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DISSERTATION PROJECT REPORT

ON

INDIAN CAPITAL MARKET & ITS EMPIRICAL STUDY

Under the guidance of


Mrs. Neha Zaidi
Assistance professor

Submitted by:
Rakesh kumar
(Enorllment No-1303101116)

School of Business
BBA 5th Semester

Galgotias university

Submitted for
partial fulfillment of the award of degree of (BBA)

From

Date of Submission: 14th April, 2016

DISSERTATION PROJECT REPORT


ON

INDIAN CAPITAL MARKET & ITS EMPIRICAL STUDY

By

Rakesh Kumar
(Enrollment No: 1303101116)

A report submitted in partial fulfillment of the requirements of Bachelor of


Business Administrion

DISSERTATION PROJECT REPORT


ON

INDIAN CAPITAL MARKET & ITS EMPIRICAL STUDY

Under the guidance of

submitted by:

Mrs Neha Zaidi


Assistance professor

Rakesh Kumar
(Enrollment No-1303101116

School of Business
BBA 5th Semester
Galgotias university
Submitted for
partial fulfillment of the award of degree of (BBA)

From

Date of Submission: 14th April, 2016

CERTIFICATE

This is to certify that Mr Rakesh kumar has


undertaken this project work entitled HR
OUTSOURCING IN INDIA as Dissertation Project

Report for the partial fulfillment of the award of


Bachelor of Business Administration degree for
Galgotias University Greater Noida (utterpradesh)

As per best of my knowledge this Dissertation


project work is an original piece of work and has not
been submitted or published elsewhere.
I wish him/ her all the best for his bright future
ahead.

DECLARATION

I, Rakesh kumar, hereby declare that this survey project report entitled INDIAN
CAPITAL MARKET & ITS EMPIRICAL STUDY has been prepared by me on
the basis of survey done during the course of my fifth semester of BBA
programme under the supervision of Mrs Neha zaidi , Assistant Professor,
Department of Business administration, GSOB, Greater Noida.
This survey project report is my bonafide work and has not been submitted
in any form to any University or Institute for the award of any degree prior to the
under mentioned date. I bear the entire responsibility of submission of this project
report.

Rakesh kumar
BBA 5th SEMESTER

Department of business administration


GSOB, Greater noida

ACKNOWLEDGEMENT
Completing the work assigned by a single hand is not always possible. The same was
here and this is an opportunity to thank all of them who directly or indirectly share their
efforts to complete task given to me.
Many thanks to the God, who has sent me on this earth and by mercy of him, I would
be able to accomplish this research
I express my deep sense of gratitude and regards to Mrs. Neha zaidi (Assistant
professor, Dept. of Business Administration, GSOB ) under whose guidance I
completed this project, I am thankful to his valuable guidance, gentle encouragement
and pains he took in guiding me throughout the study.
I would also like to thank the person who were a part of my survey and given their
valuable
Suggestions and advises.
I would like to express my heartfelt thank to my friends and family for making a
pleasant environment and for their encouragement and support throughout the duration
of research project which help me to complete my project.

Rakesh Kumar

CONTENTS

PREFACE...

INTRODUCTION

OBJECTIVES OF THE STUDY.........................................................

SCOPE OF THE STUDY....................................................................

LITERATURE REVIEW....................................................................

IMPORTANCE OF THE STUDY.....................................................

RESEARCH METHODOLOGY.......................................................

ANALYSIS & FINDINGS.................................................................

THEORITICAL TOOLS FOR ANALYSIS......................................

RECOMMENDATIONS....................................................................

CONCLUSIONS................................................................................

LIMITATIONS..................................................................................

BIBLIOGRAPHY..............................................................................

PREFACE

The Project Study Price Behavior of mid-cap stocks in the Indian Capital Market
aims to analyze the mid-cap stocks market of India with special emphasis on pricing, to
study and understand the trading mechanism of stocks and to understand the mid-cap
stock price-behavior and find reasons for the recent mid-cap rally.
Midcap stocks are once again back to where they belong, in the limelight. Experts give
their top picks within the space and also explain the trading strategy one should adopt
in the current market scenario.
The inclination towards conducting this study was mainly because of the sudden
immense rise in the demand for mid-cap shares. It not only showed the increasing risk
bearing capacity of investors but also reflected the interest of Foreign Institutional
Investors in our economy as they were one of the major buyers of these shares.
The understanding of the price behavior of an upcoming segment that has the future
potential to attract large number of investments contributing to a fast -paced
development.
In the initial portion of the report I have tried to understand the concept of mid-cap
stocks, collected different models through which the price determination takes place,
the evolution of the mid-cap segment, the CNX Midcap nifty index determination.

The later portion is more related to the application of the concepts in real life that is
acquiring information about the segments price behavior from professionals, what are
the tools they utilize in determining the prices while trading in the market.
This study is being conducted with the help of secondary and primary data. Secondary
data being collected from various books, journals, and websites and different articled
published in business newspapers and magazines. Primary data is being collected from
a sample size of 10 stock brokers in and around Delhi with the help of a structured and
undisguised questionnaire along with personal interview the study is being descriptive
in nature.
These stocks are highly risky and speculative and in a bullish phase though everyone
mints money depending on the stocks invested in, however the penny stocks and small
investors mostly suffer losses in case of a Bearish Phase. Also investment in this
particular segment requires a lot of in-depth knowledge about the segment, the
segments price behavior and especially a lot of experience which I could gather from
my personal interaction with the professionals.
Midcap stocks are once again back to where they belong, in the limelight. Experts give
their top picks within the space and also explain the trading strategy one should adopt
in the current market scenario.
The inclination towards conducting this study was mainly because of the sudden
immense rise in the demand for mid-cap shares. It not only showed the increasing risk
bearing capacity of investors but also reflected the interest of Foreign Institutional
Investors in our economy as they were one of the major buyers of these shares.

The understanding of the price behavior of an upcoming segment that has the future
potential to attract large number of investments contributing to a fast -paced
development.
In the initial portion of the report I have tried to understand the concept of mid-cap
stocks, collected different models through which the price determination takes place,
the evolution of the mid-cap segment, the CNX Midcap nifty index determination.
The later portion is more related to the application of the concepts in real life that is
acquiring information about the segments price behavior from professionals, what are
the tools they utilize in determining the prices while trading in the market.
This study is being conducted with the help of secondary and primary data. Secondary
data being collected from various books, journals, and websites and different articled
published in business newspapers and magazines. Primary data is being collected from
a sample size of 10 stock brokers in and around Delhi with the help of a structured and
undisguised questionnaire along with personal interview the study is being descriptive
in nature.
These stocks are highly risky and speculative and in a bullish phase though everyone
mints money depending on the stocks invested in, however the penny stocks and small
investors mostly suffer losses in case of a Bearish Phase. Also investment in this
particular segment requires a lot of in-depth knowledge about the segment, the
segments price behavior and especially a lot of experience which I could gather from
my personal interaction with the professionals.

10

Chapter 1
INTRODUCTION

11

As the research is about the study of the price behavior of mid cap stocks it would
revolve around the factors that affect the prices of these stocks and the reasons
behind the increase in the trade of the mid cap stocks. Because of this it becomes
important for us to understand the trading mechanism of the mid cap stocks.
To recap, lets remind ourselves of the stock market carnage of May 17, after which the
investorswealth in listed companies has swollen by close to Rs. 700,000 crore. During
the same period, the BSE 30-share sensex rallied smartly by around 2000 points, or
44%, to reach the record high of 6498 on Friday.
A group-wise trend analysis on the BSE shows that a total of 20.3 crore shares were
traded in the B1 group. This is the highest ever volume attracted by this group in the
history of the Indian stock market. The B1-group houses medium and small companies.

