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 Live Project Submitted to the “College name” in Partial
              fulfillment of the requirements



                  SUMATI SETHIA
                                 Executive Summary
As a part of MBF Programme, a student has to pursue a live project duly approved by
the Academic and Corporate Guide. I had the privilege of undertaking project on
Equity Research and Valuation of Top FMCG Companies. The project has been
undertaken to study the FMCG industry and identify the right stock to invest for long
term wealth creation.

My project is divided into Five Chapters and they are given as under.

   1. Chapter one of the study contains, concept of Equity research and importance of the
       subject in the present scenario. The main focus of this chapter is to give overview of the
       main topics of the project as it deals with the introduction of some important aspects i.e.
       the project, Company and FMCG industry.
   2. Chapter two deals with review of literature on Equity research, Equity valuation and
      Fundamental analysis. Importance of this chapter is in regard to discussing some of the
      empirical works on the chosen subject of project.
   3. Chapter three deals with objective of the study, research methodology and brief
       review of other related literature. The main idea of this chapter is to give an overview of
       the research methodology and analysis techniques used in the project.
   4. Chapter four deals with analysis and interpretations. Main Analysis and
       interpretation of the results, Analysis has been done on the basis of fundamental
       analysis technique of equity research and in the latter part equity valuation has been
       done on the basis of dividend discount model.
   5. Chapter five deals with summary of major findings, discussions of results,
       This chapter gives an overview of all the analysis work done in the project so this is one
       of the main chapters as it gives an overview of the main aspects of the project.

COLLEGE NAME                                                                                Page 2
                                    LIST OF TABLES

 Table No.                                  Table Title                          Page No.
       I.    The top 10 companies in Indian FMCG sector                          8
      II.    Economic indicators and their possible impact on the stock market   25
     III.    Growth rates at sectoral level                                      45
    IV.      Per capita income and consumption at 2004-05 prices                 47
      V.     Demand side growth of GDP, growth contribution and relative share   49
    VI.      Private final consumption: annual growth and share                  51
    VII.     Sectoral investment rate                                            56
   VIII.     Deployment of gross bank credit by major sectors                    63
    IX.      Contribution to total flow of resources to commercial               65
      X.     Sectorial impact of budget 2010                                     68
    XI.      Complete analysis of budget impact on FMCG sectors                  69
    XII.     Investment in the FMCG sector                                       85
   XIII.     Product wise production                                             86
   XIV.      Key executives’ of company( ITC)                                    90
   XV.       List of products and services with sales and production details     91
   XVI.      Income and growth                                                   94
  XVII.      Operating profit margin                                             95
  XVIII.     Cost structure                                                      96
   XIX.      Adjusted, adjusted cash and reported eps                            97
   XX.       Dividend per share and operating profit per share                   98
   XXI.      Book value and net operating income per share ratios                99
  XXII.      Price earnings ratio                                                100
  XXIII.     Operating, gross profit and net profit margin                       101
 XXIV.       Adjusted cash margin and adjusted return on net worth               102
  XXV.       Reported return on net worth and return on long term funds          103
 XXVI.       Debt to equity ratios                                               104
 XXVII.      Owners fund as % of total source                                    105
XXVIII.      Fixed assets turnover ratio                                         106
 XXIX.       Current and quick ratios                                            107
  XXX.       Inventory turnover ratio                                            108
 XXXI.       Dividend payout ratio                                               109
 XXXII.      Earning retention ratio                                             110
XXXIII.      Inputs for the calculation of intrinsic value of stock:             111
XXXIV.       Inputs for calculation of growth rate in dividends                  112

COLLEGE NAME                                                                      Page 3
 XXXV.       Inputs for calculation of required rate of return(r)              112
 XXXVI.      Sensitivity analysis with different discount rates                113
XXXVII.      Sensitivity analysis with different growth rates                  113
XXXVIII.     Inputs for calculation of historical growth                       116
 XXXIX.      Inputs for calculation fundamental growth                         116
      XL.    Inputs for calculation of weighted average growth rate            116
     XLI.    Inputs for calculation estimation of intrinsic value of stock     117
    XLII.    Key executives’ of company ( DABUR INDIA)                         121
   XLIII.    List of products and services with sales and production details   122
   XLIV.     Income and growth                                                 129
    XLV.     Operating profit margin                                           130
   XLVI.     Cost structure                                                    131
  XLVII.     Adjusted, adjusted cash and reported eps                          132
 XLVIII.     Book value and net operating income per share ratios              133
   XLIX.     Operating, gross profit and net profit margin                     135
        L.   Adjusted cash margin and adjusted return on net worth             136
       LI.   Reported return on net worth and return on long term funds        137
      LII.   Debt to equity ratios                                             138
     LIII.   Owners fund as % of total source                                  139
     LIV.    Fixed assets turnover ratio                                       140
      LV.    Current and quick ratios                                          141
     LVI.    Inventory turnover ratio                                          142
    LVII.    Dividend payout ratio                                             142
   LVIII.    Earning retention ratio                                           143
     LIX.    Inputs for the calculation of intrinsic value of stock            146
      LX.    Inputs for calculation of growth rate in dividends                146
     LXI.    Inputs for calculation of required rate of return(r)              147
    LXII.    Sensitivity analysis with different discount rates                148
   LXIII.    Sensitivity analysis with different growth rates                  148
   LXIV.     Inputs for calculation of historical growth                       151
    LXV.     Inputs for calculation fundamental growth                         151
   LXVI.     Inputs for calculation of weighted average growth rate            151
  LXVII.     Inputs for calculation estimation of intrinsic value of stock     152
 LXVIII.     Key executives’ of company( HINDUSTAN UNILEVER LIMITED)           156
   LXIX.     List of products and services with sales and production details   157
    LXX.     Income and growth                                                 160
   LXXI.     Operating profit margin                                           161

 COLLEGE NAME                                                                   Page 4
     LXXII.    Cost structure                                                  162
    LXXIII.    Adjusted, adjusted cash and reported eps                        163
    LXXIV.     Dividend per share and operating profit per share               164
     LXXV.     Operating, gross profit and net profit margin                   165
    LXXVI.     Adjusted cash margin and adjusted return on net worth           166
   LXXVII.     Reported return on net worth and return on long term funds      167
  LXXVIII.     Debt to equity ratios                                           168
    LXXIX.     Owners fund as % of total source                                169
     LXXX.     Fixed assets turnover ratio                                     170
    LXXXI.     Current and quick ratios                                        171
   LXXXII.     Inventory turnover ratio                                        172
  LXXXIII.     Dividend payout ratio                                           173
  LXXXIV.      Earning retention ratio                                         174
   LXXXV.      Inputs for the calculation of intrinsic value of stock          177
  LXXXVI.      Inputs for calculation of growth rate in dividends              178
 LXXXVII.      Inputs for calculation of required rate of return(r)            178
LXXXVIII.      Sensitivity analysis with different discount rates              179
  LXXXIX.      Sensitivity analysis with different growth rates                179
       XC.     Inputs for calculation of historical growth                     182
       XCI.    Inputs for calculation fundamental growth                       182
      XCII.    Inputs for calculation of weighted average growth rate          182
      XCIII.   Inputs for calculation estimation of intrinsic value of stock   183

   COLLEGE NAME                                                                 Page 5
                                      LIST OF FIGURES
Figure no.                                       Figure title             Page no.
   1.        Per capita income and consumption at 2004-05 prices                47
   2.        Private final consumption share of total                           51
   3.        Sectoral share in domestic saving                                  54
   4.        Sectoral share in gross domestic capital formation                 55
   5.        Y-o-y growth in broad money (m3) and non-food credit               61
   6.        Consumption pie                                                    81
   7.        Labour cost comparison                                             82
   8.        Income and growth(ITC)                                             94
   9.        Operating profit margin                                            95
   10.       Cost structure                                                     96
   11.       Adjusted, adjusted cash and reported eps                           97
   12.       Dividend per share and operating profit per                        98
   13.       Book value and net operating income per share                      99
   14.       Price earnings ratio                                              100
   15.       Operating, gross profit and net profit margin                     101
   16.       Adjusted cash margin and adjusted return on net worth             102
   17.       Reported return on net worth and return on long term funds        103
   18.       Debt to equity ratios                                             104
   19.       Owners fund as % of total source                                  105
   20.       Fixed assets turnover ratio                                       106
   21.       Current and quick ratios                                          107
   22.       Inventory turnover ratio                                          108
   23.       Dividend payout ratio                                             109
   24.       Earning retention ratio                                           110
   25.       Sensitivity analysis with different discount rates                113
   26.       Sensitivity analysis with different growth rates                  114
   27.       Income and growth(DABUR INDIA)                                    129
   28.       Operating profit margin                                           130
   29.       Cost structure                                                    131
   30.       Adjusted, adjusted cash and reported eps                          132
   31.       Dividend per share and operating profit per share                 133
   32.       Book value and net operating income per share ratios              134
   33.       Operating, gross profit and net profit margin                     135
   34.       Adjusted cash margin and adjusted return on net worth             136

COLLEGE NAME                                                                 Page 6
  35.   Reported return on net worth and return on long term funds    137
  36.   Debt to equity ratios                                         138
  37.   Owners fund as % of total source                              139
  38.   Fixed assets turnover ratio                                   140
  39.   Current and quick ratios                                      141
  40.   Inventory turnover ratio                                      142
  41.   Dividend payout ratio                                         142
  42.   Earning retention ratio                                       143
  43.   Sensitivity analysis with different discount rates            148
  44.   Sensitivity analysis with different growth rates              149
  45.   Income and growth                                             160
  46.   Operating profit margin                                       161
  47.   Cost structure                                                162
  48.   Adjusted, adjusted cash and reported eps                      163
  49.   Dividend per share                                            164
  50.   Book value and net operating income per share                 165
  51.   Operating, gross profit and net profit margin                 166
  52.   Adjusted cash margin and adjusted return on net worth         167
  53.   Reported return on net worth and return on long term funds    168
  54.   Debt to equity ratios                                         169
  55.   Owners fund as % of total source                              170
  56.   Fixed assets turnover ratio                                   171
  57.   Current and quick ratios                                      172
  58.   Inventory turnover ratio                                      173
  59.   Dividend payout ratio                                         174
  60.   Earning retention ratio                                       175
  61.   Sensitivity analysis with different discount rates            179
  62.   Sensitivity analysis with different growth rates              180

COLLEGE NAME                                                         Page 7
                                     TABLE OF CONTENTS
Acknowledgements                                            IV
List of Tables                                              VI-IX
List of Figures                                             IX-X
Chapter 1. Introduction                                         1-13

   1.1 Introduction to the project                                   2

   1.2 Introduction to the ESML                                      4

   1.3 Introduction to FMCG industry                                 7

   1.4 Introduction to the companies analysed                       12

       1.4.1 ITC limited                                            12

       1.4.2 Dabur India limited                                    12

       1.4.3 Hindustan Unilever limited                             13

Chapter 2. Review of literature                                14-21

Chapter 3. Research methodology                                22-40

   3.1 Basic introduction to equity research                        23

   3.2 An overview of ratio analysis                                27

   3.4 Equity valuation                                             38

   3.5 Dividend discount model (DDM)                                38

       3.5.1 Gordon growth model or constant growth model           38

       5.5.2 The to-stage model                                     39

Chapter 4. EIC analysis and Equity valuation                  41-184

   4.1 Economic analysis                                            42

   4.2 Industry analysis                                            70

       4.2.1 FMCG industry analysis                                 78

   4.3 Company analysis                                             88

COLLEGE NAME                                                  Page 8
    4.3.1 ITC limited                                                             89 About the company                                                 89 Management team                                                   90 Products and services                                             91 SWOT analysis                                                     92 Operational performance                                           94 Financial performance                                             97 Equity valuation of ITC limited                                  111

           Valuation with constant growth or Gordon model     111
           Valuation with two stage growth model              115

    4.3.2 Dabur India limited                                                    119 About the company                                                119 Management team                                                  121 Products and services                                            122 SWOT analysis                                                    123 Operational performance                                          129 Financial performance                                            132 Equity valuation of Dabur India limited                          145

           Valuation with constant growth or Gordon model     145
           Valuation with two stage growth model              150

    4.3.3 Hindustan Unilever limited                                             154 About the company                                                154 Management team                                                  156 Products and services                                            157 SWOT analysis                                                    158 Operational performance                                          158

COLLEGE NAME                                                                   Page 9
 Financial performance                                             163

 Equity valuation of Hindustan Unilever limited                    177
             Valuation with constant growth or Gordon model      177
             Valuation with two stage growth model               181

Chapter 5. Findings and Conclusion                                                  185

BIBLIOGRAPHY                                                                        194

ANNEXURE                                                                            202

COLLEGE NAME                                                                     Page 10
                 CHAPTER #1


COLLEGE NAME                  Page 11
                       INTRODUCTION TO THE PROJECT

The project has been undertaken to identify the right stock in fast growing FMCG sector to
invest for long term wealth creation. The stocks have been identified on the basis of various
situations prevailing in the country keeping in mind the global scenario. And fundamental analysis
and valuation of stocks have been used for this purpose.

Objectives of the project:

    Compute the intrinsic value of top three FMCG stocks.
    To do the fundamental analysis for the determination of intrinsic worth of the

             • To do the Economic analysis

             • To do the Industry analysis

             • To do the Company analysis

The Project is divided into 5 chapters each chapter discusses the following aspects of the project:


This chapter gives an overview of the project and it has been further divided into following sub-

      Introduction to the project
      Introduction to the Elite Stock Management Limited
      Introduction to the FMCG sector
      Introduction to the companies analyzed (i.e. ITC, Dabur, and Nestle)


      This chapter discusses about some of the literary works of some great authors regarding
       the topic.


      The main focus of this chapter is to give an overview of the methods used for making the

COLLEGE NAME                                                                               Page 12
Chapter 4: ANALYSIS

      This is the most important chapter of the project as it includes the calculations and
       analysis for making the objectives of project fulfilled.


      In this chapter I have discussed the findings and conclusions I got through analysis.


COLLEGE NAME                                                                              Page 13
                          INTRODUCTION TO THE ESML

About ESML:
Elite Stock Management Limited, more popularly known as Elite Stock, is one of today’s
upcoming equity research and broking houses of India. Elite Stock offers a wide range of wealth
generation solutions to individuals and institutions based on creative value-investing ideas. Its
strength lies in its customer-centric approach.

Elite Stock was established in 1990 to provide financial services to Retail, High Net worth
Individuals, Corporate and Institutional clients. Soon after, it acquired membership of National
Stock Exchange of India Ltd. (NSEIL), Bombay Stock Exchange Ltd. (BSE) and National
Securities Depository Ltd. (NSDL). Elite Stock holds registration from Securities and Exchange
Board of India (SEBI) to trade, both in Equity and Derivatives segment of NSEIL and Equity
segment of BSE. Its sister concern (Elite Comtrade Pvt. Ltd.) holds membership of MCX to trade
in Bullion and Commodity Derivatives.

The Best of Elite Stock

      Treats its customer with the utmost reverence
      Plans for Cash Flow, Investment and Retirement
      Runs a well nurtured financial research center to watch industry trends and performance,
       and monitor the economy
      Uses cutting-edge technology

Management Profile
Steered by a highly talented and motivated team Elite Stock is committed to customer fulfillment
in an extremely professional, transparent and ethical environment. Our highly professional and
trained personnel are devoted to their customers and are readily available for personalized

Managing Director

RAVINDER PARKASH SETH: An Electronics Engineer, he has worked on several projects in
India and abroad. Having spent five years with ECIL (Electronic Corporation of India Ltd.) as a
Computer Engineer, he then served the Ministry of Health Saudi Arabia at Dammam, as a Bio
Medical Engineer for seven years. In the year 1990, he turned his dream into reality when he

COLLEGE NAME                                                                             Page 14
promoted the Elite Stock Management Ltd. as a stock broking company with the idea of making
peoples’ money work for them.



       Elite Stock’s ardent endeavor is to offer its esteemed customers quality investment
       services based on meticulously researched investment strategies to add value to their
       Elite Stock’s mission is to pursue long-term relations with its customers by offering
       competitive business terms, latest technology based infrastructure and well researched
       information to enhance their investment decision making.

       Elite Stock is committed to offer expertise to its clients in managing their portfolio with the
       aim of bringing returns on their investment.


       To accomplish greater heights in Stock Broking, Wealth Management and Investment
       To set new benchmarks through customer-centric, technology driven and professional


1990                Elite Stock Management Ltd. joins hands as a business associate with
                    Prabhudas Lilladher Private Ltd., a member of BSE and NSE, and sows the
                    seed to commence operations.
1991                We establish a Portfolio Management Center at New Delhi in association
                    with Dalal Street Journal Group.
1992                Elite Stock starts an Equity Research Division to provide statistical reports to
                    clients for their portfolio management.
1995                After just five years in the business, Elite Stock becomes member of
                    National Stock Exchange of India Ltd. (NSEIL)

COLLEGE NAME                                                                                 Page 15
2000       Elite Stock becomes the Depository Participant of National Securities
           Depository Limited (NSDL) to provide related services to its clients.
2001       Within a decade of its conception, the Company becomes the Trading
           Member for derivatives segment of NSE.
2002       We now establish our Distribution Division, enabling distribution of
           investment products from our various retail outlets.
2003       We open multiple branches in Delhi and NCR, expanding our horizon and
2004       Elite Stock becomes a Self Clearing Member for derivatives segment of
2005       We become members of MCX under the name of Elite Comtrade Pvt. Ltd.
           (sister concern of Elite Stock). We begin Internet trading
2006       We attain membership of Bombay Stock Exchange Ltd. (BSE)

COLLEGE NAME                                                             Page 16

Fast Moving Consumer Goods (FMCG), also known as Consumer Packaged Goods (CPG), are
products that have a quick turnover, and relatively low cost. Consumers generally put less
thought into the purchase of FMCG than they do for other products. Though the absolute profit
made on FMCG products is relatively small, they generally sell in large numbers and so the
cumulative profit on such products can be large.

       FMCG industry is innovative, full of rich experience, reaches worldwide, people working
       with FMCG may get frequent opportunity to travel meet new culture, gets experience
       very quickly and chances to rise in status is much easier.
       Unlike other sectors FMCG shares float in a steady manner irrespective of market dip
       worldwide. So basically, fast moving consumer goods are pretty awesome.

