, is a work stoppage caused by

the mass refusal of employees to work . A strike usually takes place in response to

employee grievances. Strikes became important during the industrial revolution, when

mass labour became important in factories and mines. In most countries, they were quickly made

illegal, as factory owners had far more political power than workers. Strikes are sometimes used to

put pressure on governments to change policies.

For instance: Labour Strike at Maruti Suzuki India Ltd Manesar plant in Punjab

Maruti Suzuki India Limited

A partial subsidiary of Suzuki Motor Corporation of Japan, is India's largest -passenger car

company, accounting for over 45% of the domestic car market. The company offers a complete

range of cars from entry level Maruti 800 and Alto, to hatchback Ritz, A-star , Swift, Wagon-

R , Estillo and sedans DZire, SX4, in the 'C' segment Maruti Eeco and Sports Utility vehicle Grand

Vitara.

It was the first company in India to mass-produce and sell more than a million cars. It is largely

credited for having brought in an automobile revolution to India

Manesar Manufacturing Facility

The Manesar Manufacturing Plant was inaugurated in February 2007 and is spread over 600 acres

(2.4 km2). Initially it had a production capacity of 100,000 vehicles annually but this was increased

to 300,000 vehicles annually in October 2008. The production capacity was further increased by

250,000 vehicles taking total production capacity to 550,000 vehicles annually. The Manesar Plant

produces the A-star ,Swift, Swift DZire and SX4.

Situation:

"In many ways, the 13-day strike at Maruti Suzuki India Ltd, India’s largest automobile

manufacturer, was a wake-up call for the Indian corporate sector. Not only did it illustrate the unity

among the company’s workers, but with workers and unions across states voicing support, it

threatened to flare up into a wider industrial dispute, giving strong signals of a resurgence of trade

union activity in the country .

http://en.wikipedia.org/wiki/Employee


http://en.wikipedia.org/wiki/Labor_(economics)

http://en.wikipedia.org/wiki/Grievance

http://en.wikipedia.org/wiki/Industrial_revolution

http://en.wikipedia.org/wiki/Labour_economics

http://en.wikipedia.org/wiki/Factory

http://en.wikipedia.org/wiki/Mining

http://en.wikipedia.org/wiki/Suzuki


http://en.wikipedia.org/wiki/Japan

http://en.wikipedia.org/wiki/Maruti_800

http://en.wikipedia.org/wiki/Maruti_Alto

http://en.wikipedia.org/wiki/Maruti_Ritz

http://en.wikipedia.org/w/index.php?title=Maruti_A_star&action=edit&redlink=1


http://en.wikipedia.org/wiki/Maruti_Swift

http://en.wikipedia.org/wiki/Maruti_Wagon-R


http://en.wikipedia.org/w/index.php?title=Maruti_Estillo&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Maruti_DZire&action=edit&redlink=1

http://en.wikipedia.org/wiki/Maruti_SX4

http://en.wikipedia.org/wiki/Maruti_Eeco

http://en.wikipedia.org/wiki/Manesar

http://en.wikipedia.org/wiki/Maruti_Suzuki_A-STAR

http://en.wikipedia.org/wiki/Maruti_Suzuki_Swift

http://en.wikipedia.org/wiki/Maruti_Suzuki_Swift_DZire

http://en.wikipedia.org/wiki/Suzuki_SX4


http://en.wikipedia.org/wiki/Labor_(economics)

http://en.wikipedia.org/wiki/Grievance

http://en.wikipedia.org/wiki/Industrial_revolution

http://en.wikipedia.org/wiki/Labour_economics

http://en.wikipedia.org/wiki/Factory

http://en.wikipedia.org/wiki/Mining


http://en.wikipedia.org/wiki/Japan

http://en.wikipedia.org/wiki/Maruti_800

http://en.wikipedia.org/wiki/Maruti_Alto

http://en.wikipedia.org/wiki/Maruti_Ritz


http://en.wikipedia.org/wiki/Maruti_Swift



http://en.wikipedia.org/w/index.php?title=Maruti_Estillo&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Maruti_DZire&action=edit&redlink=1

http://en.wikipedia.org/wiki/Maruti_SX4

http://en.wikipedia.org/wiki/Maruti_Eeco

http://en.wikipedia.org/wiki/Manesar

http://en.wikipedia.org/wiki/Maruti_Suzuki_A-STAR

http://en.wikipedia.org/wiki/Maruti_Suzuki_Swift

http://en.wikipedia.org/wiki/Maruti_Suzuki_Swift_DZire

http://en.wikipedia.org/wiki/Suzuki_SX4



It wasn’t a wage hike or improvement in working conditions but the right to form a union—

something of a rarity in the new industrial ecosystem in India—which saw 3,000 employees of

Maruti’s Manesar plant in Haryana striking work on June 3. The plant workers wanted to register a

new union—the Maruti Suzuki Employees Union (MSEU)—and had already applied for

registration, something the management was opposed to.

Labour leaders contend the lack of union activity in the industrial sector is because of large-scale

suppression of labour rights and union voices. “Managements do not want to have unions. They

want to make the unions subservient to their interests and compel the workers to be part of a union

controlled by them.”

Although the strike at Maruti has been called off and the matter resolved for the time being, there

are hushed discussions across companies on the way managements handle workers and trade union

issues.

During this period there were price fluctuations in Maruti Suzuki stock prices. Stock Prices were

showing a decreasing trend.

RIGHTS & PUBLIC ISSUES

RIGHTS ISSUE

Rights issues are the shares issued by a company only to its existing shareholders which will be

cheaper than the current market price of that company share. Sometimes companies come out with



a batch of new shares and may choose not go to the public (like IPO). Company may just approach

only the existing shareholders (those who own the shares of that company). These shares are called

a rights issue. In other words, only the existing shareholders have a right to buy these shares

.

Example - If the market price of the share is Rs 200, the company may offer the rights issue shares

for Rs 180. So if you are an existing shareholder, you get more shares at a cheaper rate than the

market.

Will the share prices go up?

Normally, the price will go up because investors now want to buy the shares so that they can

benefit from the rights issue.

Rights Issues are not Free

These shares do not come free like bonus shares. A Bonus share is offered free of cost like a

gift(bonus). Right issue will need one to buy the shares.

For instance:

Before: C entral Bank of India to raise Rs 2,500 Cr through rights issue which will boost the CAR

of the bank substantially which will result in expansion of the business. We believe this will be a

game changer for the bank. Though the near term upside looks limited because of dilution of

equity we are positive on its long term prospects.

Rights Issue of Rs 2,500 Cr to improve CAR significantly: Under Basel I and Basel II the bank

CAR stands at 10% and 11% respectively. If the rights issue gets fully subscribed the CAR will

swell to 15% which will help the bank in expansion of business.