A total of 687 companies were traded in the group, including 367 gainers and 308
losers.
The B1-group shares accounted for a significant 55% of the total volume of 36.8 crore
shares traded on the exchange. In terms of turnover (value of shares traded), they
contributed Rs. 755 crore, or 34%, of the total turnover of Rs. 2,239 crore recorded on
Friday.

Since the previous Bull Run in January 04, there has been a significant improvement
in the activity of mid-cap shares, thanks to their emergence as big favorites among
investors, including foreign institutional investors.

12

It was on January 9, 04 when the Sensex had, for the first time, hit its then historic
high of 6250 during intra-day trading. On that day, the B1-group shares contributed
35% of the volumes and 10% of the turnover of the BSE.
Also the current market rally belongs to the old economy sectors of textile, trading,
logistics/shipping and manufacturing, as much as computer software and hardware.
Some mid-cap companies in these sectors have recorded a higher P/E, riding the fastpaced capacity build-up. A few companies have posted sky-high P/Es on the back of
turnaround in their financial performances and the upturn in their respective markets.
And with the Sensex seemingly poised to create history by crossing the 20,000-mark,
there seems to be a gradual change in the composition of the top performing industries
comprising of a substantial number of mid caps.

The Project Study Price Behavior of mid-cap stocks in the Indian Capital Market
aims to analyze the mid-cap stocks market of India with special emphasis on pricing, to
study and understand the trading mechanism of stocks and to understand the mid-cap
stock price-behavior and find reasons for the recent mid-cap rally.
Midcap stocks are once again back to where they belong, in the limelight. Experts give
their top picks within the space and also explain the trading strategy one should adopt
in the current market scenario.
The inclination towards conducting this study was mainly because of the sudden
immense rise in the demand for mid-cap shares. It not only showed the increasing risk

13

bearing capacity of investors but also reflected the interest of Foreign Institutional
Investors in our economy as they were one of the major buyers of these shares.
The understanding of the price behavior of an upcoming segment that has the future
potential to attract large number of investments contributing to a fast -paced
development.
In the initial portion of the report I have tried to understand the concept of mid-cap
stocks, collected different models through which the price determination takes place,
the evolution of the mid-cap segment, the CNX Midcap nifty index determination.
The later portion is more related to the application of the concepts in real life that is
acquiring information about the segments price behavior from professionals, what are
the tools they utilize in determining the prices while trading in the market.
This study is being conducted with the help of secondary and primary data. Secondary
data being collected from various books, journals, and websites and different articled
published in business newspapers and magazines. Primary data is being collected from
a sample size of 10 stock brokers in and around Delhi with the help of a structured and
undisguised questionnaire along with personal interview the study is being descriptive
in nature.
These stocks are highly risky and speculative and in a bullish phase though everyone
mints money depending on the stocks invested in, however the penny stocks and small
investors mostly suffer losses in case of a Bearish Phase. Also investment in this
particular segment requires a lot of in-depth knowledge about the segment, the

14

segments price behavior and especially a lot of experience which I could gather from
my personal interaction with the professionals.

15

Chapter 2
OBJECTIVES

16

OBJECTIVE:
1.

To understand the mid cap stocks price behavior and the underlying reasons
for the mid cap rally.

2.

To study and understand the stock brokers viewpoint of mid cap stocks price
behavior.

3.

To study the middle capital stocks market of India with special emphasis on
pricing.

INVESTING in mid-cap stocks in a volatile market is always a perilous exercise. After


a dream run in 2007, the mid-cap stocks got hammered in the recent choppy market.
Nothing illustrates this better than the decline in the CNX Mid-Cap 200 Index, which
fell 12.4 per cent in the January-March quarter while the S&P CNX Nifty fell just 6.3
per cent.
Against this must be seen the fact that the mid-cap stocks appreciated 43.2 per cent in
October-December 2007.
Not even the savvier institutional investors have escaped the ill effects of a downturn in
the stock market for these stocks.
Mutual funds that had invested heavily in mid-cap stocks too suffered during JanuaryMarch 2007. An analysis of such funds has shown that:

17

Funds such as Franklin Prima and Sundaram Select Mid-Cap, which invested
exclusively in mid-cap stocks, sank to the bottom of the "returns" pile, their NAVs (net
asset values) plunging 13-16 per cent.

Diversified equity funds which invested substantially in mid-caps Taurus

Discovery and PruICICI Tax Plan.

MID CAP, SMALL STOCK BLEED THE MOST, 2008


The stock prices of mid-cap and small-cap companies have fallen sharply on Thursday,
following the poor figures of industrial production for January 2008 on Wednesday,
underlining

the

impending

slowdown

18

in

the

manufacturing

sector.

However, market players feel that the performances of companies will not be as bad as
being made out from the industrial production figures. They hope that the consumption
will pick up soon and the companies' profitability would not be affected.

In the last two months since first week of January 2008, mid-cap index of Bombay
stock exchange (BSE) has fallen by 35% and small cap by 42%. In this period the
benchmark Sensex has fallen by 27%. But, in the last two weeks, fall in case of capital
goods manufacturing companies is the maximum. In March 2008 so far, the index for
the capital goods companies has fallen by 20.50%.

It seems that the market had the idea of a slowdown in the capital goods sector.
Industrial production figure for January showed that the production in capital goods
grew by only 2.1% as against over 16% in December 2007.

Many of the madcap companies like Amteck Auto, Ashahi India, Motilal Oswal and
Aventis Pharma are quoting at their 52-weeks low. Some well known companies like
Adlabs Films and Dish TV are quoting at around one third of the values at their peak in
January 2008. Educomp Solution also lost substantial valuation from its peak. The
company fell by 11.48% to close at Rs 3,238 on Thursday. It was quoting at Rs 5,650
on January 17. The real estate companies are the worst hit by the current round of
bearish trend. The realty companies' index of BSE fell by 46% from its peak. All the
companies have lost their valuations in January this year.

19

Such a fall has made many stocks attractive. However, as the institutional buyers are
absent from the market, because of turmoil in the US market due to sub-prime loan
crisis, experts feel that one should wait till the stocks bottom out. Even the mutual
funds are sitting on cash, which they have recently raised from market through publicofferings.

On an average, mid-cap companies are quoting at around 16 times of their past


earnings. Small caps' price to earning ratio has fallen to 12.72 at present.

The market's climb to all-time high levels in recent past is partly because of the midcap segment. Even the top-performing equity diversified funds have been growing on
mid-cap stocks to achieve their returns. Several funds have a mid-cap mandate. Even
otherwise, funds have preferred the higher risk-higher return formula in mid-cap stocks
in the past year. "Equity funds have gained tremendously from their exposure to midcap stocks, which have done much better than large-caps in the past year or so," notes
Adenwala.
For example, the top-performing SBI Magnum Global Fund had a 63.54 per cent
exposure to the CNX Midcap 200 Index as of September, 2007. Other big gainers like
Tata Growth Fund (55.97 per cent), Reliance Growth (52.9 per cent), Alliance Equity
Fund (48.80 per cent) and Franklin India Prima Fund (68.72 per cent) also followed
suit.