Indian FMCG Sector:

This The Fast Moving Consumer Goods (FMCG) industry in India is one of the largest sectors in
the country and over the years has been growing at a very steady pace. The sector consists of
consumer non-durable products which broadly consists, personal care, household care and food
& beverages. The Indian FMCG industry is largely classified as organised and unorganised. This
sector is also buoyed by intense competition. Besides competition, this industry is also marked
by a robust distribution network coupled with increasing influx of MNCs across the entire value
chain sector continues to remain highly fragmented.

It has been predicted that the FMCG market will reach to US$ 33.4 billion in 2015 from US $
billion 11.6 in 2003. The middle class and the rural segments of the Indian population are the
most promising market for FMCG, and give brand makers the opportunity to convert them to
branded products. Most of the product categories like jams, toothpaste, skin care, shampoos, etc,
in India, have low per capita consumption as well as low penetration level, but the potential for
growth is huge. The Indian Economy is surging ahead by leaps and bounds, keeping pace with
rapid urbanization, increased literacy levels, and rising per capita income.

The big firms are growing bigger and small-time companies are catching up as well. According
to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the
balance by Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned
by Hindustan Lever. Pepsi is at number three followed by Thums Up. Britannia takes the fifth

COLLEGE NAME                                                                             Page 17
place, followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). These are figures the soft
drink and cigarette companies have always shied away from revealing. Personal care, cigarettes,
and soft drinks are the three biggest categories in FMCG. Between them, they account for 35 of
the top 100 brands.

                                           TABLE - I

S. NO.          Companies

1.              Hindustan Unilever Ltd.
2.              ITC (Indian Tobacco Company)
3.              Dabur India
4.              Procter & Gamble (India)
5.              Nestlé India
6.              GCMMF (AMUL)
7.              Cadbury India
8.              Britannia Industries
9.              Parle Products
10.             Marico Industries


Industry Classification

The FMCG industry is volume driven and is characterized by low margins. The products are
branded and backed by marketing, heavy advertising, slick packaging and strong distribution
networks. The FMCG segment can be classified under the premium segment and popular
segment. The premium segment caters mostly to the higher/upper middle class which is not as
price sensitive apart from being brand conscious. The price sensitive popular or mass segment
consists of consumers belonging mainly to the semi-urban or rural areas who are not particularly
brand conscious. Products sold in the popular segment have considerably lower prices than their
premium counterparts.

COLLEGE NAME                                                                              Page 18
FMCG segments are:

  1. Household Care
   Personal Wash: The market size of personal wash is estimated to be around INR 8,300
    Cr. The personal wash can be segregated into three segments: Premium, Economy and
    Popular. The penetration level of soaps is ~92 per cent. It is available in 5m retail stores,
    out of which, 75 per cent are in the rural areas. HUL is the leader with market share of
    ~53 per cent; Godrej occupies second position with market share of ~10 per cent. With
    increase in disposable incomes, growth in rural demand is expected to increase because
    consumers are moving up towards premium products. However, in the recent past there
    has not been much change in the volume of premium soaps in proportion to economy
    soaps, because increase in prices has led some consumers to look for cheaper substitutes.

   Detergents: The size of the detergent market is estimated to be INR 12,000 Cr.
    Household care segment is characterized by high degree of competition and high level of
    penetration. With rapid urbanization, emergence of small pack size and sachets, the
    demand for the household care products is flourishing. The demand for detergents has
    been growing but the regional and small unorganized players account for a major share of
    the total volume of the detergent market. In washing powder HUL is the leader with ~38
    per cent of mar- ket share. Other major players are Nirma, Henkel and Proctor & Gamble.

  2. Personal Care

   Skin Care: The total skin care market is estimated to be around INR 3,400 Cr. The skin
    care market is at a primary stage in India. The penetration level of this segment in India is
    around 20 per cent. With changing life styles, increase in disposable incomes, greater
    product choice and availability, people are becoming aware about personal grooming.
    The major players in this segment are Hindustan Unilever with a market share of 54 per
    cent, followed by CavinKare with a market share of 12 per cent and Godrej with a market
    share of 3 per cent.

   Hair Care: The hair care market in India is estimated at around INR 3,800 Cr. The hair
    care market can be segmented into hair oils, shampoos, hair colorants & conditioners, and

COLLEGE NAME                                                                             Page 19
     hair gels. Marico is the leader in Hair Oil segment with market share of ~ 33 per cent;
     Dabur occupies second position at 17 per cent.

   Shampoos: The Indian shampoo market is estimated to be around INR 2,700 Cr. It has
    the penetration level of only 13 per cent in India. Sachet makes up to 40 per cent of the
    total shampoo sale. It has low penetration level even in metros. Again the market is
    dominated by HUL with around 47 per cent market share; P&G occupies second position
    with market share of around 23 per cent. Anti-dandruff segment constitutes around 15 per
    cent of the total shampoo market. The market is further expected to increase due to
    increased marketing by players and availability of shampoos in affordable sachets.

   Oral Care: The oral care market can be segmented into toothpaste 60 per cent;
    toothpowder 23 per cent; toothbrushes 17 per cent. The total toothpaste market is
    estimated to be around INR 3,500 Cr. The penetration level of toothpowder/toothpaste in
    urban areas is three times that of rural areas. This segment is dominated by Colgate-
    Palmolive with market share of 49 per cent, while HUL occupies second position with
    market share of 30 per cent. In toothpowders market, Colgate and Dabur are the major
    players. The oral care market, especially toothpastes, remains under penetrated in India
    with penetration level 50 per cent.

  3. Food & Beverages

   Food Segment: The foods category in FMCG is gaining popularity with a swing of
    launches by HUL, ITC, Godrej, and others. This category has 18 major brands
    aggregating INR 4,600 Cr. Nestle and Amul slug it out in the powders segment. The food
    category has also seen innovations like softies in ice creams, ready to eat rice by HUL
    and pizzas by both GCMMF and Godrej Pillsbury.

   Tea: The major share of tea market is dominated by unorganized players. More than 50
    per cent of the market share is capture by unorganized players. Leading branded tea
    players are HUL and Tata Tea.

COLLEGE NAME                                                                         Page 20
    Coffee: The Indian beverage industry faces over supply in segments like coffee and tea.
     However, more than 50 per cent of the market share is in unpacked or loose form. The
     major players in this segment are Nestlé, HUL and Tata Tea.

Growth Prospects

With the presence of 12.2% of the world population in the villages of India, the Indian rural
FMCG market is something no one can overlook. Increased focus on farm sector will boost rural
incomes, hence providing better growth prospects to the FMCG companies. Better infrastructure
facilities will improve their supply chain. FMCG sector is also likely to benefit from growing
demand in the market. Because of the low per capita consumption for almost all the products in
the country, FMCG companies have immense possibilities for growth. And if the companies are
able to change the mindset of the consumers, i.e. if they are able to take the consumers to
branded products and offer new generation products, they would be able to generate higher
growth in the near future. It is expected that the rural income will rise in 2007, boosting
purchasing power in the countryside. However, the demand in urban areas would be the key
growth driver over the long term. Also, increase in the urban population, along with increase in
income levels and the availability of new categories, would help the urban areas maintain their
position in terms of consumption. At present, urban India accounts for 66% of total FMCG
consumption, with rural India accounting for the remaining 34%. However, rural India accounts
for more than 40% consumption in major FMCG categories such as personal care, fabric care,
and hot beverages. In urban areas, home and personal care category, including skin care,
household care and feminine hygiene, will keep growing at relatively attractive rates. Within the
foods segment, it is estimated that processed foods, bakery, and dairy are long-term growth
categories in both rural and urban areas.

COLLEGE NAME                                                                             Page 21

                                        ITC LIMITED

ITC is one of India's foremost private sector companies with a market capitalisation of nearly
US $ 19 billion and a turnover of over US $ 5 billion. ITC is rated among the World's Best Big
Companies, Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine.

ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers,
Packaging, Agri-Business, Packaged Foods & Confectionery, Information Technology,
Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While
ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels,
Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent
businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and

ITC's diversified status originates from its corporate strategy aimed at creating multiple drivers
of growth anchored on its time-tested core competencies: unmatched distribution reach,
superior brand-building capabilities, effective supply chain management and acknowledged
service skills in hoteliering. Over time, the strategic forays into new businesses are expected to
garner a significant share of these emerging high-growth markets in India.

ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is one of
the country's biggest foreign exchange earners (US $ 3.2 billion in the last decade). The
Company's 'e-Choupal' initiative is enabling Indian agriculture significantly enhance its
competitiveness by empowering Indian farmers through the power of the Internet. This
transformational strategy, which has already become the subject matter of a case study at
Harvard Business School, is expected to progressively create for ITC a huge rural distribution
infrastructure, significantly enhancing the Company's marketing reach

                                  DABUR INDIA LIMITED

Dabur India Limited has marked its presence with significant achievements and today
commands a market leadership status. Our story of success is based on dedication to nature,
corporate and process hygiene, dynamic leadership and commitment to our partners and
stakeholders. The results of our policies and initiatives speak for themselves.

COLLEGE NAME                                                                              Page 22
      Leading consumer goods company in India with a turnover of Rs. 2834.11 Crore (FY09)
      3 Subsidiary Group companies - Dabur International, Fem Care Pharma and
       newU and 8 step down subsidiaries: Dabur Nepal Pvt Ltd (Nepal), Dabur Egypt Ltd
       (Egypt), Asian Consumer Care (Bangladesh), Asian Consumer Care (Pakistan),
       African Consumer Care (Nigeria), Naturelle LLC (Ras Al Khaimah-UAE), Weikfield
       International (UAE) and Jaquline Inc. (USA).
      17 ultra-modern manufacturing units spread around the globe
      Products marketed in over 60 countries
      Wide and deep market penetration with 50 C&F agents, more than 5000 distributors
       and over 2.8 million retail outlets all over India

                           HINDUSTAN UNILEVER LIMITED

Hindustan Unilever Limited (HUL) is India's largest Fast Moving Consumer Goods Company,
touching the lives of two out of three Indians with over 20 distinct categories in Home &
Personal Care Products and Foods & Beverages. The company’s Turnover is Rs. 20, 239 crores
(for the 15 month period – January 1, 2008 to March 31, 2009).

HUL is a subsidiary of Unilever, one of the world’s leading suppliers of fast moving consumer
goods with strong local roots in more than 100 countries across the globe with annual sales of
€40.5 billion in 2008. Unilever has about 52% shareholding in HUL.

Hindustan Unilever was recently rated among the top four companies globally in the list of
“Global Top Companies for Leaders” by a study sponsored by Hewitt Associates, in partnership
with Fortune magazine and the RBL Group. The company was ranked number one in the Asia-
Pacific region and in India.

      The mission that inspires HUL's more than 15,000 employees, including over 1,400
       managers, is to “add vitality to life". The company meets every day needs for nutrition,
       hygiene, and personal care, with brands that help people feel good, look good and get
       more out of life. It is a mission HUL shares with its parent company, Unilever, which
       holds about 52 % of the equity.

COLLEGE NAME                                                                           Page 23
                 CHAPTER #2


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  Equity research seek to develop, and thereafter communicate to investors, insights regarding
  the value, risk, and volatility of a covered security, and thus assist investors to decide
  whether to buy, hold, sell, sell short, or simply avoid the security in question or derivative

  Some of the empirical works in this subject have been discussed below:

  Berscheid, Walster and William, (1973) described a general theory of social behavior-equity
  theory-consisting of 4 propositions designed to predict when individuals will perceive that
  they are justly treated and how they will react when they find themselves enmeshed in unjust
  relationships. Research conducted to test equity theory is summarized. Ways in which equity
  theory interlocks with other major social psychological theories are discussed. Some ways in
  which equity theory can be applied to understanding social problems are considered.

  Stefano Bonini, Laura Zanetti, Roberto Bianchini, Antonio Salvi, (2010) concentrated on
  the fact that Analysts’ target prices have received limited attention in academic research. In
  their paper they have tried to fill the gap by developing an innovative multi-layer accuracy
  metric that we test on a novel database. This analysis shows that forecasting accuracy is very
  limited: prediction errors are consistent, auto correlated, non-mean reverting and large (up to
  46%). Controlling for market and company factors, they found evidence that factors like
  inclusion in the market index, market momentum; size and market value are all negatively
  correlated with accuracy These unexpected results suggest that analysts research is
  systematically biased which supports theoretical predictions by Ottaviani and Sorensen
  (2006). Since forecasting is largely an unmonitored activity, market participants may fail in
  fully understanding this behavior thus not arbitraging away these inefficiencies.

  Doron Nissim and Stephen H. Penman, (2001) in their paper discusses about financial
  statement analysis which has been traditionally seen as part of the fundamental analysis
  required for equity valuation. But the analysis has typically been ad hoc. Drawing on recent
  research on accounting-based valuation, this paper outlines a financial statement analysis for
  use in equity valuation. Standard profitability analysis is incorporated, and extended, and is
  complemented with an analysis of growth. An analysis of operating activities is distinguished
  from the analysis of financing activities. The perspective is one of forecasting payoffs to
  equities. So financial statement analysis is presented as a matter of pro form analysis of the
  future, with forecasted ratios viewed as building blocks of forecasts of payoffs. The analysis
  of current financial statements is then seen as a matter of identifying current ratios as

COLLEGE NAME                                                                             Page 25
  predictors of the future ratios that determine equity payoffs. The financial statement analysis
  is hierarchical, with ratios lower in the ordering identified as finer information about those
  higher up. To provide historical benchmarks for forecasting, typical values for ratios are
  documented for the period 1963–1999, along with their cross-sectional variation and
  correlation. And, again with a view to forecasting, the time series behavior of many of the
  ratios is also described and their typical long-run, steady-state levels are documented.

  James A. Ohlson, (2001) in this paper revisits Ohlson 1995 to make a number of points not
  generally appreciated in the literature. First, the residual income valuation (RIV) model does
  not serve as a crucial centerpiece in the analysis. Instead, RIV plays the role of condensing
  and streamlining the analysis, but without any effect on the substantive empirical
  conclusions. Second, the concept of "other information" in the model can be given concrete
  empirical content if one presumes that next-period expected earnings are observable.

  Robert D. Pritchard, (1968) discussed the theoretical precision and research related to equity
  theory, as it is conceived by Adams, is reviewed. While equity theory is a significant step
  forward, the theory itself needs further specification. The research supports equity
  predictions in the area of underpayment, but the overpayment effects have not been
  satisfactorily demonstrated. Elaborations of the theory are presented in the areas of (1)
  determinants of inequity, (2) dissatisfaction resulting from inequity, and (3) responses to

  Stephen H. Penman and Theodore Sougiannis, (1997) in their paper focused on Standard
  formulas for valuing the equity of going concerns as it require prediction of payoffs "to
  infinity" but practical analysis requires that they be predicted over finite horizons. This
  truncation inevitably involves (often troublesome) "terminal value" calculations. This paper
  contrasts dividend discount techniques, discounted cash flow analysis, and techniques based
  on accrual earnings when applied to a finite-horizon valuation. Valuations based on average
  ex-post payoffs over various horizons, with and without terminal value calculations, are
  compared with (ex-ante) market prices to give an indication of the error introduced by each
  technique in truncating the horizon. Comparisons of these errors show that accrual earnings
  techniques dominate free cash flow and dividend discounting approaches. Further, the
  relevant accounting features of techniques that make them less than ideal for finite horizon
  analysis are discovered. Conditions where a given technique requires particularly long
  forecasting horizons are identified and the performance of the alternative techniques under
  those conditions is examined.

COLLEGE NAME                                                                             Page 26
  Paul Gompers and Josh Lernera, (1998) described that inflows of capital into venture funds
  increase the valuation of these funds’ new investments. This effect is robust to (i) controlling
  for firm characteristics and public market valuations, (ii) examining first differences, and (iii)
  using inflows into leveraged buyout funds as an instrumental variable. Interaction terms
  suggest that the impact of venture capital inflows on prices is greatest in states with the most
  venture capital activity. Changes in valuations do not appear related to the ultimate success
  of these firms. The findings are consistent with competition for a limited number of attractive
  investments being responsible for rising prices.

  Xiao-Jun Zhang, (1999) in this paper examines how conservative accounting affects the
  relation between accounting data and firm value. The analysis shows that conservative
  accounting can be characterized equivalently in terms of book value, earnings, or book rate
  of return. Furthermore, capitalized earnings generally provide a less biased estimate of equity
  value than book value does. In addition, firm growth affects the way earnings and book
  values are combined in valuation. A weighted average of book value and capitalized
  earnings, with the weight on earnings being an increasing and convex function of growth,
  yields an asymptotically.

  Stephen H. Penman, (1997) in his paper focused on the fact that it is common to apply
  multipliers to earnings and book value to calculate approximate equity values. However,
  applying a price-earnings multiple or a price-to-book multiple typically produces two
  valuations and the analyst is left with the question of how to combine these into one
  valuation. His paper calculates weights that do this. It shows that these weights differ over
  the difference between earnings and book value and systematically so over time: when
  earnings are small compared to book value the weights are different from when earnings are
  large relative to book value, and they vary in a non-linear way over the difference between
  the two. The weights have the interpretation of combining forecasts of future earnings based
  on earnings and book value separately into one composite forecast that uses both pieces of
  information together. So the paper calculates a second set of weights to ascertain how the two
  numbers are combined to forecast one-year-ahead earnings and three-years-ahead earnings.
  The calculated weights are applied out of sample to ascertain their predictive ability against
  other benchmarks.

  Stephen H. Penman, (1998) in his paper lays out alternative equity valuation models that
  involve forecasting for finite periods and shows how they are related to each other. The paper
  contrasts dividend discounting models, discounted cash flow models, and residual income
  models based on accrual accounting. It shows that some models that are apparently different

COLLEGE NAME                                                                               Page 27
  yield the same valuation. It gives the general form of the terminal value calculation in these
  models and shows how this calculation serves to correct errors in the model. It also shows
  that all models can be interpreted as providing a particular specification of the terminal value
  for the dividend discount model. In so doing it shows how one calculates the terminal value
  for the dividend discount formula. The calculation involves weighting forecasted stocks and
  flows of value with weights determined by a parameter that can be discovered from pro
  forma analysis.