On 17/03/2011 Central Bank goes to ex rights at 3:5; stock dips Central Bank of India touched an

intraday high of Rs 153.80 and an intraday low of Rs 140. At 09:21 hrs the share was quoting at Rs

145.30, down Rs 25.90, or 15.13% on the NSE.

It was trading with volumes of 495,136 shares. In the previous trading session, the share closed up

7.64% or Rs 12.15 at Rs 171.20

Rights Issue: FY11 sees momentum; FY12 to see more action. The amount raised by Indian

companies during 2010-11 through rights issues increased 15% year-on-year to Rs 9,594 crore.

However, only 24 companies used the rights route to mobilise resources as against 29 companiesin 2009-10, according to a primary capital market study done by a Delhi-based research house

Prime Database.“The largest rights issue in the year was from Central Bank of India, which raised

Rs 2,498 crore,” said Prithvi Haldea, CMD, Prime Database.

“Significantly, nearly 50% of the mobilization was done by the banks. Rights issues were floated

by State Bank of Bikaner and Jaipur for Rs780 crore, State Bank of Mysore for Rs 583

crore, Karur Vysya for Rs 458 crore and Karnataka Bank for Rs 457 crore.”

http://www.moneycontrol.com/india/stockpricequote/banks-public-sector/central-bankindia/CBO01

http://www.moneycontrol.com/india/stockpricequote/banks-public-sector/state-bankbikanerjaipur/SBB02

http://www.moneycontrol.com/india/stockpricequote/banks-public-sector/state-bankmysore/SBM

http://www.moneycontrol.com/india/stockpricequote/banks-private-sector/karur-vysya-bank/KVB

http://www.moneycontrol.com/india/stockpricequote/banks-private-sector/karnataka-bank/KB04


http://www.moneycontrol.com/india/stockpricequote/banks-public-sector/state-bankbikanerjaipur/SBB02

http://www.moneycontrol.com/india/stockpricequote/banks-public-sector/state-bankmysore/SBM

http://www.moneycontrol.com/india/stockpricequote/banks-private-sector/karur-vysya-bank/KVB

http://www.moneycontrol.com/india/stockpricequote/banks-private-sector/karnataka-bank/KB04



The other Rs 1000 crore plus issues were fromSuzlon Energy (1,308), REI Agro (1,245)

and EIH(1,179 ). The manufacturing and services sector preferred increasingly to use the QIP and

the preferential issues route.

However, the amount still falls short of Rs 12,622 crore, raised in 2008-09 and is much lower than

Rs 32,519 crore that was mobilized in 2007-08 .

After Central Bank of India rights issue opens 24/03/2011; stock up

Central Bank of India touched an intraday high of Rs 135.40 and an intraday low of Rs 129.30. At

09:46 hrs the share was quoting at Rs 134.65, up Rs 1.30, or 0.97%.

The company's rights issue has opened today. It is going to issue 3 rights share for every 5 held at

Rs 103, reports CNBC-TV18 .

It was trading with volumes of 67,587 shares. In the previous trading session, the share closed

down 1.19% or Rs 1.60 at Rs 133.35

FIIs

Attracting foreign capital appears to be the main reason for opening up of the stock markets for

FIIs. In order to attract portfolio investments, it has been advocated to develop stock markets. The

general perception about the foreign portfolio investments is that, not only do they expand the

http://www.moneycontrol.com/india/stockpricequote/engineering-heavy/suzlon-energy/SE17

http://www.moneycontrol.com/india/stockpricequote/food-processing/rei-agro/RA06

http://www.moneycontrol.com/india/stockpricequote/hotels/eih/EIH


http://www.moneycontrol.com/india/stockpricequote/engineering-heavy/suzlon-energy/SE17

http://www.moneycontrol.com/india/stockpricequote/food-processing/rei-agro/RA06

http://www.moneycontrol.com/india/stockpricequote/hotels/eih/EIH




demand base of the stock market, but they can also stabilize the market through investor

diversification.

Impact on Share pricePrice discovery of stocks are results of the interaction between supply-demand forces.

Buying equities in huge chunks leads to a steep rise in the prices and heavy selling leads to a

massive fall in the prices. Heavy buy and selling of stocks create a demand-supply gap situation for

that particular stock and which ultimately result in the fall or rise in the price. This is whathappened when FIIs come into play.

General perception about FIIs that they bring good money and also their entry symbolizes a mature

market. Though, it is true that FIIs do help in formation of an efficient market, their sudden

movements of funds have been responsible for some of the biggest stock market crash in the

history.

Investment by FIIs is heavily dependent on the expected return. Whenever there is a change in the

expected return scenario (due to political situation, restrictions etc) or availability of a better

investment opportunity, a movement of funds can be seen by these FIIs. This comes through heavy

selling of the stock holdings in their portfolio. And due to this heavy selling massive falls in stock prices take place. Individual investors who jumped into the fray when market was rising feel the

pinch most when these FIIs sell off their holdings. These investors incur heavy losses due to the

sudden fall. The stocks also take severe beatings as these stocks takes a long time to recover due to

loss of confidence, despite the companies’ good financial performance.

The effect of FIIs fund movement on stock prices can be seen through the analysis of historical

price and shareholding pattern of Vakrangee Software, a domestic mid-cap IT Company.

Example: The CompanyVakrangee Software

Vakrangee Software’s Ltd is a domestic IT company. The company’s businesses includeDocument Management Services (DMS), Printing Management Services (PMS) and IT & IT

Enabled Services (ITes). The company has a good business model and expected to grow with a

rapid growth rate in future.

The stock of the company is currently trading at Rs.32. The company’s stock price has fallen from

all time high of Rs.291 to Rs. 19 due to heavy sell off by FIIs. The fall of stock price started from

September, 2008 onwards due to heavy selling by FIIs. Their stake in company has come down to

zero in Dec, 2008. The sudden fall in stock price can be seen in historical price chart (between

23/07/08 to 20/04/09).

http://en.wikipedia.org/wiki/Stock



http://en.wikipedia.org/wiki/Investment






These Pie-Charts explain the change in the share holding pattern of the company in last two

quarters. Before September quarter, FIIs had a major share (18%) in the company. Their share was

almost equals to the promoters share. In December quarter, FIIs share came down to zero due to

their sudden exit which led to a massive fall in stock price. Currently, the company is available at a

deep discount and with almost no risk. Here no risk implies zero FIIs’ stake in the company.

Conclusion

By the analysis of Vakrangee Software, we can conclude that the companies in which FIIs have

very large stake are more prone to have stock price crash than the companies in which FIIs has no

or very low stake. Before investing in such companies, investors should always do some research

and try to find out whether FIIs are dumping the stocks.

Here the result of this analysis also applies to the whole market. A very large amount of fund under

FIIs management without any restrictions on their movements can destabilize the market.

RECALLS & WINNING OR LOSING A CASE OF SUIT



What is Recall?