20

But the high exposure to mid-caps has not been without reason. Fund managers seem to
have realized early during the bull rally that the mid-cap segment is where the big gains
are going to come from. With most large-caps already running high and considering the
re-rating potential of many stocks in the midcap segment, their choice was but natural.
The benchmark index for the mid-cap segment, the CNX Midcap 200 Index was the
best performer among broader indices in the past year. The index gave a return of
128.60 per cent for the year ended September, 2007, much better than the 90.01
per cent managed by the Sensex and the 75.49 per cent by the Nifty.
In fact, the CNX Midcap 200 Index was the second best of all the indices (including
sectoral indices) behind the BSE Consumer Durable Index (182.20 per cent) for the
year. The former is in fact the best performing index for the past two-year period with
returns of 92.40 per cent.
Many mid-cap funds have assets as big as large-cap schemes. But liquidity in mid-caps
is only about 16-17 per cent of that in large-caps
The good run in the mid-cap segment has also given rise to a spate of new fund
launches in the segment. Tata Mutual Fund was the latest to launch a mid-cap fund,
while it was preceded in the previous months by new funds such as Kotak Midcap, SBI
Magnum Midcap, Sahara Midcap, Cholas Midcap, Sundaram SMILE, HSBC Midcap
and ING Vysya Midcap.
However, if recent trends are to be believed, the mid-cap mania seems to be coming to
an end - to an extent, at least. Fund managers are decreasing their exposure to the midcap segment, keeping in mind rising valuations and lack of liquidity in many counters.

21

The CNX Midcap 200 Index has a P/E in the mid-20s compared to 15 for the Sensex.
This means that fund managers will be paying a higher price, and keeping in mind the
lack of liquidity that is a big risk to take on their books.
The problem is that liquidity in mid-caps is only about 26-32 per cent of that in largecaps. The total market capitalization of large-caps (say, above Rs 1,900 crore) is around
Rs 19, 82,620 crore, while that of mid-caps (say, Rs 2000-Rs 2,500 crore) is about Rs 3,
81,771 crore. And only half of it is free float. "It is difficult to say at this point how this
boom in mid-caps is going to pan out," says a fund manager. "Let me put it this way.
These days the size (assets under management) of mid-cap funds is getting larger and
many of them have AUMs as big as large-cap funds (for example, Franklin Prima Fund,
a predominantly mid-cap fund, had an AUM of Rs 1,617 crore, while Franklin's largecap fund, Franklin India Bluechip Fund held a size of Rs 1,609 crore). So when a midcap fund of a size of Rs 45,000 crore wants to invest 25 per cent in a mid-cap stock of
Rs 8,500 market cap, it owns nearly 5 per cent of the stock itself. The higher exposure
will mean that the fund will also be exposed to higher liquidity risk if the market goes
down," says the fund manager. Keeping in mind this risk, the recently launched HSBC
Midcap Fund kept an upper limit of Rs 2700 crore to its AUMs. Another fund which
has taken the same route is Reliance Growth Fund, which is planning to suspend sales
in the fund for three months. According to the fund, the move was to protect the interest
of existing investors in the fund in view of the increasing fund size and to facilitate
better performance. The Reliance Growth Fund currently has a corpus of Rs 3,582
crore. The suspension will take effect when the fund's corpus reaches Rs 3,200 crore or
September, 2008, whichever is earlier.

22

FUTURE SCENARIO
These companies may appear to be volatile. But if one looks at them over a long period
of time, the profits, which may accrue, are far higher than the risk taken. Further, in the
last few years, companies have been performing in a tough economic environment. Mid
cap companies have been improving their performance. The changes in the bottomline
havent been significant enough to attract enough attention. All of a sudden, we now
have a favorable environment. Thus more attention would be paid to these companies.
We therefore see a bright future for mid cap sector too.
Also there is a lot of foreign money coming in through this route. However, FIIs deals
with volumes. The mid-caps usually suffer on account of illiquidity. Large caps would
always be the preferred routes of investments of FIIs because these counters are liquid.

23

Chapter 3
SCOPE

24

SCOPE:
The scope of research is restricted to the analysis of price fluctuations of the shares of
mid sized companies in the share market. The analysis of the market prices is being
done to understand the price behavior, a price trend which could possibly emerge. From
an investors point of view it is this trend and understanding of prices that generates
investment as future trends and forecasts are made on the basis of these price behaviors.
Therefore the scope of the project is limited to the price aspect of the mid cap stocks.
INVESTING in mid-cap stocks in a volatile market is always a perilous exercise. After
a dream run in 2007, the mid-cap stocks got hammered in the recent choppy market.
Nothing illustrates this better than the decline in the CNX Mid-Cap 200 Index, which
fell 12.4 per cent in the January-March quarter while the S&P CNX Nifty fell just 6.3
per cent.
Against this must be seen the fact that the mid-cap stocks appreciated 43.2 per cent in
October-December 2007.
Not even the savvier institutional investors have escaped the ill effects of a downturn in
the stock market for these stocks.
Mutual funds that had invested heavily in mid-cap stocks too suffered during JanuaryMarch 2007. An analysis of such funds has shown that:
Funds such as Franklin Prima and Sundaram Select Mid-Cap, which invested
exclusively in mid-cap stocks, sank to the bottom of the "returns" pile, their NAVs (net
asset values) plunging 13-16 per cent.

25

Diversified equity funds which invested substantially in mid-caps Taurus

Discovery and PruICICI Tax Plan.

MID CAP, SMALL STOCK BLEED THE MOST, 2008


The stock prices of mid-cap and small-cap companies have fallen sharply on Thursday,
following the poor figures of industrial production for January 2008 on Wednesday,
underlining

the

impending

slowdown

in

the

manufacturing

sector.

However, market players feel that the performances of companies will not be as bad as
being made out from the industrial production figures. They hope that the consumption
will pick up soon and the companies' profitability would not be affected.

26

In the last two months since first week of January 2008, mid-cap index of Bombay
stock exchange (BSE) has fallen by 35% and small cap by 42%. In this period the
benchmark Sensex has fallen by 27%. But, in the last two weeks, fall in case of capital
goods manufacturing companies is the maximum. In March 2008 so far, the index for
the capital goods companies has fallen by 20.50%.

It seems that the market had the idea of a slowdown in the capital goods sector.
Industrial production figure for January showed that the production in capital goods
grew by only 2.1% as against over 16% in December 2007.

Many of the madcap companies like Amteck Auto, Ashahi India, Motilal Oswal and
Aventis Pharma are quoting at their 52-weeks low. Some well known companies like
Adlabs Films and Dish TV are quoting at around one third of the values at their peak in
January 2008. Educomp Solution also lost substantial valuation from its peak. The
company fell by 11.48% to close at Rs 3,238 on Thursday. It was quoting at Rs 5,650
on January 17. The real estate companies are the worst hit by the current round of
bearish trend. The realty companies' index of BSE fell by 46% from its peak. All the
companies have lost their valuations in January this year.

Such a fall has made many stocks attractive. However, as the institutional buyers are
absent from the market, because of turmoil in the US market due to sub-prime loan

27

crisis, experts feel that one should wait till the stocks bottom out. Even the mutual
funds are sitting on cash, which they have recently raised from market through publicofferings.

On an average, mid-cap companies are quoting at around 16 times of their past


earnings. Small caps' price to earning ratio has fallen to 12.72 at present.