  John R.M. Hand and Wayne R. Landsman, (1999) in their paper employs Ohlson's (1995,
  1998) accounting based equity valuation model to structure an empirical assessment of the
  pricing of dividends in stock prices. They address two questions. First, to what extent does
  the pricing of dividends reflect Modigliani and Miller’s (1958, 1961) one-to-one
  displacement property? Second, what explains the direction and magnitude of any divergence
  from dividend displacement? Using annual cross-sections of NYSE, AMEX and NASDAQ
  firms over the period 1974-1996, they find robust evidence that dividends are materially
  positively priced, sharply contrasting with the negative relation predicted by dividend
  displacement. They also found that the positive pricing of dividends is at least three times
  larger for loss firms than for profit firms. Their explanation for these results is that managers
  of loss firms use dividends to signal future profitability, while to a lesser degree managers of
  profit firms use dividends to alleviate concerns about the misuse of free cash flow. They
  conclude that dividends are a component of, and rich proxy for, other information about
  future abnormal earnings that is reflected in price but is not yet captured by current financial

  Anita Mehra Prasada and Murli Rajanb, (2000) tried to examine the impact of exchange
  rate fluctuations and interest rate risk on equity valuation in Germany, Japan, the United
  Kingdom, and the United States. Their estimations indicate significant cross-sectional
  variations in the currency exposure of U.S. industries and interest rate exposure of Japanese
  industries. Exchange risk is priced in the United States for the overall period and in the
  Japanese and the U.K. markets during the second sub period. Interest rate risk is not priced in
  any of the markets during the overall sample period.

  Xiaoquan Jiang, (2005) given the failure of the conventional dividend discount model to
  explain volatile, dynamic stock price movements, he tested the empirical validity of an
  alternative model, the accounting‐based residual income model (RIM), which posits that the
  current stock price equals the current book value of equity plus the present value of expected
  future residual income. He also tested two implications of the two models: volatility of prices

COLLEGE NAME                                                                              Page 28
  relative to fundamentals and the model's dynamic implications by cross‐equation restrictions.
  From the study he found that, for stock valuation, book values and accounting earnings in the
  RIM contain more useful information than dividends alone.

  Alireza Nasse and Jack Strauss, (2003) examine whether there has been a stable relation
  between prices and dividends over the past 20 years for firms in the S&P 100. Their results
  support the present-value model and a close link between stock prices and dividends for most
  of the sample period. However, since the mid 1990s, the present-value model parameters
  indicate a 43% overvaluation of stock prices. They show that a short-run decline in long-term
  interest rates and a breakdown in the historic price–dividend relation can explain the

  Robert Brooks and Billy Helms, (2005) in their paper develops a dividend discount model
  that will allow as many growth stages as desired. The model is directly applicable to most
  common stocks in that quarterly dividends are assumed and you need not be on a dividend
  payment date. The equation is easily programmed into a computer and is computationally
  very fast. The Newton-Rhapson algorithm is suggested as a means for estimating the required
  rate of return.

  Thomas H. Paynea and J. Howard Finchb, (1999) focused on the importance of appropriate
  application of the constant growth dividend discount model (DDM) as it requires an
  understanding of the fundamental nature of the model and its parameters. They realized that
  It is important that students not only be able to mechanically “plug and chug” the formula,
  but that they also understand the model’s assumptions, inputs, sensitivity to error and
  practical limitations. This paper demonstrates that the valuation measure derived from using
  the DDM is very sensitive to the relationship between the required return on investment (Ks)
  and the assumed growth rate (g) in earnings and dividends. Examples show that the valuation
  error increases at an increasing rate when the values of Ks and g converge in the formula.
  Classroom experience has indicated that students believe and strive to compute a single
  “correct” valuation of the share price. They should realize that the goal of valuation analysis
  is to estimate a reasonable range for the intrinsic value of a share price, rather than a single
  point estimate as often implied by end-of-chapter and exam-type problems using the DDM.

  John R. Grahama and Campbell R. Harvey, (1999) conducted a survey of 392 CFOs about
  the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on
  present value techniques and the capital asset pricing model, while small firms are relatively
  likely to use the payback criterion. A surprising number of firms use firm risk rather than

COLLEGE NAME                                                                              Page 29
  project risk in evaluating new investments. Firms are concerned about financial flexibility
  and credit ratings when issuing debt, and earnings per share dilution and recent stock price
  appreciation when issuing equity. They found some support for the pecking-order and trade-
  off capital structure hypotheses but little evidence that executives are concerned about asset
  substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.

  Dechow, Huttonb, Meulbroekb and Sloana,(1998) found that Firms with low ratios of
  fundamentals (such as earning and book values) to market values are known to have
  systematically lower future stock returns. They document that short-sellers position
  themselves in the stock of such firms, and then cover their positions as the ratios mean-
  revert. They also show that short-sellers refine their trading strategies to minimize
  transactions costs and maximize their investment returns. Their evidence is consistent with
  short-sellers using information in these ratios to take positions in stocks with lower expected
  future returns.

  Thomas Oberlechner, (2001) in his article presents findings of a questionnaire and an
  interview survey on the perceived importance of chartist/technical and fundamental analysis
  among foreign exchange traders and financial journalists in Frankfurt, London, Vienna, and
  Zurich. Results confirm that most traders use both forecasting approaches and that the shorter
  the forecasting horizon, the more important chartist/technical analysis is. Financial journalists
  put more emphasis on fundamental analysis than do foreign exchange traders. Results
  indicate that the importance of chartism may have increased over the last decade. Regarding
  the use of chartist/technical and fundamental analysis on seven forecasting horizons, four
  distinct clusters of traders can be identified. Forecasting styles and the overall importance
  attached to fundamental versus chartist/technical analysis vary across different trading
  locations. Foreign exchange traders mention a s series of psychological motives and
  consequences of the use of chartism.

  Messod D. Beneish, Charles M. C. Lee and Robin L. Tarpley, (2001) examined the
  usefulness of contextual fundamental analysis for the prediction of extreme stock returns.
  Specifically, they use a two-stage approach to predict firms that are about to experience an
  extreme (up or down) price movement in the next quarter. In the first stage, they define the
  context for analysis by identifying extreme performers; in the second stage they develop a
  context-specific forecasting model to separate winners from losers. They show that extreme
  performers share many common market-related attributes, and that the incremental
  forecasting power of accounting variables with respect to future returns increases after

COLLEGE NAME                                                                               Page 30
  controlling for these attributes. Collectively, these results illustrate the usefulness of
  conducting fundamental analysis in context.

  Anthony C. Greig, (1992) re-examined the Ou and Penman (1989) conclusion that
  fundamental analysis identifies equity values not currently reflected in stock prices, and thus
  systematically predicts abnormal returns. Their fundamental summary measure Pr, the
  estimated probability of an earnings increase, also proxies for firm size and CAPM risk.
  After controlling cross-sectional differences in CAPM beta and firm size, no significant
  incremental predictive ability is attributable to Pr. The Pr measure is interpreted as a proxy
  for expected return differences rather than as new evidence of a systematic market under
  reaction to the future earnings signal inherent in current financial statements.

  Yu-Hon Luia and David Moleb, (1998) in their article reports the results of a questionnaire
  survey conducted in February 1995 on the use by foreign exchange dealers in Hong Kong of
  fundamental and technical analyses to form their forecasts of exchange rate movements.
  Their findings reveal that>85% of respondents rely on both fundamental and technical
  analyses for predicting future rate movements at different time horizons. At shorter horizons,
  there exists a skew towards reliance on technical analysis as opposed to fundamental
  analysis, but the skew becomes steadily reversed as the length of horizon considered is
  extended. Technical analysis is considered slightly more useful in forecasting trends than
  fundamental analysis, but significantly more useful in predicting turning points. Interest rate-
  related news is found to be a relatively important fundamental factor in exchange rate
  forecasting, while moving average and/or other trend-following systems are the most useful
  technical technique.

COLLEGE NAME                                                                              Page 31
               CHAPTER #3


COLLEGE NAME                   Page 32

Equity Research refers to the study of the performance of the economy as a whole, the
industry and various companies and analyzing the same. It enables to predict the future
performance of a particular stock based on its past performance, the current status of the
internal as well as the external environment.

 The internal environment includes:
      The financial performance
      The operational performance
      The future deals with the clients
      The share price trend
      The management of the company, i.e. the Board of Directors etc. The
      nature of the business

 The external environment includes:
      The Economy
      The global scenario with respect to the business
      General economic scenario
      Political scenario
      Performance of the stock market on the whole

 EQUITY RESEARCH can be done by two methods:

       Fundamental Analysis

      Here we look at balance sheet, income statement etc. to determine a company‘s value.
      In financial terms it is used to measure a company‘s intrinsic value. It takes a long term
      approach to analyze the market as compared to technical analysis. It often looks at
      data over a number of years.

       Technical Analysis

COLLEGE NAME                                                                            Page 33
      Technical traders study the price movements of the particular company's stock in the
      market. Technical analysts strongly believe that the price movements follow a trend
      a n d b y i d e n t i f y i n g t h e t r e n d , o n e c a n accurately predict the price that might
      occur in future. Technical analysts use financial tools with software support. One can
      be overawed by the terms and studies of a technical analyst when he/she
      explains the rationale behind the prediction. Technical analysis is used for a time
      frame of weeks, days or even minutes.

  I have used fundamental analysis for the purpose of my project. Fundamental Analysis is a
  conservative and non-speculative approach based on the fundamentals.
  The various steps in fundamental analysis are listed below.

       Economy
       Industry
       Company

A brief glimpse of each of these factors is explained on next page.


Primary sources:

The primary sources of data were Annual reports of the companies and discussion and inputs
from my corporate guide.

Secondary sources:

The other sources of data collection are journals, newspapers, research reports, capital market
service providers, available literature, estimation of analysts, annual reports. Here is an indicative
list of some sources:

Economic and political weekly

Capital market line magazine

Ministry of Finance

Economic Survey (2009-10)

COLLEGE NAME                                                                                       Page 34
RBI and Central statistical organization (CSO) reports etc.


  In the table below are some economic indicators and their possible impact on the stock
  market are given in a nutshell:-

  Economic Factors                Economic indicators          Impact on     the   stock
  GNP                         Growth                           Favorable
                              Decline                          Unfavorable
  Price Conditions            Stable                           Favorable
                              Inflation                        Unfavorable
  Economy                     Boom                             Favorable
                              Recession                        Unfavorable
  Employment                  Increase                         Favorable
                              Decrease                         Unfavorable
  Personal Disposable Income  Increase                         Favorable
                              Decrease                         Unfavorable
  Personal Savings            Increase                         Favorable
                              Decrease                         Unfavorable
  Interest Rates              Low                              Favorable
                              High                             Unfavorable
  Balance of Trade            Positive                         Favorable
                              Negative                         Unfavorable
  Strength of Rupee in Forex  Strong                            Favorable
  Market                      Weak                             Unfavorable
 Corporate Taxation, Direct &Low                              Favorable
 Indirect Taxes              High                             Unfavorable
* Self Constructed


        1. Overview- past and present scenario, market size, residential and commercial,
           various themes

COLLEGE NAME                                                                          Page 35
        2. Government. Policies
        3. Status in tier I, II and III cities
        4. Demand and Supply
        5. Problems
        7. Competition
                 Michael Porter Analysis
        8. Market Performance.


There may be situations where the industry is very attractive but a few companies within it
might not be doing all that well; similarly there may be one or two companies which may be
doing exceedingly well while the rest of the companies in the industry might be in doldrums.
You as an investor will have to consider both the financial and non- financial aspects so as to
form qualitative impression about a company .Some of the factors are: -

        1) About the Company
        2) Management Team
        3) Products / Services
        4)  SWOT Analysis.
        6) Operational Performance (With forecast)
                     Sales & its Growth
                     Segment Wise Analysis
                     Operating Profit Margin
                     Cost Structure
        7) Financial Performance
                     Profit/Loss & Balance Sheet (2years)
                     Ratios Analysis
        8) Valuation
                     Equity Valuation: Dividend discount model (DDM)
                                            - Gordon Growth Model or Constant Growth
                                            - Two Stage Model

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                      AN OVERVIEW OF RATIO ANALYSIS

Financial statement analysis or Ratio analysis is “The technique of the calculation of a number of
accounting ratio from the data or figures found in the financial statements, the comparison of the
accounting ratio with those of the previous years or with those of another concerns engaged in
similar, trade or with the standard ratio and interpretation of the comparison”.

The ratio analysis is useful in the following manner:-

       Ratio analysis simplifies the understanding of the financial statement.

       Financial statement contains a large number of financial figures. The study of these
       figures will not provide proper idea about their significance; hence it is necessary to
       establish relationship between figures to understand them better.

       It helps to determine the financial soundness of business; a management accountant can
       ascertain the financial position of undertaking with accounting ratio. He can evaluate the
       liquidity, solvency, profitability etc.

       Forecasting, planning, communication, control are the main activities of the
       management. They can be better performed through ratio analysis comparison of past
       performance with present of one concern with that of other etc. it even helps in areas
       where improvement in performance is lacking.

       The accounting ratios can be classified as follows :-
       •      Liquidity Ratios
       •      Asset Management Ratios
       •      Financial Leverage Ratios
       •      Profitability Ratios

Liquidity Ratio:
These ratios indicate the short term solvency position of the concern. This is weather the concern
will be able to meet its short-term liability. Out of its short term assets, it also indicates the

COLLEGE NAME                                                                              Page 37
working capital position of the concern. These ratios when they are compared with the turnover.
They also indicate whether there is any over-trading or under-trading.

    These ratios help the trader (owner), banker, short term lenders, to know weather the
     concern to capacity to repay the loans.
    These ratios help the management and share holder with long-term creditors. The long
     term creditors will know whether concern has to capacity to pay their interest, the
     management will know the financial position.

The Liquidity Ratios most commonly used are as follows:
1.     Current Ratio or Working Capital Ratio
2.     Quick Ratio, Liquid Ratio, Liquidity Ratio or Acid Test Ratio
3.     Absolute Liquid Raito or Cash Position Ratio or Cash Ratio

1. Current Ratio or Working Capital Ratio:
Current ratio is the ratio which expresses the relationship between current assets and current
liabilities. It helps in ascertaining the short term solvency ratio, and measures the availability of
working capital.
Current Assets Includes: Cash-in-hand, Cash-at-bank, B/R, Sundry Debtors, Stock (inventory),
Marketable Securities (short term investment), Pre-paid expenses, advance granted to staff and
income receivable.
Current liabilities include: those liabilities which will have to be repaid in 1 year time like ,B/P,
Sundry creditors, bank o/d, cash credit, short term loans, o/s expenses, incomes received in advance,
provision for income tax, unclaimed proposed dividends and any position of long term loan
following due for payment in current year from current assets.
Current Ratio is calculated as follows:

2. Quick Ratio:
This ratio compares the assets that are quickly converted into cash to current liabilities.
The Quick Ratio measures the ability to meet current obligations based on the most

COLLEGE NAME                                                                                 Page 38
liquid assets. Liquid assets include cash, marketable securities, and accounts receivable.
Quick Liabilities are: includes all current liabilities except bank o/d and cash credit.

Quick Ratio is calculated as follows:

3. Cash Ratio:
Absolute liquid assets and quick liabilities are taken for calculating this ratio. This ratio is used
to know the cash position of the company. Absolute Liquid assets include Cash in hand, cash at
bank, Realizable Marketable Securities. Quick Liabilities includes all current liabilities except
bank o/d and cash credit.
Cash ratio is calculated as follows

Financial Leverage Ratios:
This ratio measures the financial position of the owners. The long term solvency of the concern
and guides the management in proper administration. These ratios are helpful for long term
creditors, share holders and management. It is an important indicator of the relationship of
owner’s equity and borrowed funds.

The commonly used Financial Leverage Ratios are:

1.     Debt-to-equity Ratio or External and Internal Ratio.
2.     Net worth Ratio or Proprietary Ratio
3.     Solvency Ratio
4.     Fixed Asset to Net worth Ratio
5.     Current Asset to Net worth Ratio
6.     Current Liabilities to Net worth Ratio

COLLEGE NAME                                                                                 Page 39
7.     Capital Gearing Ratio
8.     Times Interest earned

1. Debt-to-equity Ratio or External and Internal Ratio:
This expresses the relationship between debt and equity. This ratio indicates the extent to which
debt is covered by shareholder’s fund. The debt-to-equity ratio tells how the firm finances its
operations with debt relative to the book value of its shareholders’ equity. It reflects the real
position of the equity holders and the lenders and indicates the company’s policies on the mix of
both the funds Debt refers to refers to long term liability. Equity refers to Proprietary fund
(owners fund) i.e. capital accumulated reserves and profitless issues and fictitious assets.
Debt-to- Equity Ratio is calculated as follows:

2. Net worth Ratio or Proprietary Ratio
This ratio expresses the relationship between net worth and total assets. Net worth means total
assets minus total liabilities or share holders fund. Total assets refer to all realizable assets; they
include all tangible assets and patents, copyrights, trademark. But they do not include goodwill
because it cannot be realised until the concern is sold or liquidated.
Net worth Ratio is calculated as follows:

3. Solvency Ratio:
This ratio is calculated with the help of total assets and total liabilities. It is an important
indicator of the financial position.