A recall occurs when a company issues a warning that a product is defective and must be

returned. Typically, companies will fix the problem or replace the product with a new version that

does not have the same problems. Recalls are common if the product's problem may be dangerous,

and represent an enormous cost for the business, which must spend time and funds making the

problem right.

Recalls also have far-reaching effects on the stock of the company, although exact reactions vary.

Negative Opinions

First, a recall is always associated with a negative opinion of the company. The business admits

that it made a product incorrectly, and investors know that the recall itself will cost the business

money that could have been spent in project investment. One recall may also lead to others, as

occurred with Toyota in 2010. Altogether, the effects of a recall tend to lower stock price if they

make any noticeable change to the market.

1. Association

Not all recalls affect stock. The correlation appears to be in how investors view the company

making the recall. For instance, a large company may own many different smaller manufacturers

that produce goods for its shopping center. If one of the small manufacturers issues a recall on a

product, the stock of the parent company may not suffer, since investors do not link the recall with

the quality of the visible parent. However, if a company is closely associated with the quality of its

product, such as an automobile manufacturer or a tire company, then recalls can lower stock price

as investors back away.

3. Recovery

a. There is a period during a recall when the company has a chance to recover. In the

recovery period, the company issues releases explaining what it will do to correct

the problem and how it will treat the issue in future products. Sometimes products

are changed to specifically treat the defect. If the recovery period is handled well,

investors will see that the company is responsible and knows how to take care of its

mistakes. This can actually cause a stock boost in the long term, as long as no other

recalls follow.

Industry Changes

b. Recalls, especially in complex manufacturing fields, can lead to changes throughoutthe industry. Government regulation might solve the defect but require companies

to meet new standards. Other businesses may take note of the issue and take steps

to change it themselves. This leads to the reorganization of funds, which can impact

stock throughout the industry, either positively or negatively depending on each

company's reaction.



A corporate recall is done in several steps:

1. The company or government issues a press release stating what products are affected, why they

are being recalled, and what consumers need to do next.

2. The company offers free repairs, refunds, or future discounts on the product.

3. The company tries to mend its reputation through public relations efforts.

For instance:

Toyota Corp. is a prominent example of how a recall can affect a company’s reputation. In 2009-

2010, millions of Toyotas were recalled for faulty accelerators. Although Toyota has since fixed

the problem, its reputation was damaged in the process.

Toyota Motor Corp. was sued on 8th Feb, 2010 in Los Angeles federal court for failing to disclose

to investors that there was a major design defect in the automaker's acceleration systems.

The proposed class action complaint, filed in U.S. District Court in downtown Los Angeles by aSan Diego law firm on behalf of all purchasers of Toyota publicly traded securities, accuses

Toyota, certain of its affiliates and certain of their officers and directors with violations of the

Securities Exchange Act of 1934 .

The suit alleges that Toyota issued "materially false and misleading statements" regarding its

operations and its business and financial results and outlook when the company knew it had a

design problem. "Defendants misled investors by failing to disclose that there was a major design

defect in Toyota's acceleration system, which could cause unintended acceleration," the lawsuit,

filed by the firm Coughlin Stoia, alleges .

As a result of defendants' false statements, Toyota's securities traded at artificially inflated prices --

reaching a high of $91.78 per share on Jan. 19. On Jan. 21, Toyota announced it would recall 2.3

million vehicles in North America because of problems with the accelerator pedal sticking. in late

January, Toyota's total U.S. market capitalization has fallen 13 percent to $135.87 billion. In

trading on the Tokyo Stock Exchange, Toyota shares also have lost nearly 17 percent of their value

since Jan. 21. That's wiped out about 2.27 trillion yen ($25.1 billion) of the company's market

capitalization there .

On Feb. 2, after the market closed, Toyota reported that its U.S. sales for January 2010 had

dropped by 16 percent from a year ago due to the recall and subsequent sales suspension of its

most popular models," the lawsuit contends .



Then, on Feb. 3, before the market opened, Toyota announced that it had received reports of brake

problems in its 2010 model year Prius hybrid. As a result of this news, Toyota's (stock price) fell

$4.69 per share, closing at $73.49 per share on Feb. 3,2010 on high volume, according to the

complaint. Toyota's common stock also dropped approximately 6 percent.Toyota's North American

sales offices are located in Torrance.

IMPACT OF ANY ECONOMY

US RECESSION

WHAT IS RECESSION

A recession is a decline in a country's gross domestic product (GDP) growth for two or more

consecutive quarters of a year. A recession is also preceded by several quarters of slowing down.

CRISIS IN US

The cause of this Recession and possible depression is the Subprime mortgage crisis and also the

credit crisis. Subprime mortgage crisis happened few years ago when banks loan money to people

for low interest rates for a set amount of time (usually 5 years) and when that 5 years is over the

interest rates is raised. Most people foolishly borrowed money that they can't pay back to buy

houses because of the housing market boom.



The result: Interest rates go up, people can't pay, they sell houses, a lot of people are in the same

position. Therefore there is a overload of houses on the market which caused the prices of houses

to go down.With the prices of houses going down, people can't pay back loans which cause many

investment banks to fail. Many foreign investors also had a lot of money on these companies such

as Lehman brothers which is why other countries are affected as well.

IMPACT ON INDIAN STOCK MARKET

The United States accounts for one-fourth of the world GDP and any significant slowdown is

bound to have reverberations elsewhere. On the other hand, interdependencies between the US

economy and emerging economies like India and China has reduced considerably over the last two

decades. Thus, the effect may not be as drastic as would have been the case in the 1980s.

The IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more

of their revenues from the United States--a classic case of having put all eggs in one basket.

Banking and IT sector are mostly affected. on march 13 2008 domestic Bombay Stock Exchange

benchmark index (Sensex) fell sharply by 770.63 points or 4.78 per cent to 15357.35.The impact

of U.S. recession was reflected on all markets around the globe, including Asian markets. Japan’s

Nikkei 225 was down by 3.33 per cent. Among U.S. stock indices, NYSE Composite, Nasdaq

Composite and S&P 500 are also showing strong downward trends.

Reliance Communications, Tata Steel, Hindalco and Reliance Energy which lost in the range of 7-

9 per cent followed DLF closely.

Other heavyweights such as L&T, ICICI Bank and Reliance Industries also figured among the

prominent losers. They were down in the range of 4-6 per cent.

BSE IT



BANKRUPTCY OF A COMPANY

LEHMAN BROTHERS

MEANING OF BANKCRUPTCY

Bankruptcy is a legal proceeding in which people who cannot pay their bills can get a fresh

financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases



are handled in federal court. Filing bankruptcy immediately stops all of your creditors from

seeking to collect debts from you, at least until your debts are sorted out according to the law.

ABOUT LEHMAN BROTHERS

Lehman was the fourth largest investment bank in the USA (behind Goldman Sachs, Morgan

Stanley, and Merrill Lynch), doing business in investment banking, equity and fixed-income sales

and trading (especially U.S. Treasury securities), research, investment management, private equity,

and private banking.