The market's climb to all-time high levels in recent past is partly because of the midcap segment. Even the top-performing equity diversified funds have been growing on
mid-cap stocks to achieve their returns. Several funds have a mid-cap mandate. Even
otherwise, funds have preferred the higher risk-higher return formula in mid-cap stocks
in the past year. "Equity funds have gained tremendously from their exposure to midcap stocks, which have done much better than large-caps in the past year or so," notes
Adenwala.
For example, the top-performing SBI Magnum Global Fund had a 63.54 per cent
exposure to the CNX Midcap 200 Index as of September, 2007. Other big gainers like
Tata Growth Fund (55.97 per cent), Reliance Growth (52.9 per cent), Alliance Equity
Fund (48.80 per cent) and Franklin India Prima Fund (68.72 per cent) also followed
suit.
But the high exposure to mid-caps has not been without reason. Fund managers seem to
have realized early during the bull rally that the mid-cap segment is where the big gains
are going to come from. With most large-caps already running high and considering the
re-rating potential of many stocks in the midcap segment, their choice was but natural.
28

The benchmark index for the mid-cap segment, the CNX Midcap 200 Index was the
best performer among broader indices in the past year. The index gave a return of
128.60 per cent for the year ended September, 2007, much better than the 90.01
per cent managed by the Sensex and the 75.49 per cent by the Nifty.
In fact, the CNX Midcap 200 Index was the second best of all the indices (including
sectoral indices) behind the BSE Consumer Durable Index (182.20 per cent) for the
year. The former is in fact the best performing index for the past two-year period with
returns of 92.40 per cent.
Many mid-cap funds have assets as big as large-cap schemes. But liquidity in mid-caps
is only about 16-17 per cent of that in large-caps
The good run in the mid-cap segment has also given rise to a spate of new fund
launches in the segment. Tata Mutual Fund was the latest to launch a mid-cap fund,
while it was preceded in the previous months by new funds such as Kotak Midcap, SBI
Magnum Midcap, Sahara Midcap, Cholas Midcap, Sundaram SMILE, HSBC Midcap
and ING Vysya Midcap.
However, if recent trends are to be believed, the mid-cap mania seems to be coming to
an end - to an extent, at least. Fund managers are decreasing their exposure to the midcap segment, keeping in mind rising valuations and lack of liquidity in many counters.
The CNX Midcap 200 Index has a P/E in the mid-20s compared to 15 for the Sensex.
This means that fund managers will be paying a higher price, and keeping in mind the
lack of liquidity that is a big risk to take on their books.

29

The problem is that liquidity in mid-caps is only about 26-32 per cent of that in largecaps. The total market capitalization of large-caps (say, above Rs 1,900 crore) is around
Rs 19, 82,620 crore, while that of mid-caps (say, Rs 2000-Rs 2,500 crore) is about Rs 3,
81,771 crore. And only half of it is free float. "It is difficult to say at this point how this
boom in mid-caps is going to pan out," says a fund manager. "Let me put it this way.
These days the size (assets under management) of mid-cap funds is getting larger and
many of them have AUMs as big as large-cap funds (for example, Franklin Prima Fund,
a predominantly mid-cap fund, had an AUM of Rs 1,617 crore, while Franklin's largecap fund, Franklin India Bluechip Fund held a size of Rs 1,609 crore). So when a midcap fund of a size of Rs 45,000 crore wants to invest 25 per cent in a mid-cap stock of
Rs 8,500 market cap, it owns nearly 5 per cent of the stock itself. The higher exposure
will mean that the fund will also be exposed to higher liquidity risk if the market goes
down," says the fund manager. Keeping in mind this risk, the recently launched HSBC
Midcap Fund kept an upper limit of Rs 2700 crore to its AUMs. Another fund which
has taken the same route is Reliance Growth Fund, which is planning to suspend sales
in the fund for three months. According to the fund, the move was to protect the interest
of existing investors in the fund in view of the increasing fund size and to facilitate
better performance. The Reliance Growth Fund currently has a corpus of Rs 3,582
crore. The suspension will take effect when the fund's corpus reaches Rs 3,200 crore or
September, 2008, whichever is earlier.

FUTURE SCENARIO

30

These companies may appear to be volatile. But if one looks at them over a long period
of time, the profits, which may accrue, are far higher than the risk taken. Further, in the
last few years, companies have been performing in a tough economic environment. Mid
cap companies have been improving their performance. The changes in the bottomline
havent been significant enough to attract enough attention. All of a sudden, we now
have a favorable environment. Thus more attention would be paid to these companies.
We therefore see a bright future for mid cap sector too.
Also there is a lot of foreign money coming in through this route. However, FIIs deals
with volumes. The mid-caps usually suffer on account of illiquidity. Large caps would
always be the preferred routes of investments of FIIs because these counters are liquid.
As the research is about the study of the price behavior of mid cap stocks it would
revolve around the factors that affect the prices of these stocks and the reasons
behind the increase in the trade of the mid cap stocks. Because of this it becomes
important for us to understand the trading mechanism of the mid cap stocks.
To recap, lets remind ourselves of the stock market carnage of May 17, after which the
investorswealth in listed companies has swollen by close to Rs. 700,000 crore. During
the same period, the BSE 30-share sensex rallied smartly by around 2000 points, or
44%, to reach the record high of 6498 on Friday.
A group-wise trend analysis on the BSE shows that a total of 20.3 crore shares were
traded in the B1 group. This is the highest ever volume attracted by this group in the
history of the Indian stock market. The B1-group houses medium and small companies.

31

A total of 687 companies were traded in the group, including 367 gainers and 308
losers.
The B1-group shares accounted for a significant 55% of the total volume of 36.8 crore
shares traded on the exchange. In terms of turnover (value of shares traded), they
contributed Rs. 755 crore, or 34%, of the total turnover of Rs. 2,239 crore recorded on
Friday.

Since the previous Bull Run in January 04, there has been a significant improvement
in the activity of mid-cap shares, thanks to their emergence as big favorites among
investors, including foreign institutional investors.
It was on January 9, 04 when the Sensex had, for the first time, hit its then historic
high of 6250 during intra-day trading. On that day, the B1-group shares contributed
35% of the volumes and 10% of the turnover of the BSE.
Also the current market rally belongs to the old economy sectors of textile, trading,
logistics/shipping and manufacturing, as much as computer software and hardware.
Some mid-cap companies in these sectors have recorded a higher P/E, riding the fastpaced capacity build-up. A few companies have posted sky-high P/Es on the back of
turnaround in their financial performances and the upturn in their respective markets.
And with the Sensex seemingly poised to create history by crossing the 20,000-mark,
there seems to be a gradual change in the composition of the top performing industries
comprising of a substantial number of mid caps.

32

The Project Study Price Behavior of mid-cap stocks in the Indian Capital Market
aims to analyze the mid-cap stocks market of India with special emphasis on pricing, to
study and understand the trading mechanism of stocks and to understand the mid-cap
stock price-behavior and find reasons for the recent mid-cap rally.
Midcap stocks are once again back to where they belong, in the limelight. Experts give
their top picks within the space and also explain the trading strategy one should adopt
in the current market scenario.
The inclination towards conducting this study was mainly because of the sudden
immense rise in the demand for mid-cap shares. It not only showed the increasing risk
bearing capacity of investors but also reflected the interest of Foreign Institutional
Investors in our economy as they were one of the major buyers of these shares.
The understanding of the price behavior of an upcoming segment that has the future
potential to attract large number of investments contributing to a fast -paced
development.
In the initial portion of the report I have tried to understand the concept of mid-cap
stocks, collected different models through which the price determination takes place,
the evolution of the mid-cap segment, the CNX Midcap nifty index determination.
The later portion is more related to the application of the concepts in real life that is
acquiring information about the segments price behavior from professionals, what are
the tools they utilize in determining the prices while trading in the market.
This study is being conducted with the help of secondary and primary data. Secondary
data being collected from various books, journals, and websites and different articled
33

published in business newspapers and magazines. Primary data is being collected from
a sample size of 10 stock brokers in and around Delhi with the help of a structured and
undisguised questionnaire along with personal interview the study is being descriptive
in nature.
These stocks are highly risky and speculative and in a bullish phase though everyone
mints money depending on the stocks invested in, however the penny stocks and small
investors mostly suffer losses in case of a Bearish Phase. Also investment in this
particular segment requires a lot of in-depth knowledge about the segment, the
segments price behavior and especially a lot of experience which I could gather from
my personal interaction with the professionals.