Solvency Ratio is calculated as follows:

COLLEGE NAME                                                                                   Page 40
4. Fixed Asset to Net worth Ratio:
This ratio expresses the relationship between fixed assets and net worth. This ratio states what
proportion of the shareholders funds are invested in the assets. If the ratio is more it indicates it
means majority of share holders’ funds are sunk in fixed assets and the concern has to manage its
working capital from borrowed funds. Fixed assets refer to assets like land and building,
machinery, furniture, vehicles etc. which are used permanently or for a longer period of time.
Fixed assets mean net fixed assets i.e. fixed assets minus depreciation. Net worth refers to share
holders’ funds.
The ratio is calculated as follows:

5. Current Asset to Net worth Ratio:
This suggests the position of current liability and owners fund in the enterprise. It compares the
current liabilities with the net worth of the company.
This ratio is calculated as follows:

6. Current Liabilities to Net worth Ratio:
This suggests the position of current liability and owners fund in the enterprise. It compares the
current liabilities with the net worth of the company.
This ratio is calculated as follows:

7. Capital Gearing Ratio:
It expresses the relationship between fixed interest and dividend, bearing securities to equity
share holders’ fund. Equity capital in this context means capital and all accumulated reserves

COLLEGE NAME                                                                                 Page 41
less loses and fictitious assets.
Fixed interest bearing securities: -refers to long term loan carrying fixed rate of interest e.g.:
debentures, long term fixed deposit.
Fixed dividend bearing shares: - refers to long term preference share capital, which is entitled to
a fixed rate of dividend.
This ratio is the measure of capital investment of equity share holder, if the fixed interest and
fixed dividend bearing securities are more than equity share holders fund, company is said to be
highly geared. On the other hand if the equity share holders fund is more than fixed interest and
dividend bearing securities then the company is said to be low geared. The degree of capital
gearing adopted will determine the future prospect of raising finance
Capital Gearing Ratio is calculated as follows:

8. Times Interest earned:
Times Interest Earned is the number of times the company’s earnings (before interest and taxes)
covers the interest expense. It represents the margin of safety in making fixed interest payments.
A high ratio is desirable from both creditors and management.
Times Interest Earned is calculated as follows:

Profitability ratios:
Profitability ratios measure the profitability of a concern. They reveal the total effect of a
concern. They reveal the total effect of business transaction, the profit earning capacity,
successful achievement of the concern in earning profits are the main source of finance for its
existence. Profit is the yard stick to measure efficiency of the owners, investors, creditors etc.
they indicate the safety of the funds and a source of extra benefits to the employees, for the
government, as they are the basis for tax collection. Even customers are benefited as they can
demand price reduction. They are the index of the economic progress of the country.

COLLEGE NAME                                                                               Page 42
The Profitability Ratios commonly used are:

1.     Gross Profit Ratio
2.     Net Profit Ratio
3.     Operating Profit Ratio
4.     Return on Investment
5.     Return on Equity
6.     Return on Asset

1. Gross Profit Ratio:
Gross profit ratio measures the relationship of gross profit to net sales and is generally expressed
in percentage. This ratio is an important measure of profitability ratio. It is useful to compare the
gross profit margin across similar business. In this context total income is considered to be the
sales. Total income is taken as sales in this context.
Gross Profit Ratio is calculated as follows:

2. Net Profit Ratio:
This ratio indicates the net margin earned in sales. Net profit means final balance of operating
and non operating income after meeting all expenses. It is a widely used measure of
performance. In this context total income is considered as sales. Total income is taken as sales in
this context.
The ratio is calculated as follows:

3. Operating Profit Ratio:
It establishes the relationship between cost of goods sold and other operating expenses to net
sales. Operating cost refers to all expenses incurred for operating a business. It comprises of cost

COLLEGE NAME                                                                                 Page 43
of goods sold, factory expenses, office and administrative expenses. Total income is considered
as total sales.
The ratio is calculated as follows:

4. Return on Investment:
It is the only measures that indicate the earnings of the business on capital employed. It is useful
for inter firm comparison. It helps to measure the efficiency of 2 or more departments within the
same organization. It helps to assess the relative profitability of different product. It helps to find
out whether alternative use of funds is justifiable. It also helps in profit planning.
The ratio is calculated as follows:

5. Return on Equity:
This ratio shows the profit attributable to the amount invested by the owners of the business. It
indicates the potential investors into the business what they might hope to receive as a return.
The stockholders equity includes share capital, share premium, distributable and non
distributable reserves.
The ratio is calculated as follows:

6. Return on Asset:
Return on Assets measures the net income returned on each dollar of assets. This ratio measures
overall profitability from our investment in assets.
The ratio is calculated as follows:

COLLEGE NAME                                                                                   Page 44
Market Value Ratios:
One final group of ratios that warrants some attention is Market Value Ratios. These ratios
attempt to measure the economic status of the organization within the marketplace. Investors use
these ratios to evaluate and monitor the progress of their investments.
The commonly used Market Value Ratios are:
1.      Earning Per Share
2.      Dividend Per Share
3.      Price Earning Ratio
4.      Dividend Yield
5.      Dividend Coverage
6.      Dividend Payout Ratio
7.      Book Value per Share

1. Earnings Per Share:
Whatever income remains in the business after all prior claims, other than owners claims, have
been paid , will belong to the ordinary shareholders who can then make a decision as to how
much of this income they wish to remove from business in the form of a dividend, and how
much they wish to retain in the business. The shareholders are particularly interested in knowing
how much have been earned during the financial year on each of the shares held by them. For
this reason earning per share is calculated. Growth in earnings is often monitored with Earnings
per Share (EPS). The EPS expresses the earnings of a company on a "per share" basis.
The ratio is calculated as under:

2. Dividend per Share:
This ratio calculates the dividend paid to each shareholder. It is the ratio of total dividend
attributable to the shareholders to the number of shares outstanding.
This ratio is calculated as follows:

COLLEGE NAME                                                                             Page 45
3. Dividend Yield :
The dividend yield ratio indicates the return that investors are obtaining on their investment in
the form of dividends. For investors interested in a source of income, the dividend yield is
important since it gives the investor an indication of how much dividends are paid by the
The ratio is calculated as under:

4. Dividend Coverage:
This ratio measures the extent of earnings that are being paid out in the form of dividend. It
indicates how many times the dividend paid are covered by earnings.
The ratio is calculated as under:

5. Price Earnings Ratio:
The relationship of the price of the stock in relation to EPS is expressed as the Price to Earnings
Ratio or P / E Ratio. Investors often refer to the P / E Ratio as a rough indicator of value for a
company. A high P / E Ratio would imply that investors are very optimistic (bullish) about the
future of the company since the price (which reflects market value) is selling for well above
current earnings. A low P / E Ratio would imply that investors view the company's future as
poor and thus, the price the company sells for is relatively low when compared to its earnings.
The P / E Ratio is calculated as follows:

COLLEGE NAME                                                                               Page 46
6. Dividend Payout Ratio:
This ratio looks at the dividend payment in relation to net income. It states what portion of the
net income is distributed as dividend.
The ratio is calculated as under:

7. Book Value per Share:
Book Value per Share expresses the total net assets of a business on a per share basis. This
allows us to compare the book values of a business to the stock price and gauge differences in
valuations. Net Assets available to shareholders can be calculated as Total Equity less Preferred
Book Value per Share is calculated as follows:

COLLEGE NAME                                                                             Page 47
                                  EQUITY VALUATION

                          DIVIDEND DISCOUNT MODEL (DDM):

The Dividend Discount Model is the most commonly used method for a firm’s equity valuation.
Financial theory states that the value of a stock is the worth of all the future cash flows expected
to be generated by the firm discounted by the appropriate risk adjusted rate. We can use
dividends as a measure of the cash flows returned to the shareholder.

Various inputs are required to value equity in this model. These are as follows:
    DPS = Dividend to be received in a n year.
    Ke = The expected rate of return for the investment
 The required rate of return can be estimated using the following formula:


         DPS refers to the dividend per share
         MPS refers to the market price per share
         g is the growth rate in the dividends


The Gordon Growth model (the Constant Growth Model) relies on the principle that
Dividends grow indefinitely at a constant rate. Use this model if your stock meets the Following
             • It pays out 90% or more of its Net Income in dividends;
             • Its leverage is expected to remain stable into the future;
             •Its growth rates are expected to be comparable to or lower than the
             economy’s nominal growth rate.

COLLEGE NAME                                                                                Page 48
                   =                                                             +….

This equation is a geometric series that can be simplified algebraically into:

                   =                          or

               = Expected dividends next year
           = Cost of Equity
         g = Growth rate in dividends forever
            = Value of a share of stock today


This model is based on two stages of growth – an initial phase where there is an extraordinary
growth phase that last n years and a subsequent stable growth phase that is expected to last


              = Value of a share of stock today
                  = Most recent dividends per share
             = Cost of equity; hg: high growth period, sg: stable growth period
               = extraordinary high-growth rate for n years

                = stable growth rate after year n

COLLEGE NAME                                                                           Page 49
   : Extraordinary growth rate for the first n years = Retention rate * ROE
        • Extraordinary growth can be defined as growth that cannot be sustained indefinitely.
        In a two-stage model, it can be used to grow variables like EPS, DPS, and assorted
        balance sheet items in the first stage. It can be found by multiplying the company’s
        Return on Equity by its Retention Rate (the % of earnings the company does not pay
        out in dividends). Retention rate = 1 – Dividend Payout Ratio.
    : Steady state growth rate forever after year n

COLLEGE NAME                                                                          Page 50
               CHAPTER #4


COLLEGE NAME                  Page 51
                                 ECONOMIC ANALYSIS

In the table below are some economic indicators and their possible impact on the stock market are
given in a nutshell and all the aspects have been discussed latter on according to present economic

  Economic Factors               Economic indicators          Impact on        the   stock
  GNP                         Growth                          Favorable
                              Decline                         Unfavorable
  Price Conditions            Stable                          Favorable
                              Inflation                       Unfavorable
  Economy                     Boom                            Favorable
                              Recession                       Unfavorable
  Employment                  Increase                        Favorable
                              Decrease                        Unfavorable
  Personal Disposable Income Increase                         Favorable
                              Decrease                        Unfavorable
  Personal Savings            Increase                        Favorable
                              Decrease                        Unfavorable
  Interest Rates              Low                             Favorable
                              High                            Unfavorable
  Balance of Trade            Positive                        Favorable
                              Negative                        Unfavorable
  Strength of Rupee in Forex Strong                            Favorable
  Market                      Weak                            Unfavorable
  Corporate Taxation         (Direct & Indirect Taxes)
                             Low                       Favorable
                             High                      Unfavorable


The fiscal year 2009-10 began as a difficult one. There was a significant slowdown in the growth
rate in the second half of 2008-09, following the financial crisis that began in the industrialized
nations in 2007 and spread to the real economy across the world. The growth rate of the gross
domestic product (GDP) in 2008-09 was 6.7 per cent, with growth in the last two quarters hovering
around 6 per cent. There was apprehension that this trend would persist for some time, as the full
impact of the economic slowdown in the developed world worked through the system. It was also

COLLEGE NAME                                                                               Page 52
a year of reckoning for the policymakers, who had taken a calculated risk in providing substantial
fiscal expansion to counter the negative fallout of the global slowdown. Inevitably, India’s fiscal
deficit increased from the end of 2007-08, reaching 6.8 per cent (budget estimate, BE) of GDP in
2009-10. A delayed and severely sub- normal monsoon added to the overall uncertainty. The
continued recession in the developed world, for the better part of 2009-10, meant a sluggish export
recovery and a slowdown in financial flows into the economy. Yet, over the span of the year, the
economy posted a remarkable recovery, not only in terms of overall growth figures but, more
importantly, in terms of certain fundamentals, which justify optimism for the Indian economy in
the medium to long term.

The real turnaround came in the second quarter of 2009-10 when the economy grew by 7.9 per cent.
As per the advance estimates of GDP for 2009-10, released by the Central Statistical Organization
(CSO), the economy is expected to grow at 7.2 per cent in 2009-10, with the industrial and the service
sectors growing at 8.2 and 8.7 per cent respectively. This recovery is impressive for at least three
reasons. First, it has come about despite a decline of 0.2 per cent in agricultural output, which was the
consequence of sub-normal monsoons. Second, it foreshadows renewed momentum in the
manufacturing sector, which had seen continuous decline in the growth rate for almost eight quarters
since 2007-08. Indeed, manufacturing growth has more than doubled from 3.2 per cent in 2008-09 to
8.9 per cent in 2009-10. Third, there has been a recovery in the growth rate of gross fixed capital
formation, which had declined significantly in 2008-09 as per the revised National Accounts Statistics
(NAS). While the growth rates of private and Government final consumption expenditure have dipped
in private consumption demand, there has been a pick-up in the growth of private investment demand.

The fast-paced recovery of the economy underscores the effectiveness of the policy response of the
Government in the wake of the financial crisis. Moreover, the broad- based nature of the recovery
creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last
fifteen to eighteen months, as part of the policy response to the global slowdown, so as to put the
economy back on to the growth path of 9 per cent per annum. A major concern during the year
2009-10, especially in the second half, was the emergence of high double-digit food inflation.
On a year-on-year basis, wholesale price index (WPI) headline inflation in December 2009 was
7.3 per cent but for food items (primary and manufactured) with a combined weight of 25.4 per
cent in the WPI basket, it was 19.8 per cent. Thus, unlike the first half of 2008-09 when global
cost-push factors resulted in WPI inflation touching nearly 13 per cent in August 2008, with
inflation in primary and manufactured products just below the overall average and that in the
fuel and power group at over 17 per cent, the upsurge in prices in the second half of 2009-10
has been more concentrated and confined to food items only. As of the week ending January 30,

COLLEGE NAME                                                                                     Page 53
2010 the inflation in primary food articles stood at 17.9 per cent, and that in fuel, power light
and lubricants at 10.4 per cent. A significant part of this inflation can be explained by supply-
side bottlenecks in some of the essential commodities, precipitated by the delayed and sub-
normal south- west monsoons. Since December 2009, there have been signs of these high food
prices, together with the gradual hardening of non-administered fuel product prices, getting
transmitted to other non-food items, thus creating some concerns about higher- than-anticipated
generalized inflation over the next few months.

        At global level, following one of the deepest downturns in recent times, economic
growth took root and extended to advanced economies in the second half of 2009. The pace and
shape of recovery, however, remains uncertain. The International Monetary Fund’s (IMF)
World Economic Outlook update of January 26, 2010 suggests that following a sharp decline of
3.2 per cent in 2009, output in the advanced economies has begun to expand since the second
half of 2009 and is now expected to grow by 2.1 per cent in 2010. In the case of emerging and
developing economies, the modest 2.1 per cent output growth in 2009 is expected to be
followed by a rise of about 6 per cent in 2010. For the world as a whole an output decline of 0.8
per cent in 2009 is projected to turn into a growth of 3.9 per cent in 2010. The rapid rebound in
world output has been driven by the extraordinary amount of policy stimulus, monetary as well
as fiscal. The concern about the recovery losing momentum, once the stimulus is withdrawn,
remains. High unemployment rates, growing fiscal deficit and contraction of credit to
productive sectors are areas of concern for the developed economies. For the emerging
economies, which are already on the path to recovery, there are challenges emanating from
increased capital flows with ramifications for monetary growth, inflation and exchange rate
uncertainty, along with policy implications for the capital account.


Overall GDP growth
With the release of the Quick Estimates of National Income for 2008-09, the CSO has effected a
revision in the base year of its NAS from 1999-2000 to 2004-05. It includes changes on account of
certain refinements in definitions of some aggregates, widening of coverage, inclusion of long-
term survey results and the normal revision in certain data in respect of 2008-09. While there are
no major changes in the overall growth rate of GDP at constant 2004-

COLLEGE NAME                                                                               Page 54
05 prices, except for 2007-08 where it has been revised upward from 9.0 to 9.2 per cent, there
are some changes in growth rates at sectoral level and in the level estimates of GDP. Thus, for
                           GROWTH RATES AT SECTORAL LEVEL

                                                     2005-06     2006-07      2007-08        2008-09
  Agriculture, Forestry & Fishing                    2009-10
                                                         5.2        3.7       4.7       1.6      -
  Mining & Quarrying                                      1.3      8.7       3.9       1.6       8.7

  Manufacturing                                            9.6     14.9      10.3       3.2
  Electricity, Gas & Water Supply                         6.6     10.0       8.5       3.9       8.2

  Construction                                            12.4     10.6      10.0       5.9
  Trade, Hotels & Restaurants                            12.4     11.2
                                                                   6.5       9.5       5.3
  Transport, Storage & Communication                      11.5     12.6      13.0      11.6
  Financing, Insurance, Real Estate              &        12.8     14.5      13.2      10.1
  Business Services                                                9.9
  GDP at Factor Cost
  Community, Social & Personal Services                   9.5
                                                           7.6     9.7
                                                                    2.6      9.2
                                                                              6.7      6.7
                                                                                       13.9      7.2
Source: Indian Economic Survey 2009-10.

 The contribution of the agriculture sector to the GDP at factor cost in 2004-05 has declined from
 17.4 per cent in the old series to 15.9 per cent in the new series. Similarly, while the contribution
 of registered manufacturing has declined from 10.9 per cent in the old series to 9.9 per cent in the
 new series, that of unregistered manufacturing has increased from 4.9 to 5.4 per cent. There is
 also an increase in the contribution of real estate, ownership of dwellings and business services
 from 8.2 per cent to 8.9 per cent. In the case of level estimates of GDP at current prices, the
 difference ranges from 3.1 per cent in 2004-05 to 6 per cent in 2008-09. As a result, there are
 also changes in the expenditure estimates of the GDP, which, as can be seen in the following
 paragraphs, has altered the analysis related to the impact of the global slowdown on the Indian
 economy as presented in the 1.7 The advance estimate of GDP growth at 7.2 per cent for

COLLEGE NAME                                                                                   Page 55
 2009-10, falls within the range of 7 +/- 0.75 projected nearly a year ago in the Economic
 Survey 2008-09. With the downside risk to growth due to the delayed and sub-normal
 monsoons having been contained to a large extent, through the likelihood of a better-than-average
 rabi agricultural season, the economy has responded well to the policy measures undertaken in
 the wake of the global financial crisis. While the GDP at factor costs at constant 2004-05 prices, is
 placed at Rs 44,53,064 crore, the GDP at market prices, at constant prices, is estimated at Rs 47,
 67,142 crore. The corresponding figures at current prices are Rs 57, 91,268 crore and Rs 61,
 64,178 crore respectively. It is worthwhile to note here that the growth rates of GDP at market
 prices, at constant 2004-05 prices, in 2008-09 and 2009-10 at 5.1 per cent and 6.8 per cent have
 been considerably lower than the growth rates of GDP at factor cost. This is due to the
 significant decline in net indirect taxes (i.e. indirect taxes minus subsidies) in the said years on
 account of the fiscal stimulus implemented by the Government, which included tax relief to
 boost demand and increase in the expenditure on subsidies.