REASON AND EFFECT OF BANKRUPTCY

Lehman Brothers were considered one of Wall Street’s biggest dealers in fixed-interest trading and

were heavily invested in securities linked to the sub-prime mortgage market. When Lehman

Brothers collapsed, they had about $60 billion in toxic bad debts, and had assets of $639 billionagainst debts of $613 billion; making it the largest investment bank to collapse since the 1990’s

linked to the sub-prime mortgage market. They lost $14 billion in the past 18 months after being

forced to take huge write downs on the value of those investments; which ultimately lead them to

file for bankruptcy. Banking sector got affected more.

One of the largest companies affected were AIG, who backed a majority of credit default swaps by

Lehman Brothers. So, when Lehman collapsed, AIG and many other banks, firms and individuals

felt the pain..

September 15, 2008 has been proclaimed Wall Street’s worst day in seven years. The Dow

Jones Industrial average lost more than 500 points, more than 4%, which is the steepest fall since

the day after the September 11th attacks.

IMPACT ON INDIA

While the collapse of the US-based Lehman Brothers may not have a direct impact on Indian

banks, some of them may face marginal losses due to their exposures to the US investment bank.

Bankruptcy of Lehman Brothers affected Indian IT, Reality sector more. Lehman has investments

in Indian companies such as Spice Communications, Spice Mobile, Edelweiss Cap, IVRCL Infra,



Development Credit Bank, Champagne Indage, Golden Tobacco and Emkay Global. Several IT

companies that had got major outsourcing deal from Lehman.

Not only the ICICI bank, but other Indian Banks have also been affected by the Lehman Brother

Bankruptcy due to MTM losses or Mark to market losses. As per the reports, The Indian banking

sector has incurred Rs 4 billion mark-to-market losses due to their investment in instruments of

bankrupt Lehman Brothers and AIG.

On 15th Sept The Bombay Stock Exchange (BSE) benchmark Sensex fell by 772.62 points and the

Nifty of the National Stock Exchange also dipped below 4,000-mark by falling 242.40 points.

ICICI Bank lost around Rs.375 Crore as ICICI Bank UK Plc holds 57 million euro of senior bonds

of Lehman Brothers Inc.

BSE BANKEX AND ICICI BANK

The ICICI bank was trading at around 700 in the month of August, and suddenly in the month of

September and October it started declining because of bankruptcy of Lehman brothers. Also BSE

BANKEX is also showing downward trend in the month of September and October.



BSE BANKEX

ICICI BANK



COMPANY SPECIFIC NEWS AFFECTING COMPANY

Sometimes stock prices of the particular company also get affected if that particular company has

announced some important news. If the news is good then stock prices may increase and vice-

versa.

When there is positive news about a particular stock or company, people try to invest all their

money in that particular stock or market. This leads to increase in the interest of buying the stock.

But there are many circumstances where news could also bring a negative effect where it could

ruin the prospect of the particular stock. So it is very important to know the overall news

Following are some of the news which are announced recently, and that has affected stock prices

of that company (30th August 2011).

Company name Closing

price

Price

change in

Rs

Price

change in

%

News / Events affecting

stock price

Man Inds. 146.55 20.5 16.26 Rallies on settlement hopes

Bharati Shipyard 103.95 13.45 14.86 Preferential issue to promoters

at price of Rs 139 per warrant

OnMobile Global 62.5 4.8 8.32 Board to consider buyback on

September 3

DLF 196.35 11.85 6.42 IDFC mulling acquisition of

DLF's stake in Noida IT park

BGR Energy Sys. 324.3 12.15 3.89 Bagged Rs 444-cr order from

NPCIL

Fortis Health. 152.5 1.1 0.73 Plans to open four new

hospitals by 2013

I O C L 306.55 -2.45 -0.79 To shut Mathura plant, Koyali

units in Sept

O N G C 263.15 -11.8 -4.29 FPO may hit in second half of

September

Man Industries

Man industries are a leading manufacturer and exporter of large diameter Carbon Steel Line Pipes

for various high pressure transmission applications for Gas, Crude Oil, Petrochemical Products and



Potable Water. The Company has state-of-the-art manufacturing facilities for LSAW & HSAW

Line Pipes and also for various types of Anti-Corrosion Coating Systems.

Earlier in May 2011, Group chairman RC Mansukhani had alleged that his younger brother JC

Mansukhani, who is managing director and vice-chairman of Man Industries, misused powers and

violated corporate governance practices. First, he was alleged to have bought 1 lakh shares from

the market on 17 June and 18 June 2010 without informing the company, an act which scaled up

the equity stake of the promoters beyond 55%. The second charge was that he bought a further

2.3% stake on 24 September 2010, a transaction allegedly routed through his friend and relatives,

after the company received substantial orders from foreign clients

The board of directors of the company had withdrawn the powers of management exercisable by J.

C. Mansukhani as the managing director of the company with effect from May 19 due to alleged

fraudulent practices. Meanwhile, J. C. Mansukhani had moved the Company Law Board (CLB)

following his suspension by the company. And because of this The stock had fallen as much as

4.14% at the day's low of Rs. 126.10.

But recently Man Indus has rallied 16% at Rs 147 on hopes of an amicable settlement between the

promoter siblings, Rameshchandra Mansukhani and Jhamaklal Mirchumal Mansukhani.

EFFECT OF DIVIDEND

Distribution of dividend does not come for free, because, the share price drops in the same value as

the dividend paid after the ex-date. This can happen because they are investors who want to receive

the dividends but have no plan to hold the stock any further. For instance, if Wal-Mart Stores Inc.



decided to distribute $1 per share as dividend to its shareholders, its share price will generally

drops from $49 to $48 per share after the ex-date.

Best dividend paying stock of 2011

• Hero Honda

• India bulls Sec

• HCL Info

• GE Shipping etc

• TCS

• Indian oil corporation

• State bank of India

• Infosys

HINDUSTAN UNILEVER

Hindustan Unilever declared final dividend of 3.50 per share on 8th July 2011.on 7 th July it

opened at 330 Rs and On 8th July prices opened at 333.65 and closed at 334, and on 11th July it

opened at 332.00,so the prices declined after dividend.

THE PERFORMANCE OF SECTOR

The performance of the sector or industry that the company is in also plays in part in determining

the stock price of the company. Most of the times, the stock price of the companies in the same



industry will move in tandem with each other. This is because market conditions will generally

affects the companies in the same industry the same way. Of course, there are exceptions to this.

Sometimes, the stock price of a company will benefit from a piece of bad news in its competitor if

the companies are competing for the same target market.

Some of the sectors which did not perform well in 2011 are

• BSE IT- The question mark about the growth in the US and Eurozone economies have

worsened the outlook of the BSE IT index, which has broken sharply below a downward-

sloping channel, and is in a bear market.