It seems that the market had the idea of a slowdown in the capital goods sector.
Industrial production figure for January showed that the production in capital goods
grew by only 2.1% as against over 16% in December 2007.

Many of the madcap companies like Amteck Auto, Ashahi India, Motilal Oswal and
Aventis Pharma are quoting at their 52-weeks low. Some well known companies like
Adlabs Films and Dish TV are quoting at around one third of the values at their peak in
January 2008. Educomp Solution also lost substantial valuation from its peak. The
company fell by 11.48% to close at Rs 3,238 on Thursday. It was quoting at Rs 5,650
on January 17. The real estate companies are the worst hit by the current round of
bearish trend. The realty companies' index of BSE fell by 46% from its peak. All the

34

companies have lost their valuations in January this year.

Such a fall has made many stocks attractive. However, as the institutional buyers are
absent from the market, because of turmoil in the US market due to sub-prime loan
crisis, experts feel that one should wait till the stocks bottom out. Even the mutual
funds are sitting on cash, which they have recently raised from market through publicofferings.

On an average, mid-cap companies are quoting at around 16 times of their past


earnings. Small caps' price to earning ratio has fallen to 12.72 at present.

The market's climb to all-time high levels in recent past is partly because of the midcap segment. Even the top-performing equity diversified funds have been growing on
mid-cap stocks to achieve their returns. Several funds have a mid-cap mandate. Even
otherwise, funds have preferred the higher risk-higher return formula in mid-cap stocks
in the past year. "Equity funds have gained tremendously from their exposure to midcap stocks, which have done much better than large-caps in the past year or so," notes
Adenwala.
For example, the top-performing SBI Magnum Global Fund had a 63.54 per cent
exposure to the CNX Midcap 200 Index as of September, 2007. Other big gainers like
Tata Growth Fund (55.97 per cent), Reliance Growth (52.9 per cent), Alliance Equity
Fund (48.80 per cent) and Franklin India Prima Fund (68.72 per cent) also followed
suit.

35

But the high exposure to mid-caps has not been without reason. Fund managers seem to
have realized early during the bull rally that the mid-cap segment is where the big gains
are going to come from. With most large-caps already running high and considering the
re-rating potential of many stocks in the midcap segment, their choice was but natural.
The benchmark index for the mid-cap segment, the CNX Midcap 200 Index was the
best performer among broader indices in the past year. The index gave a return of
128.60 per cent for the year ended September, 2007, much better than the 90.01
per cent managed by the Sensex and the 75.49 per cent by the Nifty.
In fact, the CNX Midcap 200 Index was the second best of all the indices (including
sectoral indices) behind the BSE Consumer Durable Index (182.20 per cent) for the
year. The former is in fact the best performing index for the past two-year period with
returns of 92.40 per cent.
Many mid-cap funds have assets as big as large-cap schemes. But liquidity in mid-caps
is only about 16-17 per cent of that in large-caps
The good run in the mid-cap segment has also given rise to a spate of new fund
launches in the segment. Tata Mutual Fund was the latest to launch a mid-cap fund,
while it was preceded in the previous months by new funds such as Kotak Midcap, SBI
Magnum Midcap, Sahara Midcap, Cholas Midcap, Sundaram SMILE, HSBC Midcap
and ING Vysya Midcap.
However, if recent trends are to be believed, the mid-cap mania seems to be coming to
an end - to an extent, at least. Fund managers are decreasing their exposure to the midcap segment, keeping in mind rising valuations and lack of liquidity in many counters.

36

The CNX Midcap 200 Index has a P/E in the mid-20s compared to 15 for the Sensex.
This means that fund managers will be paying a higher price, and keeping in mind the
lack of liquidity that is a big risk to take on their books.
The problem is that liquidity in mid-caps is only about 26-32 per cent of that in largecaps. The total market capitalization of large-caps (say, above Rs 1,900 crore) is around
Rs 19, 82,620 crore, while that of mid-caps (say, Rs 2000-Rs 2,500 crore) is about Rs 3,
81,771 crore. And only half of it is free float. "It is difficult to say at this point how this
boom in mid-caps is going to pan out," says a fund manager. "Let me put it this way.
These days the size (assets under management) of mid-cap funds is getting larger and
many of them have AUMs as big as large-cap funds (for example, Franklin Prima Fund,
a predominantly mid-cap fund, had an AUM of Rs 1,617 crore, while Franklin's largecap fund, Franklin India Bluechip Fund held a size of Rs 1,609 crore). So when a midcap fund of a size of Rs 45,000 crore wants to invest 25 per cent in a mid-cap stock of
Rs 8,500 market cap, it owns nearly 5 per cent of the stock itself. The higher exposure
will mean that the fund will also be exposed to higher liquidity risk if the market goes
down," says the fund manager. Keeping in mind this risk, the recently launched HSBC
Midcap Fund kept an upper limit of Rs 2700 crore to its AUMs. Another fund which
has taken the same route is Reliance Growth Fund, which is planning to suspend sales
in the fund for three months. According to the fund, the move was to protect the interest
of existing investors in the fund in view of the increasing fund size and to facilitate
better performance. The Reliance Growth Fund currently has a corpus of Rs 3,582
crore. The suspension will take effect when the fund's corpus reaches Rs 3,200 crore or
September, 2008, whichever is earlier.

37

It seems that the market had the idea of a slowdown in the capital goods sector.
Industrial production figure for January showed that the production in capital goods
grew by only 2.1% as against over 16% in December 2007.

Many of the madcap companies like Amteck Auto, Ashahi India, Motilal Oswal and
Aventis Pharma are quoting at their 52-weeks low. Some well known companies like
Adlabs Films and Dish TV are quoting at around one third of the values at their peak in
January 2008. Educomp Solution also lost substantial valuation from its peak. The
company fell by 11.48% to close at Rs 3,238 on Thursday. It was quoting at Rs 5,650
on January 17. The real estate companies are the worst hit by the current round of
bearish trend. The realty companies' index of BSE fell by 46% from its peak. All the
companies have lost their valuations in January this year.

Such a fall has made many stocks attractive. However, as the institutional buyers are
absent from the market, because of turmoil in the US market due to sub-prime loan
crisis, experts feel that one should wait till the stocks bottom out. Even the mutual
funds are sitting on cash, which they have recently raised from market through publicofferings.

On an average, mid-cap companies are quoting at around 16 times of their past


earnings. Small caps' price to earning ratio has fallen to 12.72 at present.