The recovery in GDP growth for 2009-10, as indicated in the advance estimates, is broad based.
Seven out of eight sectors/sub-sectors show a growth rate of 6.5 per cent or higher. The
exception, as anticipated, is agriculture and allied sectors where the growth rate is estimated to
be minus 0.2 per cent over 2008-09. Sectors including mining and quarrying; manufacturing;
and electricity, gas and water supply have significantly improved their growth rates at over 8
per cent in comparison with 2008-09. The construction sector and trade, hotels, transport and
communication have also improved their growth rates over the preceding year, though to a
lesser extent. However, the growth rate of community, social and personal services has declined
significantly, though it continues to be around its pre-global crisis medium-term trend growth
rate. Financing, insurance, real estate and business services have retained their growth
momentum at around 10 per cent in 2009-10. In terms of sectoral shares, the share of
agriculture and allied sectors in GDP at factor cost has declined gradually from 18.9 per cent in
2004-05 to 14.6 per cent in 2009-10. During the same period, the share of industry has
remained the same at about 28 per cent, while that of services has gone up from 53.2 per cent in
2004-05 to 57.2 per cent in 2009-10. Continued momentum in the recovery, which is reflected
in the advance estimates for 2009-10.


The growth rates in per capita income and consumption, which are gross measures of welfare in
general, have declined in the last two years. This is a reflection of the slowdown in the overall
GDP growth. While the growth in per capita income, measured in terms of GDP at constant

COLLEGE NAME                                                                                 Page 56
market prices, has declined from a high of 8.1 per cent in 2007-08 to 3.7 per cent in 2008-09 and
then recovered to 5.3 per cent in 2009-10, per capita consumption growth as captured in the
private final consumption expenditure (PFCE) shows a declining trend since 2007-08 with its
growth rate in 2009-10 falling to one- third of that in 2007-08 (Table 1.3). The growth rate of per
capita consumption was lower than that of per capita income up to 2007-08; however since then
it was higher in two years and became lower again in 2009-10. The average growth in per capita
consumption over the period 2005-06 to 2009-10 was slower at 6.08 per cent than that in per
capita income at 6.52 per cent. These year to year differences in growth rates can be explained
by the rising savings rate and also the rise in tax collections that have been observed in some of
these years.
                   Income                              Consumption
                   Rs               (%)Growth          Rs                      (%) Growth
  2004-05          29,745                              17,620
  2005-06          32,012           7.6                18,909                  7.3
  2006-07          34,533           7.9                20,168                  6.7
  2007-08          37,328           8.1                21,841                  8.3
  2008-09          38,695           3.7                23,012                  5.4
  2009-10          40,745           5.3                23,626                  2.7

Source: Indian economic survey 2009-10.

COLLEGE NAME                                                                                Page 57

The change in the NAS series from the old base of 1999-2000 to the new base of 2004-05 has
brought about significant revision in the expenditure estimates of the GDP for 2008-09. While
growth of the PFCE in 2008-09 was revised upward from 2.9 per cent to 6.8 per cent, growth in
Government final consumption expenditure was revised downwards from over 20 per cent in
2008-09 on the old base to 16.7 per cent on the new base. In 2009-10 a growth of 4.1 per cent is
expected in private final expenditure and 8.2 per cent in Government final expenditure. There is
therefore a significant decline in the growth of consumption expenditure in 2009-10. However,
the overall share of consumption expenditure, both private as well as Government in GDP at
market prices, at constant 2004-05 prices, has declined only marginally from 70.9 per cent in
2008-09 to 69.6 per cent in 2009-10.

At the same time, the growth rate of gross fixed capital formation in 2008-09 has also undergone
a revision due to the change in the NAS base year. It was revised downward from 8.2 per cent in
the earlier base to 4 per cent in the revised base for 2008-09. It is, however, estimated to grow by
5.2 per cent in 2009-10. Moreover, gross capital formation adjusted shows a negative 4 per cent
growth in 2008-09 in the new NAS base. This is because of a significant decline in inventories
(change in stocks) from Rs1, 08,739 crore in the old base to Rs 59,812 crore in the new base.
The share of gross fixed capital formation in GDP remains nearly the same at 32.5 per cent in
2009-10 and 32.9 per cent in 2008-09.

Thus it now appears that moderation in the decline in GDP growth rate, in the second half
of2008-09, was primarily a result of the boost provided by the fiscal stimulus to consumption
demand, both private as well as Government, rather than the continued buoyancy in investment
growth, as indicated in the Economic Survey 2008-09. This in fact was the intended purpose of
the fiscal stimulus, which was not captured by the earlier NAS data. It implies that expansion in
investments in the manufacturing sector may have declined a lot faster and, perhaps, earlier than
the estimates for 2008-09 suggested in May 2009. This is, for example, reflected in the data on
contribution to growth, where the contribution of consumption, private as well as Government, to
growth saw a steep rise in 2008-09 while that of gross capital formation declined. Further,
though the growth in gross fixed capital formation (a proxy for investment growth) in 2009-10
has recovered to 5.2 per cent from 4 per cent in 2008-09, it is still below the GDP growth rate
unlike in the pre-global crisis phase.

COLLEGE NAME                                                                                Page 58
                  2004-05 MARKET PRICES (PER CENT):

                                       2004-05   2005-06   2006-07   2007-08   2008-09   2009-10

   GDP at Market Prices                              9.3       9.4       9.6       5.1       6.8
   Consumption (Private)                             9.0       8.2       9.8       6.8       4.1
   Consumption (Govt)                                8.3       3.8       9.7      16.7       8.2
   Gross Capital Formation                          14.7      14.5      16.9      -4.0        na
   Gross      Fixed      Capital                    15.3      14.3      15.2       4.0       5.2
   Formation                                        24.8      35.0      15.1     -61.2       4.7
   Change in Stocks
   Exports                                          25.9      21.8       5.2      19.3     -15.8
   Imports                                          32.5      22.0      10.0      23.0     -17.2
    Contribution to Growth
    Consumption (Private)                           57.3      51.3      59.7      78.2      36.0
   Consumption (Govt)                                9.8       4.4      10.4      33.6      13.9
   Gross Capital Formation                          51.4      52.6      62.7     -29.6        na
   Gross      Fixed      Capital                    47.3      46.1      50.1      25.8      25.5
   Formation                                       -18.6      -8.0     -15.0     -36.2      20.4
   Net Exports
   Consumption (Private)
   Relative Share                         59.2      59.1      58.4      58.5      59.5      58.0
   Consumption (Govt)                     11.0      10.9      10.3      10.3      11.5      11.6

   Gross Capital Formation                32.7      34.2      35.8      38.2      34.9       na
   Gross     Fixed           Capital      28.8      30.3      31.7      33.3      32.9      32.5
Source: Indian Economic Survey 2009-10

This makes it necessary, therefore, to watch the growth recovery in private investment in the
third and fourth quarters, in sequencing the rollback of the stimulus measures. Moreover, the
contribution of net exports has become positive in 2009-10, after a considerable period of time. It
may again turn negative as the demand for imports increases with a deepening of industrial
recovery and a pick-up in domestic demand. With growth in private expenditure on food,
beverages and tobacco falling behind the overall growth in private consumption expenditure, the
share of expenditure on food items has gradually been declining over the years. As per the CSO
data, it was 35.3 per cent in 2008-09 as against 39.6 per cent in 2004-05. At the same time, the
growth in expenditure on transport and communication and miscellaneous goods and services

COLLEGE NAME                                                                               Page 59
has been increasing, though with occasional aberrations, with the result that together they
account for nearly the same share in total private consumption as the expenditure on food items.



       Total foodgrains production in 2008-09 was estimated at 233.88 million tonnes as against
       230.78 million tonnes in 2007-08 and 217.28 million tonnes in 2006-07. In the
       agricultural season 2009-10, the impact of the delayed and sub-normal monsoon is
       reflected in the production and acreage data for kharif crops. Overall production of kharif
       cereals in 2009-10 has shown a decline of 18.51 million tonnes over 2008-09. Both for
       rice and coarse cereals, there has been a shortfall as compared to the targeted production
       and also the production level achieved in the previous year. In the case of rice the decline
       is about 15 per cent over the 2008-09 level and 17 per cent in comparison with the target
       for 2009-10.

       Sugarcane production in 2009-10 is estimated at 249.48 million tonnes, which is 9 per
       cent lower than the previous year and 27 per cent lower than the targeted production for
       2009-10. Cotton production in 2009-10 is estimated at 236.57 lakh bales (of 170 kg
       each), which is higher than the fourth advance estimates of 231.56 lakh bales in 2008-09
       by 2.2 per cent. However, it is lower than the target set for 2009-10 by 9 per cent.

       In terms of acreage, the kharif 2009-10 season saw a decline of nearly 6.5 per cent or
       46.18 lakh ha in the area covered under foodgrains. Almost the entire decline in this
       acreage was confined to the kharif rice crop. While the decline in kharif acreage under
       pulses was 5.63 per cent, the area under the nine oilseeds declined by 5.14 lakh ha. Some
       of this decline in acreage may have been made up by the increased acreage in the rabi
       season. As per the available estimates, wheat, pulses and groundnut have seen an increase
       in acreage as compared to last year.

       The total designed storage capacity at full reservoir level (FRL) of 81 major reservoirs in
       the country monitored by the Central Water Commission is 151.77 billion cubic metres

COLLEGE NAME                                                                               Page 60

                                             2004-05   2005-06     2006-07      2007-08     2008-09
                                                        Annual Growth (per cent)
   Food, Beverages & Tobacco                               7.5           3.8          7.2        2.7
   Clothing & Footwear                                    24.0         23.2           8.1       -0.6
   Gross Rent, Fuel & Power                                3.4           4.0          4.8        3.4
   Furniture, Furnishings Etc.                            14.1         15.9          14.6        3.7
   Medical Care & Health Services                          5.8           4.5          2.5        8.1
   Transport & Communication                               5.0           7.6          8.8      12.3
   Recreation,     Education   &  Cultural                 8.9           7.0         13.2        5.4
   Miscellaneous Goods & Services                         15.9         21.2          25.6      19.3
   Total Private Consumption                               8.6           8.3          9.6        6.8
                                                         Share of Total (per cent)
   Food, Beverages & Tobacco                    39.6      39.2         37.6          36.8      35.3
   Clothing & Footwear                           6.6       7.6           8.6          8.5       7.9
   Gross Rent, Fuel & Power                     13.0      12.4         11.9          11.4      11.0
   Furniture, Furnishings, etc.                  3.4       3.5           3.8          4.0       3.9
   Medical Care & Health Services                5.0       4.8           4.7          4.4       4.4
   Transport & Communication                    19.6      19.0         18.9          18.7      19.7
   Recreation,    Education     & Cultural       3.4       3.4           3.4          3.5       3.4
   Miscellaneous Goods & Services                9.4      10.0          11.2         12.8      14.4

Source: Indian Economic Survey 2009-10


COLLEGE NAME                                                                                  Page 61
Industry and Infrastructure

                                                                                    The cyclical
      slowdown in the industrial sector which began in 2007-08 got compounded by the global
      commodity price shock and the impact of the global slowdown during the course of
      calendar year 2008 was arrested at the beginning of 2009-10. After the first two months
      of the current fiscal, there were clear signs of recovery. This is evident from the NAS
      data as well as the index of industrial production (IIP). While the CSO’s advance
      estimates place industrial-sector growth at 8.2 per cent, as against 3.9 per cent in 2008-
      09, the IIP industrial growth is estimated at 7.7 per cent for the period April- November
      2009-10, significantly up from 0.6 per cent during the second half of 2008-09. The
      manufacturing sector, in particular, has grown at the rate of 8.9 per cent in 2009-10.
                                                                                    Growth in the
      major industrial groups has been a mixed bag. There was strong growth in automobiles,
      rubber and plastic products, wool and silk textiles, wood products, chemicals and
      miscellaneous manufacturing; modest growth in non- metallic mineral products; no
      growth in paper, leather, food and jute textiles; and a slump in beverages and tobacco
      products in 2009-10. In terms of use-based classification, there was strong growth in
      consumer durables and intermediate goods (partly aided by the base effect); moderate
      growth in basic and capital goods; and sharp deceleration in consumer non- durables.
      improvement in the cost structure of manufacturing companies seems to have catalysed
      the recovery. As the data on gross capital formation are available with a considerable lag,
      the investment picture is not yet clear. Growth in the production of capital goods, a proxy
      for investment, is improving, but different components of the “capital goods” group
      reflect a mixed picture during the current year. The strength of the recovery so far has
      been helped by the favourable base effect and mild inflation in manufacturing articles,
      especially of industrial inputs. The declining trend in the number of mandays lost because
      of strikes and lockouts witnessed in recent years has continued in 2009-10.

      industries and infrastructure services, led by the robust growth momentum of telecom
      services and spread across power, coal and other infrastructure like ports, civil aviation
      and roads, have also shown signs of recovery in 2009-10. In the current fiscal, electricity
      generation emerged from the lacklustre growth witnessed in the previous year and
      equalled its performance in 2007-08. That this was achieved despite constraints imposed

COLLEGE NAME                                                                             Page 62
    by the inadequate availability of coal and the dismal hydel- generation scenario due to the
    sub-normal monsoon, attests well to its potential. During April-December 2009, the peak
    deficit and total energy deficit came down considerably to 12.6 per cent and 9.8 per cent
    respectively from 13.8 per cent and 10.9 per cent during the corresponding period of the
    previous year. This happened mainly due to the increase in the growth in electricity
    generation. The availability of gas from the KG basin (D6) and surplus utilization of gas
    available on fallback basis resulted in better utilization of capacity and higher plant load
    factor (PLF) as also high growth in electricity generated from gas-based plants. The
    overall PLF also improved during April-December 2009.
                                                                                  The domestic
    supply of crude oil remained around 34 million metric tonnes (mmt) and natural gas at
    about 32 billion cubic metric tonnes during the past five years. With 15 new oil and gas
    discoveries during 2009-10, the domestic availability is expected to improve. During
    2009-10, the projected production for crude oil is 36.7 mmt, which is about 11 per cent
    higher than the actual crude oil production of 33.5 mmt in 2008-09.
    resource management, through increased wagon load, faster turnaround time and a more
    rational pricing policy, led to perceptible improvement in the performance of the
    railways. There has been no across-the-board increase in freight rates in recent years.
    Railways have taken a number of steps to attract additional traffic, one of which is the
    dynamic pricing policy through which differential tariff is charged to take care of skewed
    demand during different periods of the year and between different regions. A new class
    of non-stop super fast passenger-carrying “Duronto” trains has been introduced in
    September 2009. Seven Duronto trains have already been launched.
                                                                                  In 2009-10, as
    against the stipulated target of developing about a 3,165 km of national highways under
    various phases of the National Highway Development Project (NHDP), the achievement
    up to end November 2009 has been about 1,490 km. Similarly, as against the 2009-10
    target of about 9,800 km for awarding projects under various phases of the NHDP,
    projects totaling a length of about 1,285 km have been awarded up to end November
                                                                                  The opening
    of the telecom sector has not only led to rapid growth in subscriber base, but has also
    significantly helped in maximization of consumer benefits, particularly in terms of price
    discovery, following the forbearance approach in tariffs. From only 54.6 million
    telephone subscribers in 2003, the number increased to 429.7 million at the end of March

COLLEGE NAME                                                                            Page 63
       2009 and further to 562 million as of October 31, 2009 showing an addition of 96 million
       subscribers during the period from March to December 2009.


Gross domestic savings

Gross domestic savings (GDS) at current prices in 2008-09 were estimated at Rs 18,11,585
crore, amounting to 32.5 per cent of GDP at market prices as against 36.4 per cent in the
previous year. The fall in the rate of GDS has mainly been due to the fall in the rates of savings
of the public sector (from 5.0 per cent in 2007-08 to 1.4 per cent in 2008-09) and private
corporate sector (from 8.7 per cent in 2007-08 to 8.4 per cent in 2008-09). In respect of the
household sector, the rate of saving has remained at the same level of 22.6 per cent in 2007-08
and 2008-09. Indeed, the change in the NAS series has had the most conspicuous effect on the
savings and investment rates. The rate of GDS on the new series increased from 32.2 per cent in
2004-05 to 36.4 per cent in 2007-08 before declining to 32.5 per cent in 2009-10, as against the
old series where it rose from 31.7 per cent in 2004-05 to 37.7 per cent in 2007-08. Thus, from
2005-06 to 2007-08, the GDS rate was overestimated in the NAS old series by an average of 1.3
per cent. Definitional refinements, better estimates of savings and a higher denominator due to an
increase in the level estimates of GDP have contributed to the lowering of the rate of GDS in the
new NAS series.

COLLEGE NAME                                                                              Page 64
                     SECTORAL SHARE IN DOMESTIC SAVING 2008-09
Source: CSO Report

Capital formation
      Gross domestic capital formation(GDCF) at current prices (adjusted for errors and
      omissions) increased from Rs18,65,899 crore in 2007-08 to Rs19,44,328 crore in 2008-09
      and at constant (2004-05) prices, it decreased from Rs16,22,226 crore in 2007- 08 to
      Rs15,57,757 crore in 2008-09. The rate of gross capital formation at current prices rose from
      32.7 per cent in 2004-05 to 37.7 per cent in 2007-08 before declining to 34.9 per cent in 2008-
      At sectoral level, the rate of gross capital formation or simply the investment rate has
      increased in both the public and private sectors. In the former it rose continuously from
      7.4 per cent in 2004-05 to 9.4 per cent in 2008-09, whereas in the latter, it increased from
      23.8 per cent in 2004-05 to 27.6 per cent in 2007-08 before falling to 24.9 per cent in
      2008-09. The sectoral savings-investment gap, reflecting the gap between gross domestic
      savings and gross capital formation of a sector, declined significantly for the public sector
      as its savings increased until 2007-08. However, with a sudden drop in its savings rate by
      nearly 4 percentage point’s in2008-09, this gap shot to a negative 8 per cent. In the case
      of the private corporate sector, the savings- investment gap has been consistently positive
      and has risen in 2008-09 to 6.2 per cent after falling to 3.8 per cent in 2007-08 from 6.1
      per cent in 2004-05.