• BSE METAL

• BSE POWER

Some of the sectors which perform well are

• BSE FMCG

• BSE CONSUMER DURABLES

BSE OIL AND GAS

Performance of particular sector also affects the company.

The BSE oil and gas index emerged as the best performer among sectorial indices by rising 217.93

points, or 2.24%, at 9,936.95 points as heavy-weight Reliance Industries and state-run oil

companies stocks rallied.(March 13 2011). Easing pressure on the state-run oil companies,

following a decline in crude oil prices in global market was the major factor behind run-up in oil

sector stocks.

But in July and August prices also started declining because inflation is still not in control and

diesel and kerosene prices have not yet been raised which adds to the subsidy burden. And

Reliance may face investigation for inflating costs of the KG-D6 basin exploration to avoid paying

taxes and sharing profits with the government

Reliance industries got majorly affected.



BSE OIL INDEX

Reliance Industries

INFLATION

Economists define inflation as a rise in the general level of prices of goods and services in an

economy over a period of time. For a layman it means a rise in prices of commodities of daily use

and subsistence (food, clothing and shelter).



However, when the general price level rises, each unit of currency buys fewer goods and services.

Thus, inflation reflects erosion in the purchasing power of money.

Also, during the periods of high inflation, the real return on fixed income securities like bonds

and fixed deposits decreases. (Real return = Rate of return from investments – Inflation rate). So, a

bond which pays say 7.5% interest rate actually gives a real return of just 1% if the inflation is

6.5%. If the inflation increases further, the real return falls more. Now, you save your money so

that you can use it at some future date. If the return on your savings goes down then you would be

left with less cash to spend in future. For businesses, inflation leads to higher cost of production

which affects the profit margins to a certain extent.

Inflation can be attributed to one of the following reasons:

• Inflation via higher demand – It is the case of more money chasing few goods. This means that

the demand for the goods is high which leads to higher prices of these goods. E.g. Real estate

prices which have gone up due to the high demand over the years. The high demand is usually

caused due to an increase in consumer & government spending. In a developing country like

India, inflation via higher demand is usually a favourable situation for the economy because it

is instrumental in continuing the growth process; also it can be better managed by the policy

makers.

• Inflation via lower Supply- Every now and then we hear that poor monsoons have lead to lower

harvests of food grains, pulses, vegetables etc. Thus lower supply in the economy leads to higher

prices. Even if the demand is the same the prices may continue to rise due to lower supply .

This form of inflation is particularly detrimental for a growing economy like India and it is

relatively difficult to manage.

The Government and the central bank of the country – RBI – is very wary about the inflation rate

and is ready to jump in whenever it starts getting out of control. The tool with which they control

inflation is by controlling the interest rates in the economy.

To control inflation the RBI tries to lower demand by taking out the excess money supply from theeconomy. It increases various rates which eventually makes borrowing money expensive. This

leads to lesser borrowing by the people leading to lesser spending.

Even for business the cost of borrowing goes up which has an impact on their profit margins.

They might even delay any investment activity (to be funded by borrowing) to a later period

when the interest rates are lower to reduce their investment costs.



Very low inflation rates are also not good especially for a growing economy like India

because it can happen due to

a) Lower Demand and/or

b) Oversupply

Both these situations are detrimental to the growth process of the economy and hence not

desirable.While seeking for a wage hike from our bosses we usually quote high inflation rates as one of the

reason’s. But when there is dip in inflation rates we don’t go running for wage cuts!! Generally, it

is not so easy to reduce the wage rates in an economy. So, the company usually resorts to reduction

in workforce. On a macro level, it leads to higher unemployment in the economy. At this point,

the RBI takes action by lowering interest rate to boost domestic investment but this also leads to

lower net inflows. Thus zero or very low inflation is not conducive for the growth process.

The preferred solution therefore is a middle path, i.e. moderate inflation rate (usually 4%-6% for a

developing economy like India). Moderate inflation is necessary to act as a lubricant for the wheels

of economy. It signifies healthy demand in the economy and also avoids RBI intervention which

affects consumer and investment spending.

Generally stock markets and inflation are believed to be inversely related.

For businesses higher inflation means that raw materials become expensive which leads to

higher costs of production. The companies usually pass on a fraction of the price rise to its final

consumers; however invariably they have to absorb a fraction themselves. Thus, it adversely

affects the earnings of the companies. Lower earnings by companies can make them less

attractive for investors and hence the stock price may fall.

Also, during a high inflation period investors are looking for better rate of return on their

investments in order to maintain or improve the purchasing power of their income. The investors

will find better returns only when the P/E ratios are relatively lower. Thus in high inflationary

periods the P/E ratio should be ideally lower and similarly at lower inflation rates P/E ratios

would be higher.

We have seen the crash of 2008-09 and also the recovery thereafter. Stock prices have risen

considerably even while inflation was high and rising. How did this happen?

The reason for this was the Net inflows brought by the FIIs and the FDIs.



Thus, in a growing economy like India, even at double digit inflation rates investors might find itworthwhile investing in the stock market. So, while investing in stock market, an investor must

always look towards the trend of macro-economic indicator like inflation which affects the whole

economy and hence the stock market

SECTORAL IMPACT OF INFLATION

These hikes are a clear signal for banks to increase their lending rates; and loans for housing, carsand personal purpose will be dearer. Bank stocks suffer the most a lending and borrowing becomesdearer. Most rate sensitive sectors in the stock market are banking, real estate, autos. These suffer because loans become more expensive with higher EMI’s. In other sectors the companies which

are in expansion mode and need capital are going to suffer with credit availability becomingdifficult.

GDP

GDP (Gross Domestic Product) is the sum total of value of all the goods and services produced in

an economy during a given year. In short, it is the X-Ray report of how the economy is

performing. GDP is the most crucial economic indicator which tells us about the health of our



economy. It can help companies decide on what strategies they should adopt as also indicate to the

policy makers, the effectiveness of the steps and decisions they have undertaken.

CALCULATION OF GDP

Usually in most countries GDP is computed via the expenditure method. The expenditure

approach is based on the logic that all what is produced must be bought by somebody. In the

expenditure method GDP is calculated as the sum total of private consumption (C), government

expenditure (G), gross investment(I) made in the country, change in stocks and net exports.

Another way of looking at GDP is by classifying it under sectoral contribution. Under this, the

GDP is taken as the total value of goods produced by three major sectors: Agriculture and allied

activities, Industry & Services. The service sector which includes sub segments like transport,

insurance, finance, communication, construction etc. contributes a large share to the GDP in India.

Similarly growth in Industry and its sub segments like manufacturing, mining, electricity etc are

crucial for the growth of the GDP.



IMPACT ON THE ECONOMY AND THE STOCK MARKET

GDP has a massive impact on almost all the economic factors in a country. Even a small change in

GDP can have far reaching affects on the economy.