38

The market's climb to all-time high levels in recent past is partly because of the midcap segment. Even the top-performing equity diversified funds have been growing on
mid-cap stocks to achieve their returns. Several funds have a mid-cap mandate. Even
otherwise, funds have preferred the higher risk-higher return formula in mid-cap stocks
in the past year. "Equity funds have gained tremendously from their exposure to midcap stocks, which have done much better than large-caps in the past year or so," notes
Adenwala.
For example, the top-performing SBI Magnum Global Fund had a 63.54 per cent
exposure to the CNX Midcap 200 Index as of September, 2007. Other big gainers like
Tata Growth Fund (55.97 per cent), Reliance Growth (52.9 per cent), Alliance Equity
Fund (48.80 per cent) and Franklin India Prima Fund (68.72 per cent) also followed
suit.
But the high exposure to mid-caps has not been without reason. Fund managers seem to
have realized early during the bull rally that the mid-cap segment is where the big gains
are going to come from. With most large-caps already running high and considering the
re-rating potential of many stocks in the midcap segment, their choice was but natural.
The benchmark index for the mid-cap segment, the CNX Midcap 200 Index was the
best performer among broader indices in the past year. The index gave a return of
128.60 per cent for the year ended September, 2007, much better than the 90.01
per cent managed by the Sensex and the 75.49 per cent by the Nifty.
In fact, the CNX Midcap 200 Index was the second best of all the indices (including
sectoral indices) behind the BSE Consumer Durable Index (182.20 per cent) for the

39

year. The former is in fact the best performing index for the past two-year period with
returns of 92.40 per cent.
Many mid-cap funds have assets as big as large-cap schemes. But liquidity in mid-caps
is only about 16-17 per cent of that in large-caps
The good run in the mid-cap segment has also given rise to a spate of new fund
launches in the segment. Tata Mutual Fund was the latest to launch a mid-cap fund,
while it was preceded in the previous months by new funds such as Kotak Midcap, SBI
Magnum Midcap, Sahara Midcap, Cholas Midcap, Sundaram SMILE, HSBC Midcap
and ING Vysya Midcap.
However, if recent trends are to be believed, the mid-cap mania seems to be coming to
an end - to an extent, at least. Fund managers are decreasing their exposure to the midcap segment, keeping in mind rising valuations and lack of liquidity in many counters.
The CNX Midcap 200 Index has a P/E in the mid-20s compared to 15 for the Sensex.
This means that fund managers will be paying a higher price, and keeping in mind the
lack of liquidity that is a big risk to take on their books.
The problem is that liquidity in mid-caps is only about 26-32 per cent of that in largecaps. The total market capitalization of large-caps (say, above Rs 1,900 crore) is around
Rs 19, 82,620 crore, while that of mid-caps (say, Rs 2000-Rs 2,500 crore) is about Rs 3,
81,771 crore. And only half of it is free float. "It is difficult to say at this point how this
boom in mid-caps is going to pan out," says a fund manager. "Let me put it this way.
These days the size (assets under management) of mid-cap funds is getting larger and
many of them have AUMs as big as large-cap funds (for example, Franklin Prima Fund,
a predominantly mid-cap fund, had an AUM of Rs 1,617 crore, while Franklin's large40

cap fund, Franklin India Bluechip Fund held a size of Rs 1,609 crore). So when a midcap fund of a size of Rs 45,000 crore wants to invest 25 per cent in a mid-cap stock of
Rs 8,500 market cap, it owns nearly 5 per cent of the stock itself. The higher exposure
will mean that the fund will also be exposed to higher liquidity risk if the market goes
down," says the fund manager. Keeping in mind this risk, the recently launched HSBC
Midcap Fund kept an upper limit of Rs 2700 crore to its AUMs. Another fund which
has taken the same route is Reliance Growth Fund, which is planning to suspend sales
in the fund for three months. According to the fund, the move was to protect the interest
of existing investors in the fund in view of the increasing fund size and to facilitate
better performance. The Reliance Growth Fund currently has a corpus of Rs 3,582
crore. The suspension will take effect when the fund's corpus reaches Rs 3,200 crore or
September, 2008, whichever is earlier.

41

Chapter 4
LITERATURE REVIEW

42

As the economy is in a progressive state the FIIs and the domestic investors , both
institutional and retail are showing the red silk to the bull generating a rise in the
market that can even touch the 10K point. Not only the large equity stocks, but also
the mid cap & the penny stocks are a substantial part of this growth.
The mid caps unlike before have a large part to contribute in the current market
scenario. Therefore, the future scope of study is quite relevant.
1. THE MARKET INDEX
To begin with, lets take a look at the CNX Midcap 200 and the concepts related to it. It
is the market index that records the daily movements, (ups and downs) in the prices of
mid cap stocks.
The medium capitalized segment of the stock market is being increasingly perceived as
an attractive investment segment with high growth potential. The primary objective of
the CNX Midcap index is to capture the movement and be a benchmark of the midcap
segment of the market.

43

a.

Method of Computation
CNX Midcap is computed using market capitalization weighted method, wherein the
level of the index reflects the total market value of all the stocks in the index relative to
a particular base period. The method also takes into account constituent changes in the
index and importantly corporate actions such as stock splits, rights, etc without
affecting the index value.

b.

Base Date and Value


The CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000.

c.

Criteria for Selection of Constituent Stocks


The constituents and the criteria for the selection judge the effectiveness of the index.
Selection of the index set is based on the following criteria:

All the stocks, which constitute more than 5% market capitalization of the
universe (after sorting the securities in descending order of market capitalization), shall
be excluded in order to reduce the skewness in the weightages of the stocks in the
universe.

After step (a), the weightages of the remaining stocks in the universe is
determined again.

After step (b), the cumulative weightage is calculated.

44

After step (c) companies which form part of the cumulative percentage in
ascending order unto first 75 percent (i.e. upto 74.99 percent) of the revised universe
shall be ignored.

After, step (d), all the constituents of S&P CNX Nifty shall be ignored.

From the universe of companies remaining after step (e) i.e. 75th percent and
above, first 100 companies in terms of highest market capitalization, shall constitute the
CNX Midcap Index subject to fulfillment of the criteria mentioned below.

d.

Trading Interest
All constituents of the CNX Midcap Index must have a minimum listing record of 6
months. In addition, all candidates for the Index are also evaluated for trading interest,
in terms of volumes and trading frequency.

e.

Financial Performance
All companies in the CNX Midcap Index have a minimum track record of three years of
operations with a positive net worth.

f.

Others
A company which comes out with a IPO will be eligible for inclusion in the index, if it
fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6
month period.
2. THE MARKET REGULATOR

45

The Securities And Exchange Board of India (SEBI) oversees and monitors the
performance of the mid cap stocks .Like others , even mid cap companies have to
follow SEBI guidelines , rules and norms for operating in the stock market.
These Guidelines are then changed depending upon the dynamics of the economy.
Amendments are made in the acts for making them more effective from time to time.
SEBI covers various areas relevant for the finances, such as :

Bankers to an issue.

Buyback of Securities.

Collective Investment Scheme.

Corporate Governance.

Credit Rating Agency.

Regulator to an Issue.

Securities Appellate Tribunal.

Circulars and Clarifications on Relevant Provisions of Companies Act.

4.

TREND OVER THE PAST FEW MONTHS

Dividend
Date
January

Open

High

Low

Close

9,822.29 10,245.81 6,542.71 7,766.62

46

Price/Earnings Price/Bookvalue
24.26

5.23

Yield
0.75

2008
February
2008

7,813.61

8,119.08 7,012.72 7,594.41

18.75

4.37

Source BSE
The case with the Indian mid-caps (defined by NSE as scrips with average six months
market capitalization ranging between Rs. 750 m and Rs. 7,500 m), which continue to
defy gravity despite little fundamental backing. While their larger peers have shown
some moderation in valuations, the 'positive sentiment' on mid-caps shows no signs of
abating.
Clich as it may sound, but mid-caps have time and again proven to be the worst hit at
the slightest sign of a rally sizzling out. While the larger entities have better resistance
to sectoral cyclicalitys, economic downturns and competitive pressures, the smaller
entities often succumb to the same. Concerns on factors like management quality,
earnings volatility and lack of operational transparency get further highlighted in
unfavorable times. While their larger counterparts get active media coverage, mid-caps
garner little interest and the lack of information on them puts investors at a
disadvantage. Also, by not disclosing information proactively, some companies actually
encourage the 'rumor mill' to work overtime.
Warren Buffet, in one of his letters to the shareholders of Berkshire Hathaway wrote,
"Management cannot determine market prices, although it can, by its disclosures and
policies, encourage rational behavior by market participants." Managements of
smaller companies, however, tend to shy away from such 'disclosures', thus keeping the
investors in the dark.