COLLEGE NAME                                                                                Page 65
Source: CSO Report

Sectoral investment

The sectoral investment rate is a useful indicator of the direction of new investments. While the
overall growth of investment in India was in the range of 15 to 16 per cent per annum during the
last few years, it plunged to - 2.4 per cent in 2008-09 as a result of the external shock-led

                                          TABLE -VII
                                  SECTORAL INVESTMENT RATE
                                                                 Rate of growth of GCF

                                                       2005-06   2006-07   2007-08       2008-09
Agriculture, Forestry & Fishing                        18.1      1.4       16.5          26
Agriculture                                            18.7      0.5       17.7          27.4
Forestry & Logging                                     27.3      16        -20           16
Fishing                                                9.5       9.5       9.5           9.5
Mining & Quarrying                                     40        3.5       14.6          -7.8
Manufacturing                                          14.8      25.5      19.8          -21.9
Electricity, Gas & Water Supply                        28.6      23.7      8.7           1.3

COLLEGE NAME                                                                               Page 66
 Construction                                             0.7       45.5       23.5       -22.8
 Trade, Hotels & Restaurants                              26.3      20.2       -16        19.4
 Trade                                                    24.9      23.2       -21        23.9
 Hotels & Restaurants                                     33.6      5.4        12.2       1.7
 Transport, Storage & Communication                       14.7      1          26.3       30.3
 Railways                                                 10.6      15.8       14         17.5
 Transport by Other Means                                 6.8       -2         27.8       13.7
 Storage                                                  -268.5    19.3       8.4        32.8
 Communication                                            27        -4.4       34.1       65.1
 Financing, Insurance, Real Estate & Business Services    5.7       1.3        16.8       10.5
 Banking & Insurance                                      46.3      38.3       1.4        -18
 Real Estate, Ownership Of Dwellings & Business
 Services                                                 4.4       -0.4       17.8       12
 Community, Social & Personal Services                    18        12.3       16.4       6.2
 Public Administration & Defence                          16        13.9       15.7       8.5
 Other Services                                           20.8      10.2       17.4       3
 Total                                                    16        16.1       15.2       -2.4
Source: Indian Economic Survey 2009-10

Within the industrial sector, the decline was more prominent in manufacturing and the
construction sector. Investment in the unorganized manufacturing sector declined by a negative
42 per cent, indicative, perhaps, of the difficulty faced by the sector in accessing credit due to the
tight market conditions in the post financial- crisis phase. Investment in the services sector
registered a growth of 20.2 per cent in 2006-07, which suddenly declined to - 16.0 per cent in
2007-08 as a result of a decline in investment in the trade, hotels and restaurants sub-sector. This
decline in the said sub-sector was made up in 2008-09 when, on the strength of a growth of 19.4
per cent, there was a revival in investment growth rate in the services sector as a whole. Within
the services sector, the global financial crisis has had a dampening effect on investment growth
in the banking and insurance sub- sector in 2008-09.


                                                                                   The year-on-
       year WPI inflation rate has been fairly volatile in 2009-10. It was 1.2 per cent in March
       2009 and then declined continuously to become negative during June-August 2009,
       assisted in part by the large statistical base effect from the previous year. It turned

COLLEGE NAME                                                                                 Page 67
    positive in September 2009 and accelerated to 4.8 per cent in November 2009 and further
    to 7.3 per cent in December 2009. For the fiscal year so far (March over December 2009)
    WPI inflation is estimated at 8 per cent.
    inflation in the composite food index (with a weight of 25.4 per cent) at 19.8 per cent in
    December 2009 was significantly higher than8.6 per cent last year. In respect of food
    articles, inflation on year-on-year basis in December was 19.2 per cent and on fiscal-year
    basis (i.e. over March 2009) it was 18.3 per cent. At the same time, the composite non-
    food inflation within the manufactured group of the WPI (with a weight of 53.7 per cent)
    at 2.4 per cent in December 2009 was lower than the 6.7 per cent recorded last year. This
    suggests concentrated inflation. Indeed, for several months, rapidly rising food inflation
    has been a cause for concern.
                                                                                In December
    2009, nearly 67 per cent of the overall WPI inflation could be attributed to food items
    (primary and manufactured), followed by 12 per cent in the fuel and power commodity
    group, the remaining 21 per cent being explained by manufactured non- food and primary
    non-food articles. Among food items the major contributors to inflation are milk (20 per
    cent), eggs, meat and fish (over 20 per cent), rice (about 10 per cent), wheat (6 per cent),
    pulses (about 9 per cent), potatoes (9 per cent) and tomatoes (6 per cent).
                                                                                The      recent
    period has witnessed significant divergence in the WPI and CPI inflation rates,
    principally on account of the larger weights assigned to the food basket in the CPIs and
    due to the fact that retail prices are relatively sticky downwards. Thus, due to the sharp
    increase in essential commodity prices, while all the four CPIs remained elevated since
    March 2008, rising gradually from about 7 to 8 per cent (month-on-month) to around 15
    to 17 per cent in December 2009, WPI inflation first went up from around 8 per cent in
    March 2008 to 13 per cent in August 2008, then declined to about 1 per cent in March
    2009, turned negative during June to August 2009 before rising again to over 7 per cent
    in December 2009.
                                                                                A significant
    part of this inflation can be explained by supply-side bottlenecks in some of the essential
    commodities, precipitated by the delayed and sub-normal south-west monsoons as well as
    drought-like conditions in some parts of the country. The delayed and erratic monsoons
    may also have prevented the seasonal decline in prices, normally seen during the period
    from October to March for most food articles other than wheat, from setting in. At the
    same time, it could be argued that excessive hype about kharif crop failure, not taking

COLLEGE NAME                                                                            Page 68
       into account the comfortable situation in respect of food stocks and the possibility of an
       improved rabi crop, may have exacerbated inflationary expectations encouraging
       hoarding and resulting in a higher inflation in food items. This is supported by the
       estimates on shortfall in production / availability of major food items in 2009-10 for rice
       and wheat, as also for some other items, except pulses. In the case of sugar, delay in the
       market release of imported raw sugar may have contributed to the overall uncertainty,
       thereby allowing prices to rise to unacceptably high levels in recent months.
                                                                                    The implicit
       deflator for GDP at market prices defined as the ratio of GDP at current prices to GDP at
       constant prices is the most comprehensive measure of inflation on annual basis, Unlike
       the WPI, the GDP deflator also covers prices in the services sector which now accounts
       for well over 55 per cent of the GDP. Inflation rose to 7.2 per cent in 2008-09. It has been
       estimated at 3.6 per cent in 2009-10 as per the advance estimates.
                                                                                    Similarly, in
       the absence of an economy-wide consumer price index, it is useful to look at the deflator
       for the PFCE as a more comprehensive measure of consumer inflation on an annual basis.
       It is defined as the ratio of PFCE at current prices to PFCE at constant prices. Thus
       consumer inflation, as measured by the deflator for the PFCE, increased from 2.9 per cent
       in 2005-06 to 5.9 per cent in 2006-07, followed by a decline in 2007-08 to 4 per cent,
       before rising again to 7 per cent in 2008-09 and estimated at 6.4 per cent in 2009-10, as
       per the advance estimates.


The global economy, led by the Asian economies especially China and India, has shown signs of
recovery in fiscal 2009-10. While global trade is gradually picking up, the other indicators of
economic activity such as capital flows, assets and commodity prices are more buoyant.

BOP developments H1 2009-10:

                                                                              As per the
       latest data for fiscal 2009-10, exports and imports showed substantial decline during
       April-September (H1) of 2009-10 vis-à-vis the corresponding period in 2008-09.

COLLEGE NAME                                                                               Page 69
    However, there has been improvement in the balance of payments (BoP) situation during
    H1 of 2009-10 over H1 of 2008-09, reflected in higher net capital inflows and lower trade
    deficit. The trade deficit was lower at US$ 58.2 billion during H1 (April-September) of
    2009 as compared to US$ 64.4 billion in April-September 2008 mainly on account of
    decline in oil import.
    exports on a BoP basis posted a decline of 27.0 per cent in H1 (April-September 2009) of
    2009-10 as against a growth of 48.1 per cent in the corresponding period of the previous
    year. Import payments declined by 20.6 per cent during April-September 2009 as against
    a sharp increase of 51.0 per cent in the corresponding period of the previous year. The
    decline in imports is mainly attributed to the base effect and decline in oil prices.
                                                                                   Net    capital
    flows to India at US $ 29.6 billion in April-September 2009 remained higher as compared
    to US $ 12.0 billion in April-September 2008. All the components, except loans and
    banking capital, that comprise net capital flows showed improvement during April-
    September 2009 from the level in the corresponding period of the previous year. Net
    inward FDI into India remained buoyant at US$ 21.0 billion during April-September
    2009 (US $ 20.7 billion in April-September 2008) reflecting better growth performance
    of the Indian economy. Due to large inward FDI, the net FDI (inward FDI minus outward
    FDI) was marginally higher at US$ 14.1 billion in April-September 2009, reflecting
    better growth performance of the Indian economy. Portfolio investment mainly
    comprising foreign institutional investors’ (FIIs) investments and American depository
    receipts (ADRs)/global depository receipts (GDRs) witnessed large net inflows (US $
    17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in April-
    September 2008) due to large purchases by FIIs in the Indian capital market reflecting
    revival in growth prospects of the economy and improvement in global investors’


    Given the uncertain global context, the Government did not fix an export target for
    2009-10, instead the Foreign Trade Policy (FTP) 2009-14 set the objective of an annual
    export growth of 15 per cent with an export target of US$ 200 billion by March 2011. With
    the deepening of the global recession, the beginning of 2009-10 saw acceleration in the fall
    of export growth rate. The upwardly revised export figures for the first half of 2008-09 also
    contributed to the faster decline in the growth rate. While the export growth rate was a

COLLEGE NAME                                                                            Page 70
    negative 22.3 per cent in April-November 2008-09, in November 2009, it became a
    positive 18.2 per cent after a 13-month period of negative growth. This significant turnaround
    is due to the low base figures in November 2008 (at $11.2 billion compared to $14.1 billion
    in October 2008 and $13.4 billion in December 2008). The export growth rate in November
    2009 over October 2009 was marginally positive at 0.04 per cent. In December 2009 the
    recovery in export growth has continued with a positive year-on-year growth of 9.3 per
    cent and a growth of 10.7 per cent over the previous month.

    During 2009-10 (April-December) import growth was a negative 23.6 per cent
    accompanied by a decline in both POL and non-POL imports of 29.8 per cent and 20.7
    per cent respectively. Gold and silver imports registered negative growth of 7.3 per cent
    primarily on account of the volatility in gold prices. The continuous rise in prices of gold
    also dampened the demand. Non-POL non-bullion imports declined by 22.4 per cent
    reflecting slowdown in industrial activity and lower demand for exports. Import growth
    was at a positive 27.2 per cent in December 2009 due partly to the base effect and partly
    the 42.8 per cent increase in the growth of POL products with the pick-up in oil prices
    and industrial demand. Non-POL items also registered a significant growth in imports at
    22.4 per cent, despite a high negative growth of gold and silver imports.
    Trade deficit fell by 28.2 per cent to US$ 76.2 billion (as per customs data) in 2009-10
    (April– December) from US$ 106 billion in the corresponding period of the previous
    year. There have been significant changes in the composition and direction of both
    exports and imports in this period.


    1.49 During fiscal 2009-10, foreign exchange reserves increased by US$ 31.5 billion
    from US$ 252.0 billion in end March 2009 to US$ 283.5 billion in end December 2009.
    Out of the total accretion of US$ 31.5 billion, US$ 11.2 billion (35.6 per cent) was on
    BoP basis (i.e excluding valuation effect), because of higher inflows under FDI and
    portfolio investments, while accretion of US$ 20.3 billion (64.4 per cent) was on account
    of valuation gain due to weakness of the US dollar against major currencies. Besides, the
    Reserve Bank of India (RBI) concluded the purchase of 200 metric tonnes of gold from
    the IMF, under the IMF’s limited gold sales programme at the cost of US$ 6.7 billion in
    the month of November 2009. Further, a general allocation of SDR 3,082 million
    (equivalent to US$ 4,821 million) and a special allocation of SDR 214.6 million
    (equivalent to US$ 340 million) were made to India by the IMF on August 28, 2009 and

COLLEGE NAME                                                                             Page 71
      September 9, 2009 respectively.

Exchange Rate

      In fiscal 2009-10, with the signs of recovery and return of FII flows after March 2009, the
      rupee has been strengthening against the US dollar. The movement of the exchange rate
      in the year 2009-10 indicated that the average monthly exchange rate of the rupee against
      the US dollar appreciated by 9.9 per cent from Rs 51.23 per US dollar in March 2009 to
      Rs 46.63 per US dollar in December 2009, mainly on account of weakening of the US
      dollar in the international market.

   Source: FICCI Report


                                                                                  Since   the
      outbreak of the global financial crisis in September 2008, the RBI has followed an
      accommodative monetary policy. In the course of 2009-10, this stance was principally
      geared towards supporting early recovery of the growth momentum, while facilitating the
      unprecedented borrowing requirement of the Government to fund its fiscal deficit. The
      fact that the latter was managed well with nearly two-thirds of the borrowing

COLLEGE NAME                                                                             Page 72
    transmission of monetary policy measures continues to be sluggish and differential in its
    impact across various segments of the financial markets The downward revisions in
    policy rates announced by the RBI post-September 2008 got transmitted into the money
    and G-Sec markets; however, the transmission has been slow and lagged the in the case
    of the credit market. Though lending rates of all categories of banks (public, private and
    foreign) declined marginally from March 2009 (with benchmark prime lending rates
    [BPLR] of scheduled commercial banks [SCBs] having declined by 25 to 100 basis
    points), the decline was not sufficient to accelerate the demand for bank credit.
    Consequently, while borrowers have turned to alternate sources of possibly cheaper
    finance to meet their funding needs, banks flush with liquidity parked their surplus funds
    under the reverse repo window.
                                                                                There      has
    been continuous moderation in the growth in broad money (M ) from around 21 per cent
    at the beginning of the fiscal year to 16.5 per cent as of mid-January 2010 and it has
    remained below the indicated growth projection for the period. While in the first half of
    the year, credit to the Government remained the key driver of money growth, since the
    third quarter of 2009-10 that too has moderated Demand for bank credit/non-food credit
    remained muted during 2009-10. It was only from November 2009 that some signs of
    pick-up became evident. On financial-year basis (over end March), growth in non-food
    credit remained negative till June 2009. The lower expansion in credit relative to the
    significant expansion in deposits during 2009-10 has resulted in a decline in the credit-
    deposit ratio from 72.4 in end March 2009 to 70.8 in mid- January 2010, though with
    some signs of revival since December 2009.
                                                                                Growth       in
    sectoral deployment of gross bank credit on a year-on-year basis (as on November 20,
    2010) shows that retail credit has not picked up during 2009-10 (Table 1.9). While
    growth in credit to agriculture remained more or less the same as on the corresponding
    date of the preceding year, for the other broad sectors–industry, personal loans and
    services—growth in credit decelerated as compared to the corresponding period of the
    preceding year. The personal loans category has fared the worst with credit deployment
    showing negative variation for sub- categories like (i) Advances against Fixed Deposits,
    (ii) Credit Card Outstanding and (iii) Consumer Durables. It would be necessary to
    monitor these indicators for an improvement in credit growth, while sequencing measures
    to roll back the stimulus.

COLLEGE NAME                                                                           Page 73
                                                                                    There      has
         been significant increase by Rs 50,000 crore during April-January 2009-10 in the
         availability of non-banking resources, which has helped industry meet its credit needs.
         Thus adjusted non-food credit that accounted for nearly 48 per cent of the total flow of
         funds to the commercial sector in 2008-09 (April-January), accounted for only 39 per
         cent of the flow of funds in 2009-10 (April-January). On the other hand, the contribution
         of non-bank sources increased from 52 per cent in 2008-09 to nearly 61 per cent in 2009-
         10 for the same period.