You can see from the above diag. the impact of increasing and higher GDP growth rate. Over the

last 5-6 years the GDP of our country has been growing at a healthy rate of over 8% (average)

annually. With a growing economy, India has seen higher employment opportunity for the people

which have led to an increase in their disposable income. With higher demand in place,companies have seen a surge in their profits leading to a rise in their stock prices. To cater to

the increasing demand, companies have also increased their investment activities adding new

plants, factories, offices etc. This adds to the future expectation of revenue growth of the

companies which if sustained can lead to further increase in the stock prices.

Now a booming economy with consistent high GDP growth rates is what attracts foreign

investment in the form of FDIs and FIIs. With one of the highest GDP growth rates over the

last few years, India has also experienced one of the highest Net FII inflows in the world

which has led to stock market surging from 6000 level in early 2000 to present level of 20000.

WHAT SHOULD YOU LOOK AT IN THE GDP REPORT

• Where is the consumer spending headed? The consumer spending or Pvt. Consumption

expenditure makes up 60% of the total GDP (expenditure side). You can also find out

beforehand where the demand situation in the economy is headed by looking at a) Your

own consumption pattern and the people around you b) changes in monthly auto sales

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figures etc. Lower consumption demand impacts sectors like real estate, auto, banking etc

the most.

• Where is the IIP headed? IIP (Index of Industrial Production) is one of the leading

indicators of the economy which is published by the government every month. If the

industrial production is rising then it is likely that the GDP numbers are going to be good.

In the monthly published bulletin on the official website of RBI you can check the IIP data

and also the industry wise growth.

• Is the GDP growing on the backdrop of higher government spending?

Government spending is essential for maintaining the socio-economic framework for the

country. In 2008-09 when the economy was going through one of its worst phase, govt.

increased its spending by 56% in Dec 2008 so that the economy could revive and demand

situation could pick up. Remember, govt. cannot continue high expenditure forever, so the

growth in GDP is sustainable when it is backed by growth in key sectors like infrastructure,

mining, manufacturing, services etc.

• Is the agriculture sector growing? The agriculture sector (contributing approx. 15% tothe GDP) is greatly affected by factors like rainfall, quality of seeds, fertilizer subsidy,

interest rate for marginal farmers etc. Lack of rain or untimely rain can lead to lower

agricultural production which could lead to lower GDP growth. Also, it supports more than

50% of India’s population which forms a large chunk of the demand position in the

economy. Unfavorable agriculture production can also have an indirect impact of pulling

the overall demand in the economy down.

• Is the investment demand still strong? Long term growth of the economy is dependent

on investment activities undertaken by both government and private sector. Investment

demand has a 30% share in the GDP. During the downturn the growth rate in investmentcame down from 12.5% in Sep 2008 to 1.6% in Sep 2009. If the interest rate is

continuously increasing then you might witness a slowdown in investments.

The GDP report can thus reveal all the facts about the economy, production, income, saving,

investment etc which could prove beneficial in knowing which sectors or industry you should

invest in.

IIP

IIP (Index of Industrial Production) denotes the total production activity that happens in the

country during a particular period as compared to a reference period. It helps us to understand the

general level of industrial activity in the economy. The products included for calculation of IIP can

be segregated into 3 major sectors – Manufacturing (79.36%), Mining & Quarrying (10.47%)



and Electricity (10.17%). Another way of categorizing the items used in the calculation of IIP is a

‘Use based classification’ with categories like Basic Goods, Capital goods, Intermediate goods,

Consumer durables and Non-consumer durables.

RELATIONSHIP BETWEEN IIP AND STOCK MARKET

The diagram given above shows how lower IIP – which usually results due to lower

consumer spending – can lead to a drop in stock prices.

Depleted consumer sentiment leads to a fall in consumer spending consequently leading to lower demand in the economy. If we are not buying more then why would companies produce

more!! This leads to lower growth or sometimes even de-growth in IIP. Thus, usually the

immediate impact of poor IIP figures is falling stock prices.

Over the long term, continuous lower consumption leads to lower producer confidence. Negativesentiment about future demand further leads to reduction in investment activity & hence slowsdown the capital spending. This has an adverse impact on future sales & profits of the companies.Thus, the negative sentiment leads to an adverse investment atmosphere for both institutional andretail investors.

Lower supply coupled with lower demand can have catastrophic impact on stock market and wasone of the main reasons for drop in Sensex from 20000 to 8000 in 2008. Thus, lower IIP is bad

news for the Stock Market as well as for the growth of the economy.

ANALYSIS OF COMPOSITE INDUSTRIES

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The best way to analyze the IIP figure is to look at the various industries and their growth.

Manufacturing sector contributes approx. 80% to the IIP that is why it has the most impact on

stock market.

• Chemical & Related Products- Good growth in this sector means that companies

producing chemicals are likely to perform well. Also, check growth in user industries like

Pharma, textiles, paper & leather. For instance, the chemical sector grew by 10% in April 2010

(annual growth in production) but the growth in user industry like textile, leather & paper waslower. Thus it can be deduced that the growth is coming from Pharma sector which will

likely be reflected in the next few quarters’ performance.

• Automobiles- Monthly sales data would give you a good picture of where the industry is

headed. A continuous increase in production can be a good indication of an improved

performance by the major auto companies in the coming quarter.

• Cement Sector- Growth in IIP is good news for the cement sector as it is hugely dependent

on infrastructure & real estate for its demand. Usually the cement manufacturers ramp up their

capacity during times of high demand. However, a slowdown can lead to an oversupplysituation in the industry impacting their realizations and profits in the short run as well as the

long run. So, it is important to check whether the demand has been growing consistently

or not.

• Mining Sector- Mining Sector contributes approx. 10% to the IIP. Growth figures can tell

us in advance about how mining companies (like MOIL, Coal India), steel companies like

(Tata Steel, SAIL etc.) are going to fare in coming quarters.

As mentioned before, there is also a ‘Use-based classification’ which can give you further insights

about the growth in production of different sectors. For example if the consumer non-durable

goods segment has been growing remarkably in say past 5-6 months. This would usually lead to

FMCG companies posting impressive quarterly and annual performances.

The IIP does not include growth of banking sector. However increase in production &

investment activity is usually financed through borrowings from banks. So, if industrial

production & capital spending is increasing then it is likely to have a positive impact on the

banking sector.

WHAT SHOULD YOU LOOK AT IN THE IIP DATA

In India IIP is released with a lag of 2 months. For instance the October 2010 IIP data is made

available only in December 2010. Yet, the IIP data can give us much crucial information which

can help us in our stock investments. Here are a few pointers to best utilize the knowledge of the

IIP to profit in the Stock market.



- Check the industry wise growth. A sustained fall in growth in a specific industry could be a

good time to exit that industry and allocate your funds in stocks of a better performing industry.

- If good IIP data is backed by buoyant consumer demand then announcements like capacity

expansion, building of new factories etc. by companies you are tracking indicate a good future

flow of income and hence an upside to their stock prices.