47

0.89

All said and done, it calls for some wisdom on the part of the investor to acknowledge
the fact that an incessant upswing in the prices of mid-cap stocks, which are devoid of
any fundamental backing, is not what they should get lured by. Especially at times
when even the best of the mid-cap 'stories' seem fully priced, the time is ripe for one to
contemplate on the longevity of their rally and mull on the correction rationales
4. THEORETICAL MODELS FOR DETERMINATION OF MID-CAP STOCKS

P/E Based Valuation

P/B Based Valuation

DCF Valuation

PEG Ratio
1. P/E BASED VALUATION

1.

P/E is one of the more important fundamental valuation tools. P/E is a


ratio of the stocks price and the stocks earnings per share. To calculate a P/E, take the
price of the stock and divide it by it's earning per share.
Example: Stock Price $20, Earning Per share $2, gives a P/E 10.
Types of P/E, Individual and Collective
P/E can be calculated for an individual stock as well as for the overall market. To
calculate P/E for the overall market, investors typically use DJIA and the S&P 500.

48

To calculate the market P/E in the DJIA, the investor must use the value of the DJIA
divided by the earnings of its 30 components.
Trailing P/E
Trailing P/E, is when historical values are used, this does not give an indication of
future performance, but does give the investor an idea of the stocks historical value
which then can be compared to it's current P/E or projected P/E's. Trailing P/E ratio's
are commonly used in newspapers.
Projected P/E
Projected P/E uses the current stock price divided by the stocks projected earnings per
share. Projected earnings are generally provided in company research reports. Projected
P/E should be used with care, since it is based on estimated earnings.
Relative P/E
The relative P/E ratio is a ratio between the current P/E and historical P/E's. A relative
P/E has a numerical range of between 0-100%, representing the all time low (0%) to
the all time high (100%) P/E.
For example: if a stock has historically traded with a P/E range of 10-20, and the
current P/E is 20, than the relative P/E would be 100%. If the stock's P/E is 15, the
relative P/E would be 75% (15 / 20 = 0.75 or 75%. Some investors believe that trading
in the high range of a stock's relative P/E is not considered safe since it could be
considered overvalued.

49

Historical P/E's are not always accurate since they do not account for large events, like
in 1992, which followed a large recession, when a large portion of companies wrote off
assets and went into restructuring.
Forecasting with P/E
P/E by itself is not always a good predictor of future price movements; however it is
quite commonly used by investors to forecast future price level of stocks and the
market.
Forecasted price = Current P/E * project annual earnings per share.
Example:
Current projected annual earnings per share is $2/share, the assumption will be that it
will maintain it's P/E of 10, the estimated price at year end should be $20 ($2 X 10 =
20).
It is unlikely that the P/E should remain constant throughout the year since it is based
on a moving price. The P/E will either rise or fall by the year end based on, if it the P/E
is higher, than a higher price should have been reached, or it the P/E is lower at year
end, than the price should be lower than projected.
Forecasted market price is calculated in the same way as forecasted price.
Forecasted Market Price = Current market P/E X total projected annual earnings per
share of the market.
It should be understood by investors that forecasted prices are calculated from
assumptions made on company growth, and that they are not immune to

50

favorable/unfavorable news, competition, panic selling, business outlook and business


cycles, etc.

Tips:

Current P/E has little meaning on forecasted price.

Positive P/E conditions are that the company P/E is higher than the market P/E
at the beginning of an up-trend.

P/E's should be compared to similar companies in the same market as well as


historical P/E values.

If institutional ownership is low, P/E tends to be low.

Companies with low P/E tend to be safer.

Do Not buy low P/E stocks just because they are low, Do Not buy stocks just
because the P/E is at a historical low and Do Not use P/E's as the only mean of analysis.
If the P/E was less than 75% of the growth rate. (20 x 0.75 = 15, therefore the stock
must have a P/E less than 15)
Analyzing P/E's and projected growth rates can help give the investor an indication of
valuation. For example a P/E of 50 may be considered quite high, yet if the company's
growth rate is estimated at 50%, then this stock would be at a discount in comparison to
it's future earnings. On the other hand a stock with a P/E of 10 and a growth rate of 5%
is considered overvalued.

51

If the company has a high P/E, the reasoning would be that it would have high growth
expectations. If these expectations are not met, the higher the P/E, the higher the
potential price fall. However stocks with low P/E's should not be so quickly considered
based on the P/E alone. A low P/E may be results of competition, low growth, earnings
expectations and more.
Company's with low P/E's are generally considered more attractive because of two
main reasons, 1) the stock will rise in price if the P/E rises to that of the industry, and 2)
it can only go up. It is important when using a low P/E to always consider the
companies potential growth in earnings.

Forecasting with P/E


P/E by itself is not always a good predictor of future price movements; however it is
quite commonly used by investors to forecast future price level of stocks and the
market.
Forecasted price = Current P/E * project annual earnings per share.
Example:
Current projected annual earnings per share is $2/share, the assumption will be that it
will maintain it's P/E of 10, the estimated price at year end should be $20 ($2 X 10 =
20).

52

It is unlikely that the P/E should remain constant throughout the year since it is based
on a moving price. The P/E will either rise or fall by the year end based on, if it the P/E
is higher, than a higher price should have been reached, or it the P/E is lower at year
end, than the price should be lower than projected.
Forecasted market price is calculated in the same way as forecasted price.
Forecasted Market Price = Current market P/E X total projected annual earnings per
share of the market.
It should be understood by investors that forecasted prices are calculated from
assumptions made on company growth, and that they are not immune to
favorable/unfavorable news, competition, panic selling, business outlook and business
cycles, etc
Tips:

Current P/E has little meaning on forecasted price.

Positive P/E conditions are that the company P/E is higher than the market P/E
at the beginning of an up-trend.

P/E's should be compared to similar companies in the same market as well as


historical P/E values.

If institutional ownership is low, P/E tends to be low.

Companies with low P/E tend to be safer.

53

Do Not buy low P/E stocks just because they are low, Do Not buy stocks just
because the P/E is at a historical low and Do Not use P/E's as the only mean of analysis.

2. P/B BASED VALUATIONS:


By focusing on the P/B ratio, an institutions earning power may be ignored, while
excessive emphasis is placed on capital without any regard to the extent an institution
may be over (or under) capitalized. At the very least, comparisons based upon P/B
ratios should adjust capital ratios so that premiums to book value are based on core
equity with excess equity valued dollar-for-dollar.
Management should focus instead on the P/E multiple as a measure of relative strength
placed on the institutions shares by investors. Acquirers (and investors in minority
interests in the public and private markets) are acquiring earning power and potential
earnings growth. Investors are not acquiring capital. In fact, many banks are plagued
with too much capital to generate an adequate return on equity, deemed to be at least
15% by many investors.
As shown in the P/B formula in Chart 1, the P/B multiple is a function of ROE and the
P/E multiple. ROE in turn can be broken into a leverage component and a profitability
component. Thus, the P/B multiple essentially consists of three variables: profitability,
leverage and the P/E multiple.