Sector                                                                   % Variation (year-on-year)
                                                                2008-09(Nov. 21)    2009-10(Nov. 20)
Non-food Gross Bank Credit (1 to 4)                                    28.0                 10.4
1.   Agriculture and Allied Activities                                  21.5                21.4
2.   Industry                                                           37.0                14.2
3.   Personal Loans                                                     13.2                  0.7
     Housing                                                            9.1                   7.3
     Advances against Fixed Deposits                                    27.7                -11.8
     Credit Card Outstanding                                            25.7                -24.7
     Education                                                          38.3                 31.0
     Consumer Durables                                                  -9.8                -11.8
4.   Services                                                           32.9                 7.9
     Transport Operators                                                24.4                10.6
     Professional Services                                              80.1                 7.0
     Trade                                                              20.5                14.4
     Real Estate Loans                                                  49.0                15.3
     Non-banking Financial Companies                                    54.0                19.5
Priority Sector                                                         22.6                15.4

Source: CSO Report


COLLEGE NAME                                                                                Page 74
                                                                                 The      fiscal
    expansion undertaken by the Central Government as a part of the policy response to
    counter the impact of the global economic slowdown in 2008-09 was continued in fiscal
    2009-10. The expansion took the form of tax relief to boost demand and increased
    expenditure on public projects to create employment and public assets. The net result was
    an increase in fiscal deficit from 2.6 per cent in 2007-08 to 5.9 per cent of the revised
    GDP (new series) in 2008-09 (provisional) and 6.5 per cent in the budget estimates for
    2009-10 (as against 6.8 per cent of the GDP on the old series, reported earlier). Thus the
    fiscal stimulus amounted to 3.3 per cent of the GDP in 2008-09 and 3.9 per cent in 2009-
    10 from the level of the fiscal deficit in 2007-08.
                                                                                 As part of the
    fiscal stimulus, the Government also enhanced the borrowing limits of the State
    Governments by relaxing the targets by 100 basis points. As a result, the gross fiscal
    deficit of the States combined rose from 1.4 per cent of the GDP in 2007-08 to 2.6 per
    cent in 2008-09 (revised estimates [RE]) and was estimated at 3.2 per cent of the GDP in
    2009-10 (BE).
    implementing the fiscal stimulus, the Central Plan expenditure was frontloaded. This is
    evident from its growth of 34.3 per cent and 18.0 per cent in 2008-09 and 2009-10 (BE),
    respectively. As a proportion of the GDP, the Plan expenditure at 5.3 per cent of the GDP
    in 2009-10(BE) was the highest in recent years. Non-Plan expenditure grew by 19.4 per
    cent and 14.8 per cent respectively in 2008-09 and 2009-10 (BE).
                                                                                 The relative
    success of the fiscal stimulus in supporting effective demand, particularly the
    consumption demand, in 2008-09 and 2009-10 could be traced to its composition. The
    approach of the Government was to increase the disposable income in the hands of the
    people, for instance by effecting reductions in indirect taxes (excise and service tax) and
    by expanding public expenditure on programmes like the National Rural Employment
    Guarantee Act (NREGA) and on rural infrastructure. The implementation of the Sixth
    Pay Commission recommendations and the debt relief to farmers also contributed to this
    end. The fact that the approach worked is attested to by the GDP growth rate and more
    specifically by the growth in private consumption demand in 2008-09 and also in 2009-
    10 as reflected in the relevant data on the NAS new series. Consumption expenditure, by
    its very nature, has short lags, and affects demand quickly, with little or no effect on
    productivity, while productive infrastructure expenditure takes much longer to translate
    into effective demand. The recovery having taken root now necessitates a review of

COLLEGE NAME                                                                            Page 75
       public spending. It has to be geared towards building medium-term productivity of the
       economy and making up for the decline in investment growth in certain sectors of the
       recommendations of the Thirteen Finance Commission (FC-XIII) have to be taken on
       board in shaping the fiscal policy for 2010-11 and in the medium term. The FC-XIII has
       recommended a calibrated exit strategy from the expansionary fiscal stance of 2008-09
       and 2009-10 as the main agenda of the Central Government. Further, it has suggested that
       the revenue deficit of the Centre needs to be progressively reduced and eliminated,
       followed by emergence of revenue surplus by 2014-15. Perhaps for the first time, a cap
       on the overall debt of the Government has been recommended. It has suggested a target
       of 68 per cent of the GDP for the combined debt of the Centre and the States to be
       achieved by 2014-15. Thus the fiscal consolidation path embodies steady reduction in the
       augmented debt stock of the Centre to 45 per cent of the GDP by 2014-15, and that of the
       States to less than 25 per cent of the GDP by 2014-15. The FC-XIII has also suggested
       the need for the FRBM Act to specify the nature of shocks that would require a relaxation
       of targets under the Act. It has recommended that the share of States in the net proceeds
       of shareable Central taxes be 32 per cent in each of the financial years from 2010-11 to

                                    2007-08             2008-09           2008-09        2009-

Adjusted Non-food Bank Credit*           44.2              45.7             47.7          39.2

Flow from Non-banks                      55.8              54.3             52.3          60.8

 Domestic Sources                        25.4              34.0             28.1          33.0

 Foreign Sources                         30.4              20.3             24.2          27.8

 Source: RBI Report.


                                                                              Fiscal 2009-
       10 saw the strengthening of several public initiatives and programmes with a view to

COLLEGE NAME                                                                            Page 76
    cushioning the impact of the global slowdown on the more vulnerable segments of the
    population in the country. While some of these programmes were a part of the ongoing
    interventions to give effect to a more inclusive development strategy, there were some
    measures that were undertaken as a direct response to the slowdown of growth, especially
    in the tradable sectors of the economy. Thus emphasis in favour of higher allocation to
    social-sector development given in recent years continued to be reflected in the
    allocations under the Union Budget 2009-10. The share of Central Government
    expenditure on social services including rural development in total expenditure (Plan and
    non-Plan) increased to 19.46 per cent in 2009-10 (BE) from about 10.46 per cent in 2003-
    04. Similarly, expenditure on social services by General Government (Centre and States
    combined) as a proportion of total expenditure increased from 19.9 per cent in 2004-05 to
    23.8 per cent in 2009-10 (BE). Further, sector-specific increases including in education,
    health and rural development were reinforced in the Budget allocations for 2009-10.
                                                                               A        major
    concern was regarding the possibility of a rise in unemployment due to the slowdown of
    the economy. While comprehensive employment data for the current financial year are
    not available, some sample surveys conducted by the Labour Bureau, Ministry of Labour
    and Employment, Government of India, indicated job losses in the wake of the global
    financial crisis, which seem to have been reversed in recent months. Thus employment is
    estimated to have declined by 4.91 lakh during the third quarter (October-December) of
    2008; it increased by 2.76 lakh during January-March 2009, followed by a decline of 1.31
    lakh during April-Jun 2009, and then an increase of 4.97 lakh during the second quarter
    (July-September) 2009. On the whole, for the period October 2008 to September2009,
    there may have been a net addition of 1.51 lakh jobs in the sectors covered under the said
                                                                               Under       the
    NREGA, which is a major rural employment initiative, during the year 2009-10, 4.34
    crore households have been provided employment so far. Out of the 182.88 crore person
    days created under the scheme during this period, 29 per cent and 22 per cent were in
    favour of Scheduled Caste and Scheduled Tribe population respectively and 50 per cent
    in favour of women.


                                                                         There       are
    several factors that have emerged from the performance of the economy in the last 12

COLLEGE NAME                                                                          Page 77
    months, which, combined with an analysis of performance over the last couple of years,
    augur well for the Indian economy. There are some deep changes that have taken place in
    India, which suggest that the economy’s fundamentals are strong. First, the rates of
    savings and investment have reached levels that even ten years ago would have been
    dismissed as a pipedream for India. On this important dimension, India is now
    completely a part of the world’s fast- growing economies. In 2008-09 gross domestic
    savings as a percentage of GDP were 32.5 per cent and gross domestic capital formation
    34.9 per cent. These figures, which are a little lower than what had been achieved before
    the fiscal stimulus was put into place, fall comfortably within the range of figures one
    traditionally associated with the East Asian economies. In 2007 South Korea had a
    savings rate of 30 per cent, Japan 28 per cent, Malaysia 38 per cent and Thailand 33 per
    cent. Since these indicators are some of the strongest correlates of growth and do not
    fluctuate wildly, they speak very well for India’s medium-term growth prospects. It also
    has to be kept in mind that, as the demographic dividend begins to pay off in India, with
    the working age-group population rising disproportionately over the next two decades,
    the savings rate is likely to rise further. Second, the arrival of India’s corporations in the
    global market place and informal indicators of the sophisticated corporate culture that
    many of these companies exhibit also lend to the optimistic prognosis for the economy in
    the medium to long run.
                                                                                   In          the
    medium term it is reasonable to expect that the economy will go back to the robust
    growth path of around 9 per cent that it was on before the global crisis slowed it down in
    2008. To begin with, there has been a revival in investment and private consumption
    demand, though the recovery is yet to attain the pre-2008 momentum. Second, Indian
    exports have recorded impressive growth in November and December 2009 and early
    indications of the January 2010 data on exports are also encouraging. Further,
    infrastructure services, including, railway, transport, power, telecommunications and,
    more recently but to a lesser extent, civil aviation, have shown a remarkable turnaround
    since the second quarter of 2009-10. The favorable capital market conditions with
    improvement in capital flows and business sentiments, as per the RBI’s business
    expectations survey, are also encouraging. Finally, and even though it is too early to tell
    if this is a trend, the manufacturing sector has been showing a buoyancy in recent months
    rarely seen before. The growth rate of the index of industrial production for December
    2009—the latest month for which quick estimates are available—was a remarkable 16.8
    per cent. There is also a substantial pick-up in corporate earnings and profit margins.

COLLEGE NAME                                                                             Page 78
                                                                                  Given      the
    steadily improving fundamentals of the economy discussed at the start of this subsection,
    over and above the short-term improvements that occurred during the current fiscal year,
    the medium-term prospects of the Indian economy are really strong. If, in addition to this,
    there are improvements in infrastructure, both urban and rural, and reform in governance
    and administration, which cuts down bureaucratic transactions costs that slow down
    enterprise in India and breed corruption, it is entirely possible for India to move into the
    rarefied domain of double-digit growth and even attempt to don the mantle of the fastest-
    growing economy in the world within the next four years. If this can be coupled with
    targeted Government interventions, some of which have recently been undertaken and
    some that are on the agenda, to include the marginalized segments of the population in
    this development process, then the ultimate aim of rapid growth, which is to raise the
    standard of living of the disadvantaged and to eradicate poverty, should also be within
    reach in the not-too-distant future.

                             BUDGET 2010 ANALYSES

                        SECTORIAL IMPACT OF BUDGET 2010
    Positive                   Neutral                           Negative

COLLEGE NAME                                                                            Page 79
             Household                    Auto Components &                 Airport
              Appliances                    Tyres                              Infrastructure
             Media and                    Automobiles                       Cement
             Entertainment                Banking and finance               Information
             Oil and Gas                  Construction                      Technology
             Textiles                     Fertilisers                       Ports
                                           Hotels                            Roads
                                           Non-Ferrous Metals                Telecom
                                           Paper
                                           Petrochemicals
                                           Pharmaceuticals
                                           Power
                                           Real Estate - Residential
                                           Steel
                                           Sugar

Source: Crisil Research

FMCG – Positive
Key announcements                                        Impact
What came in?
Continued spending        on   rural       and     social Positive for all FMCG companies
Roll-back in excise duty reduction from 8% to 10% Negative for FMCG companies especially
                                                  HUL as higher sales from non-excise free
                                                  units. Neutral for Dabur

COLLEGE NAME                                                                                    Page 80
New excise slab of Rs669/100 sticks introduced in      Negative for cigarette manufacturers.
filter cigarettes under 60mm. Excise on other filter   Marginal impact on ITC (exited non-filter
cigarettes raised by 9-18%, excise on non-filter       segment), has already increased prices of its
cigarettes (>60mm but <70mm) increased by 11%          Gold Flake brand and can take suitable price
                                                       hikes to mitigate the impact
Government to set up five additional mega food Positive for food processing companies
Excise duty of 10% levied (earlier Nil) on baby & Negative for Procter & Gamble Hygiene and
clinical diapers and sanitary napkins             Health Care
Excise duty on goods covered under the Medicinal Positive for HUL as deodorants and
and Toilet Preparations Act reduced from 16% to perfumes could get cheaper
Concessional customs duty of 5% presently Positive for tea and coffee plantations
available on specified machinery for tea and coffee companies like Mcleod Russel, Tata Coffee
plantation extended and excise duty exemption on
these items is re-introduced upto 31.03.2011
Increase in MAT rate from 15% to 18%                   Negative for Dabur and GCPL
Current surcharge of 10% on domestic companies Positive for Nestle,                GlaxoSmithKline
reduced to 7.5%                                Consumer Healthcare
What did not come?
3 years accelerated depreciation of 200% on R & D Negative for food processing companies
for new units in Food Processing and Packaging

                               INDUSTRY ANALYSIS

In analyzing a firm’s profit potential, an analyst has to first assess the profit potential of each of
the industries in which the firm is competing, because the profitability of various industries
differs systematically and predictably over time. For example, the ratio of earnings before
interest and taxes to the book value of assets for all U.S. companies between 1981 and 1997 was
8.8 percent. However, the average returns varied widely across specific industries: for the bakery
products industry, the profitability ratio was 43 percentage points greater than the population
average, and 23 percentage points less than the population average for the silver ore mining

COLLEGE NAME                                                                                 Page 81
                                POTTER’S FIVE POINTS MODEL
There is a vast body of research in industrial organization on the influence of industry structure
on profitability. Relying on this research, strategy literature suggests that the average profitability
of an industry is influenced by the “five forces” shown in Figure below. According to this
framework, the intensity of competition determines the potential for creating abnormal profits by
the firms in an industry. Whether or not the potential profits are kept by the industry is
determined by the relative bargaining power of the buyer.


COLLEGE NAME                                                                                  Page 82
In most industries, the average level of profitability is primarily influenced by the nature of
rivalry among existing firms in the industry. In some industries, firms compete aggressively,
pushing prices close to (and sometimes below) the marginal cost. In other industries, firms do
not compete aggressively on price. Instead, they find ways to coordinate their pricing, or
compete on non price dimensions, such as innovation or brand image. Several factors determine
the intensity of competition between existing players in an industry

                                                                                 INDUSTRY

If an industry is growing very rapidly, incumbent firms need not grab market share from each
other to grow. In contrast, in stagnant industries, the only way existing firms can grow is by
taking share away from the other players. In this situation, one can expect price wars among
firms in the industry.

                                                                                 CONCENTR

The number of firms in an industry and their relative sizes determine the degree of concentration
in an industry. The degree of concentration influences the extent to which firms in an industry
can coordinate their pricing and other competitive moves. For example, if there is one dominant
firm in an industry (such as IBM in the mainframe computer industry in the 1970s), it can set and
enforce the rules of competition. Similarly, if there are only two or three equal-sized players
(such as Coke and Pepsi in the U.S. soft-drink industry), they can implicitly cooperate with each
other to avoid destructive price competition. If an industry is fragmented, price competition is
likely to be severe.

                                                                                 DEGREE OF

The extent to which firms in an industry can avoid head-on competition depends on the extent to
which they can differentiate their products and services. If the products in an industry are very
similar, customers are ready to switch from one competitor to another purely on the basis of
price. Switching costs also determine customers’ propensity to move from one product to
another. When switching costs are low, there is a greater incentive for firms in an industry to
engage in price competition.

COLLEGE NAME                                                                             Page 83
                                                           SCALE/LEA

If there is a steep learning curve or there are other types of scale economies in an industry, size
becomes an important factor for firms in the industry. In such situations, there are incentives to
engage in aggressive competition for market share. Similarly, if the ratio of fixed to variable
costs is high, firms have an incentive to reduce prices to utilize installed capacity. The airline
industry, where price wars are quite common, is an example of this type of situation.

                                                                                    EXCESS

If capacity in an industry is larger than customer demand, there is a strong incentive for firms to
cut prices to fill capacity. The problem of excess capacity is likely to be exacerbated if there are
significant barriers for firms to exit the industry. Exit barriers are high when the assets are
specialized, or if there are regulations which make exit costly.


The potential for earning abnormal profits will attract new entrants to an industry. The very
threat of new firms entering an industry potentially constrains the pricing of existing firms within
it. Therefore, the ease with which new firms can enter an industry is a key determinant of its
profitability. Several factors determine the height of barriers to entry in an industry:

                                                                                    ECONOMIE
       S OF SCALE

When there are large economies of scale, new entrants face the choice of having either to invest
in a large capacity which might not be utilized right away, or to enter with less than the optimum
capacity. Either way, new entrants will at least initially suffer from a cost disadvantage in
competing with existing firms. Economies of scale might arise from large investments in
research and development (the pharmaceutical or jet engine industries), in brand advertising
(soft-drink industry), or in physical plant and equipment (telecommunications industry).

                                                                                    FIRST

COLLEGE NAME                                                                                 Page 84
Early entrants in an industry may deter future entrants if there are first mover advantages. For
example, first movers might be able to set industry standards, or enter into exclusive
arrangements with suppliers of cheap raw materials. They may also acquire scarce government
licenses to operate in regulated industries. Finally, if there are learning economies, early firms
will have an absolute cost advantage over new entrants. First mover advantages are also likely to
be large when there are significant switching costs for customers once they start using existing
products. For example, switching costs faced by the users of Microsoft’s DOS operating system
make it difficult for software companies to market a new operating system.

                                                                                   ACCESS TO

Limited capacity in the existing distribution channels and high costs of developing new channels
can act as powerful barriers to entry. For example, a new entrant into the domestic auto industry
in the U.S. is likely to face formidable barriers because of the difficulty of developing a dealer
network. Similarly, new consumer goods manufacturers find it difficult to obtain supermarket
shelf space for their products. Existing relationships between firms and customers in an industry
also make it difficult for new firms to enter an industry. Industry examples of this include
auditing, investment banking, and advertising.

                                                                                   LEGAL

There are many industries in which legal barriers, such as patents and copyrights in research-
intensive industries, limit entry. Similarly, licensing regulations limit entry into taxi services,
medical services, broadcasting, and telecommunications industries.


The third dimension of competition in an industry is the threat of substitute products or services.
Relevant substitutes are not necessarily those that have the same form as the existing products,
but those that perform the same function. For example, airlines and car rental services might be
substitutes for each other when it comes to travel over short distances. Similarly, plastic bottles
and metal cans substitute for each other as packaging in the beverage industry. In some cases,
threat of substitution comes not from customers’ switching to another product but from utilizing
technologies that allow them to do without, or use less of, the existing products. For example,
energy-conserving technologies allow customers to reduce their consumption of electricity and

COLLEGE NAME                                                                               Page 85
fossil fuels. The threat of substitutes depends on the relative price and performance of the
competing products or services, and on customers’ willingness to substitute. Customers’
perception of whether two products are substitutes depends to some extent on whether they
perform the same function for a similar price. If two products perform an identical function, then
it would be difficult for them to differ from each other in price. However, customers’ willingness
to switch is often the critical factor in making this competitive dynamic work. For example, even
when tap water and bottled water serve the same function, many customers may be unwilling to
substitute the former for the latter, enabling bottlers to charge a price premium. Similarly,
designer label clothing commands a price premium even if it is not superior in terms of basic
functionality, because customers place a value on the image offered by designer labels.

                                                                                     RELATIVE

While the degree of competition in an industry determines whether or not there is Potential to
earn abnormal profits, the actual profits are influenced by the industry’s bargaining power with
its suppliers and customers. On the input side, firms enter into transactions with suppliers of
labor, raw materials and components, and finances. On the output side, firms either sell directly
to the final customers, or enter into contracts with intermediaries in the distribution chain. In all
these transactions, the relative economic power of the two sides is important to the overall
profitability of the industry firms.


Two factors determine the power of buyers: price sensitivity and relative bargaining power. Price
sensitivity determines the extent to which buyers care to bargain on price; relative bargaining
power determines the extent to which they will succeed in forcing the price down.

                                                                                     PRICE

Buyers are more price sensitive when the product is undifferentiated and there are few switching
costs. The sensitivity of buyers to price also depends on the importance of the product to their
own cost structure. When the product represents a large fraction of the buyers’ cost (for example,
the packaging material for soft-drink producers), the buyer is likely to expend the resources
necessary to shop for a lower cost alternative. In contrast, if the product is a small fraction of the
buyers’ cost (for example, windshield wipers for automobile manufacturers), it may not pay to

COLLEGE NAME                                                                                 Page 86
expend resources to search for lower-cost alternatives. Further, the importance of the product to
the buyers’ product quality also determines whether or not price becomes the most important
determinant of the buying decision.