- A continuous fall in overall IIP data may lead to many fundamentally strong stocks beingundervalued. This gives you the perfect opportunity to invest in fundamentally strong companies

at discount price.

- If growth in IIP is backed by higher investment activity and also lending by the banks, then

banking sector is likely to experience good growth. However, lower IIP growth could impact the

banking sector adversely.

CONSUMER SPENDING

Consumer spending is the total expenditure that we as consumers make throughout the year. In

more technical terms it is known as Private Final Consumption Expenditure (PFCE).To give

you an idea of how important consumer spending is, if we all decided to reduce our spending, we

could actually bring down our economy!! Such is the power that we consumers have!



Another reason why Consumer spending is important is because it is the leading indicator of

the health of the economy. This means looking at the consumer spending, we could get a pretty

good idea in advance whether the economy is doing good or bad. Wonder how? It’s pretty simple.

One of the most important factors which drive the stock prices is the corporate earnings. But what

drives the corporate earnings? Well a lot of things actually. But, among these things, one of the

most crucial is consumer spending. Take a look at the graph below to get a better idea.

From the chart it is clear that the impact of a change in consumer spending happens on Net PAT of

Sensex 30 companies with a lag of 1-2 quarter. For instance in the 3rd quarter 2009-10 you can see

consumer spending rising, the effect of which shows in the corporate earnings in the next

quarter. Thus, consumer spending can help you know beforehand where the corporate

earnings are headed!!

Consumer spending does not get eroded by itself but it happens due to a certain chain of events.




Above is a pictorial depiction of the vicious circle of crisis . If increased consumer spending is

the hero for corporate profits, then the villain is a Crisis (e.g. The Sub-Prime Crisis in

2008) which leads to reduction in the spending. A crisis creates an environment where we don’t

feel like going overboard with our spending. We tend to postpone our big purchases like house, car

etc. In fact if things start getting worse, we even start cutting back on things like movies,

restaurants etc.

The reduced consumer spending leads to lower demand situation. The producers respond by

cutting down on the production, thus we ultimately see poor financial results from corporates.More often than not poor financial results lead to depleted stock prices. Now if the production,

sales & profits are down then the companies increasingly resort to cost cutting measures like no

bonuses, pay-cuts, and even laying off people. This further lowers the consumers’ confidence

and the whole circle repeats again.

Whenever there is a downturn or a crisis, we hear people saying – “This time it’s different”. But

more often than not the reality is – “Every time it’s more or less the same.” The cycle seen

above repeats with nearly every downturn or crisis.

So, as an investor look out for such events which make you and people around you reluctant

about spending money. It might actually be the start of a downturn!

Consumer spending is the cornerstone of corporate profits. A fall in it has an overall negativeimpact on all the sectors of the economy & this is when you see the stock market tumbling.

Predictably though, some sectors get affected more than others.

SECTORAL IMPACT OF FALL IN CONSUMER SPENDING

• Real Estate & Automobile - Buying a house, car, bike etc. usually requires us to borrow a

large part of the money from the bank. During tough times, it is unlikely that we will borrow

and spend and these purchases are the ones we most likely postpone. These sectors are usually

most impacted by lower consumer spending.

• Consumer Goods – Other things on which we tend to cut down expenditures on are luxury

items like home theater, LCD TVs, refrigerator, washing machine etc. The companies

producing such luxury items are impacted heavily during these times.

• Banking Sector- The banking sector is highly affected by any loss in consumer

confidence. Lower consumer spending leads to lower borrowing. To overcome this, the banks

lower their lending rates trying to attract borrowers. Also, if you don’t feel like spending and

borrowing, you would most certainly be saving more. Thus banks face a double impact a)

Lowering of lending rates, b) Higher Interest Outlay on deposits due to increase insavings. This lowers their Net Interest Margins and the profitability for the banks.

• Pharma Sector- The Pharma sector would be relatively less impacted by lower consumer

spending. If you have a headache you don’t postpone the purchase of medicine to the next

quarter, do you? Medicine and health care services is more of a necessity than luxury, thus



they are less impacted. However companies manufacturing life style drugs (eg. weight loss

drugs, hair loss drugs) would be adversely affected, as these drugs are not dire necessities.

• Infrastructure- Infrastructure investment is mostly a government activity. In order to get

out of a crisis situation, govt. spends more. Thus there is an increase in spending towards

building roads, railways, metros etc. Companies involved in execution of infrastructure

projects are relatively less impacted and with a lag they would stand to gain due to higher

govt. expenditure.

Other industries like IT & textile sector would be more impacted by a global downturn than a

domestic crisis as the majority of these companies depend on US & European clients. The recent

European crisis had a major impact on IT and Textile sector due to lower export demand. Also, if

this circle continues to persist, then shipping industry faces the brunt of it as the lower export

demand would seriously impact the shipping business. Thus poor performance by the shipping

sector could be a good indicator of downturn already having settled in the economy.

The entire capital intensive sector would be impacted due to lower consumer spending but with a

greater lag than compared to Real Estate or automobile sector.

WHAT SHOULD YOU LOOK AT IN THE CONSUMER SPENDING DATA

Consumer spending thus seems to be a very good solution to find out where the stock market is

headed. Unfortunately, the data for consumer spending comes approximately a quarter late, thus

making it difficult for us to exactly know the amount of consumer spending in advance. However,

there are various ways in which we can find out about the pattern of consumer spending.

- Learn from your own consumption pattern and that of the people around you. If you and

the people around you are delaying the decision to buy a house, a car, TV, fridge etc. this might beyour first cue to overall lower consumer spending. A dip in footfall in shopping malls, restaurants,

markets etc. may also be a good way to identify lower consumer spending.

- Look for the monthly automobile sales figures in newspapers, TV channels etc. If the growth

in sales is lower or is showing reducing trends continuously then surely one of the major causes is

reduced consumer spending.

- Lower consumer spending affects stock from real estate, automobiles, banks etc. the

most. However you can look for investment in fundamentally strong companies of these sectorswhen they are available at discount during the downturn.

Sectors like Pharma, FMCG and Infrastructure are relatively less impacted by lower

consumer spending. Look towards investment in such sectors.

Consumer spending is the leading indicator of knowing how the stock market and the economywould be performing. Invest your money at the right time in the stocks and sectors which happen



to gain the most with higher consumer spending and avoid sectors like real estate, automobiles and banking etc during low spending times.

GOVERNMENT SPENDING

Government spending is the sum total of the total expenditure that a government makes in afinancial year. For e.g. India’s total Government Spending is 10.9% of its GDP. The Government

is a separate entity which can act as

• A Consumer – The government consumption expenditure involves its expenses on goods and

services for collective consumption, upkeep of its numerous departments and the purchases

required for them.

• An investor – In the true sense, Government invests for the development of the country and the

economy. It spends heavily on developing the infrastructure of the country which propels the

current and future growth for the economy.

Government incurs expenditure on economic and social activities like agriculture, rural

development, transport, education, health, water supply, welfare of backward of classes etc. In a

developing economy like India which is marred by a wide gulf between haves and have-nots, it

becomes the prerogative of the government to carry out social welfare projects like National

Rural Employment Guarantee Scheme (NREGA). Such projects have helped create large scale

rural employment which increases the disposable income and overall demand in the economy.

A large part of the government’s expenditure is incurred on repayment of interest on loans,

providing subsidies to industries like petroleum, agriculture and fertilizer etc, defense payments

and maintaining the law & order situation in the country. To summaries, there can be no substitute

for government spending in a developing economy like India.




The above chart shows the GDP growth rate and Government spending during the period 2000-

2010. It is seen that during the year of 2008-09 the growth rate in GDP slowed down to 6.7%,

prompting the government to increase its overall spending in the economy by 26.4%. A company

or industry might be able to compete with rising prices, cut throat competition from domestic and

international players but what it is unable to compete with is – Lack of Demand . During a crisis

the government increases its spending to propel the demand in the economy and combat this exact

situation.

When the economy is going through a downturn, the first impact is on the consumer confidence

which is beaten down. This in turn pulls down investor confidence too. The result is a fall in

consumer demand and industrial production (Read more on Consumer Spending & IIP to find out

its full impact).

To combat this, the government takes strong actions by increasing its spending on key sectors

and also increasing its own consumption expenditure to revive the falling demand situation in

the economy. This is exactly what happened in 2008-09; the government increased its expenditure

on key sectors like agriculture, irrigation, transport, communication, energy etc. by approx 42% to

Rs. 2,04,129 Cr. (much more than the average growth of 17.4% on key sectors during 2000-2007).It also increased subsidy expenditure by approx 82% to Rs. 1,29,243 Cr.

A crisis is a situation when the government spending takes precedence over normal business

activity. But be it crisis or no crisis the importance of government spending cannot be

overlooked.

But can the government continue to spending endlessly? Not really. The government also looks

to promote private investment in the economy. As seen in the chart above, the growth in

Government spending fell from 14.02% in 2003-04 to 1.5% in 2005-06. This was the timewhen the

GDP was growing steadily and private investment was also on a high. During these times the

government concentrates more on welfare activities.

SECTORAL IMPACT OF GOVERNMENT SPENDING

Now that we know the importance of Government spending, let’s understand how it impacts

particular industries or sectors. The government propels the growth in an industry by either

increasing it’s spending in it or supporting it in the forms of subsidies, lower interest rate for

investments etc. Here is an analysis on some of the key industries of the economy.

•Infrastructure - Infrastructure sector (accounts for 26.7% of India’s industrial output) is

the backbone of any economy and is necessary for the successful functioning of a country. T he

government introduces projects for development of road, highways, railways, aviation

etc. The government has set aside $ 475 billion in its 11th Five Year Plan (2007-2012) for

investment in infrastructure. With the increasing presence of private players in this sector,

companies like Reliance Infra, GMR Infra, Punj Lloyd etc stand to gain from this. The



economy stands to gain from these projects irrespective of whether they are undertaken by

govt. or given to the private sector because

Infrastructure development is essential for the growth of the country & economy

Industries like cement, steel, copper, coal etc stand to gain from it as the product of these

industries would act as a raw material for infrastructure activities

• Power Sector – A growing economy and rising population has led to an exponential rise in

demand for power in India. The power sector is largely dependent on the government plans & projects it undertakes. In the 11th Five Year Plan the target is to add 78,700 MW of power

during 2007-2012. The impact of government spending has a spiral effect. Expenditure on

Power Sector not only augments the growth of power companies like NTPC, Power Grid

Corporation etc. but also gives impetus to heavy engineering industries like BHEL, L&T

etc which provide inputs to companies from Power Sector. The chain does not stop here. The

rise in demand for engineering industry increases the demand for industries providing raw

materials to them in turn, and the wheel of development starts rolling.

• Sectors dependent on subsidies: Oil is a key raw material for most of the industries.

Government gives huge subsidies to Oil Marketing Companies like IOC, HPCL, and BPCL for selling petroleum products at a subsidized rate. This makes it almost impossible for private

players to compete with these state-owned companies. That is the reason why Reliance had to

close down all its petrol pumps in 2008. But the government cannot continue to provide

subsidy forever. In fact, it has already started the deregulation process and petrol has been

deregulated. In the short term the oil companies like IOC, HPCL, BPCL stand to gain from

this move but in the long term they might face increased competition because private players

would now be able to compete with them.

Similarly, fertilizer industry is also highly dependent on the government subsidies. Eventoday, more than 50% of population is dependent on the agricultural sector. Fertilizer being the key

raw material for agricultural sector, the government has continued to increase its subsidy to the

farmers. The total fertilizer subsidy has increased from Rs. 13800 cr. in 2000-01 to Rs. 75849 cr. in

2008-09.

Other sectors like Automobile, logistics, textile etc also gain from government spending. Over

the last 10 years the government’s expenditure on transportation has increased from Rs. 7740 cr. in

1999-00 to Rs. 31213 cr. in 2009-10. Due to large infrastructure requirements, it is expected

that construction of roads, highways, airports, ports etc. will continue. Sectors like

automobiles and logistics business stands to gain from this. Companies like Tata Motors, Ashok

Leyland, Container Corporation of India etc. have benefited heavily from this and have shown

good growth in the commercial vehicle segment over the years.

Similarly, the textile sector has also benefitted since the introduction of schemes like Technology

Upgradation Fund (TUF) Scheme. The textile companies have availed the benefits and have started

using advanced technology of production to increase their productivity. By now it is quite evident



that the government decision has a significant impact in the growth of the key sectors and the

overall economy.

WHAT SHOULD BE THE ACTION POINT

Look for investment in the sectors which would be direct beneficiaries of a favorable government

policy.

Investment in Infrastructure companies could prove to be profitable in the short term as well

as the long term because of the growing demand for it. But it is crucial that you invest in a

fundamentally strong company when it is available at discount.

A developing economy like India and a growing population ensures the ever increasing demand for electricity. Investment in the power companies which are fundamentally strong and available

at discount would be a best bet.



LIMITATIONS

• The study is based on secondary data available from News

papers, Magazines, Websites, Business news channels.

• The data collected in research work was secondary data, So, this

puts a question mark on the reliability and accuracy of this data.

• The project includes study of maximum 2 companies in each

sector as all companies cannot be covered.

• Insufficient practical knowledge of stock market.

• Time Constraint is also a major problem, as time allotted to

project is of 6 months.

FUTURE SCOPE

• Due to the dynamic nature of Stock market an individual can further

analyse other important factor that will affect stock market.

• Individual can also find out volatility in quantitative terms ie. 1% change

or 1% Standard deviation that can take place through various factors.

Winter Project Update RECENT

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