                                                                                    RELATIVE

Even if buyers are price sensitive, they may not be able to achieve low prices unless they have a
strong bargaining position. Relative bargaining power in a transaction depends, ultimately, on
the cost to each party of not doing business with the other party. The buyers’ bargaining power is
determined by the number of buyers relative to the number of suppliers, volume of purchases by
a single buyer, number of alternative products available to the buyer, buyers’ costs of switching
from one product to another, and the threat of backward integration by the buyers. For example,
in the automobile industry, car manufacturers have considerable power over component
manufacturers because auto companies are large buyers, with several alternative suppliers to
choose from, and switching costs are relatively low. In contrast, in the personal computer
industry, computer makers have low bargaining power relative to the operating system software
producers because of high switching costs.


The analysis of the relative power of suppliers is a mirror image of the analysis of the buyer’s
power in an industry. Suppliers are powerful when there are only a few companies and there are
few substitutes available to their customers. For example, in the soft- drink industry, Coke and
Pepsi are very powerful relative to the bottlers. In contrast, metal can suppliers to the soft drink
industry are not very powerful because of intense competition among can producers and the
threat of substitution of cans by plastic bottles.

Suppliers also have a lot of power over buyers when the suppliers’ product or service is critical
to buyers’ business. For example, airline pilots have a strong bargaining power in the airline
industry. Suppliers also tend to be powerful when they pose a credible threat of forward
integration. For example, IBM is powerful relative to mainframe computer leasing companies
because of IBM’s unique position as a mainframe supplier, and its own presence in the computer
leasing business.

                                                                                    COMPETITI

COLLEGE NAME                                                                                Page 87
The profitability of a firm is influenced not only by its industry structure but also by the strategic
choices it makes in positioning itself in the industry. While there are many ways to characterize a
firm’s business strategy,

There are two generic competitive strategies:

(1) Cost leadership and

(2) Differentiation.

Both these strategies can potentially allow a firm to build a sustainable competitive advantage.

Strategies for Creating Competitive Advantage:-
Strategy researchers have traditionally viewed cost leadership and differentiation as mutually
exclusive strategies. Firms that straddle the two strategies are considered to be “stuck in the
middle” and are expected to earn low profitability. These firms run the risk of not being able to
attract price conscious customers because their costs are too high; they are also unable to provide
adequate differentiation to attract premium price customers.

                                                                                     SOURCES

Cost leadership enables a firm to supply the same product or service offered by its competitors at
a lower cost. Differentiation strategy involves providing a product or service that is distinct in
some important respect valued by the customer. For example, in retailing


Cost leadership is often the clearest way to achieve competitive advantage. In industries where
the basic product or service is a commodity, cost leadership might be the only way to achieve
superior performance. There are many ways to achieve cost leadership, including economies of
scale and scope, economies of learning, efficient production, simpler product design, lower input
costs, and efficient organizational processes. If a firm can achieve cost leadership, then it will be
able to earn above-average profitability by merely charging the same price as its rivals.
Conversely, a cost leader can force its competitors to cut prices and accept lower returns, or to
exit the industry. Firms that achieve cost leadership focus on tight cost controls. They make

COLLEGE NAME                                                                                 Page 88
investments in efficient scale plants, focus on product designs that reduce manufacturing costs,
minimize overhead costs, make little investment in risky research and development, and avoid
serving marginal customers. They have organizational structures and control systems that focus
on cost control.


A firm following the differentiation strategy seeks to be unique in its industry along some
dimension that is highly valued by customers. For differentiation to be successful, the firm has to
accomplish three things. First, it needs to identify one or more attributes of a product or service
that customer’s value. Second, it has to position itself to meet the chosen customer need in a
unique manner. Finally, the firm has to achieve differentiation at a cost that is lower than the
price the customer is willing to pay for the differentiated product or service. Drivers of
differentiation include providing superior intrinsic value via product quality, product variety,
bundled services, or delivery timing. Differentiation can also be achieved by investing in signals
of value, such as brand image, product appearance, or reputation. Differentiated strategies
require investments in research and development, engineering skills, and marketing capabilities.
The organizational structures and control systems in firms with differentiation strategies need to
foster creativity and innovation. While successful firms choose between cost leadership and
differentiation, they cannot completely ignore the dimension on which they are not primarily
competing. Firms that target differentiation still need to focus on costs, so that the differentiation
can be achieved at an acceptable cost. Similarly, cost leaders cannot compete unless they achieve
at least a minimum level on key dimensions on which competitors might differentiate, such as
quality and service.

COLLEGE NAME                                                                                 Page 89
                            FMCG INDUSTRY ANALYSIS

                                  INDUSTRY SNAPSHOT

FMCG Sector is one of the most important sectors for each and every Economy. It plays a vital
role being a necessity and inelastic product which touches every life in one or the other aspect.
India's FMCG sector is the fourth largest sector in the economy and creates employment for
more than three million people in downstream activities. Its principal constituents are Household
Care, Personal Care and Food & Beverages. The total FMCG market is in excess of INR 85,000
Crores. It is currently growing at double digit growth rate and is expected to maintain a high
growth rate. FMCG Industry is characterized by a well established distribution network, low
penetration levels, low operating cost, lower per capita consumption and intense competition
between the organized and unorganized segments.

The FMCG Industry remained insulated from inflation led demand slowdown. Inflation as
measured by the wholesale price index (WPI) shot up to 9.5 per cent in June 2008 quarter and
further climbed up to 12.63 per cent in September quarter. In both these quarters, industry sales
accelerated by more than 15 per cent backed by healthy growth in off take as well as price hikes
affected. During this period, the industry was largely able to hold on to margins through a
combination of strategies such as reduction in packaging cost and changes in product mix. Since
October, inflation rate has been waning and fell to 5.91 per cent for the week ended 27th
December 2008. Thus demand for personal care products is likely to remain buoyant.

According to CMIE Data, Aggregate sale of the industry is expected to increase by 19.2 per cent
during the December 2010 quarter.

Commodity prices after peaking are on the downswing. In September 2008 quarter, palm oil
price fell by 13 per cent sequentially. In the subsequent months, palm oil price continued to
weaken further and in November 2008 its price ruled 38 per cent lower than the year ago level.
This would minimize input cost pressure for soap companies like HUL, Nirma and Godrej

COLLEGE NAME                                                                             Page 90
Consumer Products. Even fall in crude price is expected to make petroleum derivatives like LAB
(key input for detergents) cheaper as well reduce packaging costs.

Even during the slowdown of the economy, the FMCG sector has registered a growth rate of
15.6 per cent for the year 2007-08. There is a huge growth potential for all the FMCG companies
as the per capita consump- tion of almost all products in the country is amongst the lowest in the
world. Federation of Indian Chambers of Commerce and Industry (FICCI) predicted that the
Indian FMCG industry sales could grow 17 per cent during 2009-10. According to CRISIL
anticipation, FMCG sector could touch around INR 140,000 Crores by 2015.



                                                                                   Presence       of
       established distribution networks in both urban and rural areas
       Operational Costs
                                                                                   Presence       of
       well-known brands in FMCG sector
       of raw materials


       products which illegally mimic the labels and brands of the established brands Lower
       scope of investing in technology and achieving economies of scale, especially in small
                                                                               Low exports


       domestic market – over a billion populations
       rural market

COLLEGE NAME                                                                               Page 91
                                                                                 Rising income
       levels, i.e. increase in purchasing power of consumers
       potential and tax & duty benefits for setting exports units


                                                                                 Tax        and
       regulatory structure
                                                                                 Removal     of
       import restrictions resulting in replacing of domestic brands
       Slowdown in Economy can have an impact on FMCG Industry

Key Take Away for Investors
       Growth rate in Future
       distribution network and supply chain Customized Product range to suit local market
       processing technology Brand building and marketing Higher Disposable Income
       about Nutrition and Hygiene


Rivalry among Competing Firms

In the Fast Moving Consumer Goods (FMCG) Industry, rivalry among competitors is very
fierce. There are scarce customers because the industry is highly saturated and the competitors
try to snatch their share of market. Market Players use all sorts of tactics and activities from
intensive advertisement campaigns to promotional stuff and price wars etc. Hence the intensity
of rivalry is very high.

Potential Entry of New Competitors

COLLEGE NAME                                                                            Page 92
FMCG Industry does not have any measures which can control the entry of new firms. The
resistance is very low and the structure of the industry is so complex that new firms can easily
enter and also offer tough competition due to cost effectiveness. Hence potential entry of new
firms is highly viable.

Potential Development of Substitute Products

There are complex and never ending consumer needs and no firm can satisfy all sorts of needs
alone. There are plenty of substitute goods available in the market that can be re- placed if
consumers are not satisfied with one. The wide range of choices and needs give a sufficient room
for new product development that can replace existing goods. Every other day there is some
short of new product, variants and design. This leads to higher consumer’s expectation.

Bargaining Power of Suppliers

The bargaining power of suppliers of raw materials and intermediate goods is not very high.
There is ample number of substitute suppliers available and the raw materials are also readily
available and most of the raw materials are homogeneous. There is no monopoly situation in the
supplier side because the suppliers are also competing among themselves.

Bargaining Power of Consumers

Bargaining power of consumers is also very high. This is because in FMCG industry the
switching costs of most of the goods is very low and there is no threat of buying one prod- uct
over other. Customers are never reluctant to buy or try new things off the shelf.


Large domestic market

India is one of the largest emerging markets, with a population of over one billion. India is one of
the largest economies in the world in terms of purchasing power and has a strong middle class
base of 300 million. Around 70 per cent of the total households in India (188 million) resides in
the rural areas. The total numbers of rural households are expected to rise from 135 million in
2001-02 to 153 million in 2009-10. This presents the largest potential market in the world. The
annual size of the rural FMCG market was estimated at around US$ 10.5 billion in 2001-02.

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With growing incomes at both the rural and the urban level, the market potential is expected to
expand further.

India - a large consumer goods spender

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on
personal care products. The large share of fast moving consumer goods (FMCG) in total
individual spending along with the large population base is another factor that makes India one
of the largest FMCG markets. Even on an international scale, total consumer expenditure on food
in India at US$ 120 billion is amongst the largest in the emerging markets, next only to China.

                                      CONSUMPTION PIE
Source: KSA Technopak Consumer Outlook


Materials availability

India has a diverse agro-climatic condition due to which there exists a wide-ranging and large
raw material base suitable for food processing industries. India is the largest producer of
livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of rice,
wheat and fruits & vegetables. India also has an ample supply of caustic soda and soda ash, the
raw materials in the production of soaps and detergents India produced 1.6 million tonnes of

COLLEGE NAME                                                                              Page 94
caustic soda in 2003-04. Tata Chemicals, one of the largest producers of synthetic soda ash in the
world is located in India. The availability of these raw materials gives India the locational

Cost competitiveness

Labour cost comparison:

Apart from the advantage in terms of ample raw material availability, existence of low-cost
labour force also works in favour of India. Labour cost in India is amongst the lowest in Asian
countries. Easy raw material availability and low labour costs have resulted in a lower cost of
production. Many multi-nationals have set up large low cost production bases in India to
outsource for domestic as well as export markets.



                                LABOUR COST COMPARISON
Source: CSO Report

Presence across value chain:

Indian firms also have a presence across the entire value chain of the FMCG industry from
supply of raw material to final processed and packaged goods, both in the personal care products
and in the food processing sector. For instance, Indian firm Amul's product portfolio includes
supply of milk as well as the supply of processed dairy products like cheese and butter. This
makes the firms located in India more cost competitive.

COLLEGE NAME                                                                              Page 95

India has enacted policies aimed at attaining international competitiveness through lifting of the
quantitative restrictions, reduced excise duties, automatic foreign investment and food laws
resulting in an environment that fosters growth. 100 per cent export oriented units can be set up
by government approval and use of foreign brand names is now freely permitted.

FDI Policy

Automatic investment approval (including foreign technology agreements within specified
norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies
(OCBs) investment, is allowed for most of the food processing sector except malted food,
alcoholic beverages and those reserved for small scale industries (SSI). 24 per cent foreign
equity is permitted in the small-scale sector. Temporary approvals for imports for test marketing
can also be obtained from the Director General of Foreign Trade. The evolution of a more liberal
FDI policy environment in India is clearly supported by the successful operation of some of the
global majors like PepsiCo in India.

Removal of Quantitative Restrictions and Reservation Policy

The Indian government has abolished licensing for almost all food and agro-processing
industries except for some items like alcohol, cane sugar, hydrogenated animal fats and oils etc.,
and items reserved for the exclusive manufacture in the small scale industry (SSI) sector.
Quantitative restrictions were removed in 2001 and Union Budget 2004-05 further identified 85
items that would be taken out of the reserved list. This has resulted in a boom in the FMCG
market through market expansion and greater product opportunities.

Central and state initiatives

Various states governments like Himachal Pradesh, Uttaranchal and Jammu & Kashmir have
encouraged companies to set up manufacturing facilities in their regions through a package of
fiscal incentives. Jammu and Kashmir offers incentives such as allotment of land at concessional
rates, 100 per cent subsidy on project reports and 30 per cent capital investment subsidy on fixed
capital investment upto US$ 63,000. The Himachal Pradesh government offers sales tax and
power concessions, capital subsidies and other incentives for setting up a plant in its tax free
zones. Five-year tax holiday for new food processing units in fruits and vegetable processing
have also been extended in the Union Budget 2004-05. Wide-ranging fiscal policy changes have
been introduced progressively. Excise and import duty rates have been reduced substantially.

COLLEGE NAME                                                                              Page 96
Many processed food items are totally exempt from excise duty. Customs duties have been
substantially reduced on plant and equipment, as well as on raw materials and intermediates,
especially for export production. Capital goods are also freely importable, including second hand
ones in the food-processing sector.

Food laws

Consumer protection against adulterated food has been brought to the fore by "The Prevention of
Food Adulteration Act (PFA), 1954", which applies to domestic and imported food commodities,
encompassing food colour and preservatives, pesticide residues, packaging, labelling and
regulation of sales.


The structure

The Indian FMCG sector is the fourth largest sector in the economy and creates employment for
three million people in downstream activities. Within the FMCG sector, the Indian food
processing industry represented 6.3 per cent of GDP and accounted for 13 per cent of the
country's exports in 2003-04.A distinct feature of the FMCG industry is the presence of most
global players through their subsidiaries (HLL, P&G, Nestle), which ensures new product
launches in the Indian market from the parent's portfolio.


India is one of the world's largest producers for a number of FMCG products but its exports are a
very small proportion of the overall production.Total exports of food processing industry was
US$ 2.9 billion in 2001-02 and marine products accounted for 40 per cent of the total exports.
HLL, Godrej Consumer, Marico, Dabur and Vicco laboratories are amongst the top exporting

Investment in the FMCG sector

The FMCG sector accounts for around 3 per cent of the total FDI inflow and roughly 7.3 per cent
of the total sectoral investment. The food-processing sector attracts the highest FDI, while the
vegetable oils and vanaspati sector accounts for the highest domestic investment in the FMCG


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                              INVESTMENT IN THE FMCG SECTOR

                                        Domestic   Investments(US$ Foreign      Investments(US$
 SEGEMENT                               million)                   million)
 Food processing industries             517                        1096
 Vegetable oils& Vanaspati              2094                       16
 Soaps, Cosmetics and          toilet
 preparations                           266                         0
 Overall FMCG                           2877                        1113
Source: SIA Newsletter, DIPP


A brief description of the Indian FMCG industry is given in the table below:-

Household care

The size of the fabric wash market is estimated to be US$ 1 billion, household cleaners to be
US$ 239 million and the production of synthetic detergents at 2.6 million tonnes. The demand
for detergents has been growing at an annual growth rate of 10 to 11 per cent during the past five
years. The urban market prefers washing powder and detergents to bars on account of
convenience of usage, increased purchasing power, aggressive advertising and increased
penetration of washing machines. The regional and small- unorganised players account for a
major share of the total detergent market in volumes.

Personal care

The size of the personal wash products is estimated at US$ 989 million; hair care products at
US$ 831 million and oral care products at US$ 537 million. While the overall personal wash
market is growing at one per cent, the premium and middle-end soaps are growing at a rate of 10
per cent. The leading players in this market are HLL, Nirma, Godrej Soaps and Reckitt &
Colman. The oral care market, especially toothpastes, remains under penetrated in India (with
penetration level below 45 per cent) due to lack of hygiene awareness among rural markets. The
industry is very competitive both for organised and smaller regional players. The Indian skin
care and cosmetics market is valued at US$ 274 million and dominated by HLL, Colgate
Palmolive, Gillette India and Godrej Soaps. This segment has witnessed the entry of a number of
international brands, like Oriflame, Avon and Aviance leading to increased competition.

COLLEGE NAME                                                                              Page 98
                             PRODUCT WISE PRODUCTION (2004)

 Segment                   Unit             Size    Key Players                                  Share      of
                                                                                                 market leader
Household care                                                                                   (%)
Fabric wash market        Mn tonnes    50          HLL, P&G, Nirma, SPIC                         38
Laundry soaps/bars        US$ mn       1102
Detergent cakes           Mn tonnes    15
Washing powder            Mn tonnes    26
Dish wash                 US$ mn       93          HLL                                           59
Personal care                                                                                    58
Soap & Toiletries         Mn tonnes    60          HLL, Nirma, Godrej
Personal wash market      US$ mn       989         HLL, Nirma, Godrej
Oral care                 US$ mn       537         Colgate Palmolive, HLL                        40
Skin care & cosmetics     US$ mn       274         HLL, Dabur, P&G                               58
Hair care                 US$ mn       831         Marico, HLL, CavinKare,                       54
                                                   Procter & Gamble, Dabur, Godrej
Feminine hygiene          US$ mn       44          Procter & Gamble, Johnson and Johnson
Food and Beverages
Bakery products           Mn tonnes    30          Britannia, Parle, ITC
Tea                       000 tonnes   870         HLL, Tata Tea                                 31
Coffee                    000 tonnes   20          Nestle, HLL, Tata Tea                         49*
Mineral water             Mn crates    65          Parle Bisleri, Parle Agro, Coca Cola, Pepsi
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