3. DCF VALUATIONS:

54

The purpose of DCF-Valuation is to determine the value of a company in terms of its


future cash flows. The cash flows are adjusted with certain items (e.g. those not related
to companys core businesses or those with no cash effect) in order to make sure the
flows reflect the actually generated cash as good as possible.
This document describes DCF valuation in detail and in our valuation model.
The underlying idea of DCF-Valuation is to compute the fair value of a company i.e.
the intrinsic value of the companys share. The potential of the share price (which the
investors are particularly interested in) is then computed by comparing the fair value
with the current market price of the companys share.

The basic formulation of discounted cash flow valuation is as follows:

55

Free cash flow to firm is discounted with WACC to the Year 0 (the forecast year) in
order to get the present value of free cash flows.
Cumulative discounted free cash flow is a yearly item in which all the forecast years
discounted cash flows are summed up. Hence, the first item is the sum of all forecast
years free cash flows at present value terms.
Value of equity FCFF is divided by the number of shares outstanding to get the fair
value of the companys share.
More detailed formulation of Discounted cash flow valuation is as follows:

EBIT is adjusted with with Taxes and Share of associated companies profit/loss in
order to get Operating cash flow - the figure that reflects the cash actually generated
by the company much better than the EBIT (accounting figure).
Operating cash flow is adjusted with Total depreciation to get Gross cash flow. This

56

has to be done because depreciation has no cash effect and thus does not really
reduce the cash generated.
Gross cash flow includes cash tied up in investments. Hence, Change in working
capital and Gross capital expenditure have to be subtracted from it and Increase in
non-interest bearing liabilities added to it in order to get Free operating cash flow.
Change in working capital appears in the calculation as minus-signed if more capital
is tied up in the business than in the previous year. Gross capital expenditure in turn
is the cash used for investments during the year. Increase in non-interest bearing
liabilities is plus-signed, since it has an opposite effect than Net working capital.
Other items include extraordinary items, which have a cash effect even though they
are not important in a operational business sense.
Interest bearing debt, Cash at bank and Investments' share price impact are to be
added/subtracted from the Cumulative discounted cash flow so that the result of the
valuation is Value of equity, not Value of firm.

All items except for EBIT, Share of associated companies profit/loss and Taxes on
continuing operations the model calculates automatically. Thus, you can freely change
EBIT, Share of associated companies profit/loss and Taxes on continuing operations
(and naturally all the sub-items which are blue).
2.

PEG RATIO :

It is a ratio used to determine a stocks value while taking into account earnings
growth. The calculation is as follows:
PEG Ratio =

Price/Earnings Ratio
57

Annual EPS Growth


PEG is widely used as an indicator of a stocks potential value. It is favored by many
over the P/E BASED VALUATIONS as it also accounts for the growth.
Similar to the P/E Ratio a lower PEG means that the stock has been undervalued.
Keep in mind that the numbers used are projected and, therefore, can be less accurate.
Also, there are many variations using earnings from different time periods (i.e. 1 year
vs 5 year). Be sure to know the exact definition your source is using.
The PEG ratio compares a stock's price/earnings ("P/E") ratio to its expected EPS
growth rate. If the PEG ratio is equal to one, it means that the market is pricing the
stock to fully reflect the stock's EPS growth. This is "normal" in theory because, in a
rational and efficient market, the P/E is supposed to reflect a stock's future earnings
growth.

If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or
that the market expects future EPS growth to be greater than what is currently in the
Street consensus number. Growth stocks typically have a PEG ratio greater than one
because investors are willing to pay more for a stock that is expected to grow rapidly
(otherwise known as "growth at any price"). It could also be that the earnings forecasts
have been lowered while the stock price remains relatively stable for other reasons.
If the PEG ratio is less than one, it is a sign of a possibly undervalued stock or that the
market does not expect the company to achieve the earnings growth that is reflected in
the Street estimates. Value stocks usually have a PEG ratio less than one because the

58

stock's earnings expectations have risen and the market has not yet recognized the
growth potential. On the other hand, it could also indicate that earnings expectations
have fallen faster than the Street could issue new forecasts.
It is important to note that the PEG ratio cannot be used in isolation. As with all
financial ratios, investors using PEG ratios must also use additional information to get a
clear perspective of the investment potential of a company. Investors must understand
the company's operating trends, fundamentals and what the expected EPS growth rate
reflects. Additionally, to determine if the stock is overvalued or undervalued, investors
must analyze the company's P/E and PEG ratios in relation to its peer group and the
overall market.

59

Chapte5
IMPORTANCE

60

INVESTING in mid-cap stocks in a volatile market is always a perilous exercise. After


a dream run in 2007, the mid-cap stocks got hammered in the recent choppy market.
Nothing illustrates this better than the decline in the CNX Mid-Cap 200 Index, which
fell 12.4 per cent in the January-March quarter while the S&P CNX Nifty fell just 6.3
per cent.
Against this must be seen the fact that the mid-cap stocks appreciated 43.2 per cent in
October-December 2007.
Not even the savvier institutional investors have escaped the ill effects of a downturn in
the stock market for these stocks.
Mutual funds that had invested heavily in mid-cap stocks too suffered during JanuaryMarch 2007. An analysis of such funds has shown that:
Funds such as Franklin Prima and Sundaram Select Mid-Cap, which invested
exclusively in mid-cap stocks, sank to the bottom of the "returns" pile, their NAVs (net
asset values) plunging 13-16 per cent.

Diversified equity funds which invested substantially in mid-caps Taurus

Discovery and PruICICI Tax Plan.

61

MID CAP, SMALL STOCK BLEED THE MOST, 2008


The stock prices of mid-cap and small-cap companies have fallen sharply on Thursday,
following the poor figures of industrial production for January 2008 on Wednesday,
underlining

the

impending

slowdown

in

the

manufacturing

sector.

However, market players feel that the performances of companies will not be as bad as
being made out from the industrial production figures. They hope that the consumption
will pick up soon and the companies' profitability would not be affected.

In the last two months since first week of January 2008, mid-cap index of Bombay
stock exchange (BSE) has fallen by 35% and small cap by 42%. In this period the

62

benchmark Sensex has fallen by 27%. But, in the last two weeks, fall in case of capital
goods manufacturing companies is the maximum. In March 2008 so far, the index for
the capital goods companies has fallen by 20.50%.

It seems that the market had the idea of a slowdown in the capital goods sector.
Industrial production figure for January showed that the production in capital goods
grew by only 2.1% as against over 16% in December 2007.

Many of the madcap companies like Amteck Auto, Ashahi India, Motilal Oswal and
Aventis Pharma are quoting at their 52-weeks low. Some well known companies like
Adlabs Films and Dish TV are quoting at around one third of the values at their peak in
January 2008. Educomp Solution also lost substantial valuation from its peak. The
company fell by 11.48% to close at Rs 3,238 on Thursday. It was quoting at Rs 5,650
on January 17. The real estate companies are the worst hit by the current round of
bearish trend. The realty companies' index of BSE fell by 46% from its peak. All the
companies have lost their valuations in January this year.

Such a fall has made many stocks attractive. However, as the institutional buyers are
absent from the market, because of turmoil in the US market due to sub-prime loan
crisis, experts feel that one should wait till the stocks bottom out. Even the mutual
funds are sitting on cash, which they have recently raised from market through publicofferings.

63

On an average, mid-cap companies are quoting at around 16 times of their past


earnings. Small caps' price to earning ratio has fallen to 12.72 at present.

The market's climb to all-time high levels in recent past is partly because of the midcap segment. Even the top-performing equity diversified funds have been growing on
mid-cap stocks to achieve their returns. Several funds have a mid-cap mandate. Even
otherwise, funds have preferred the higher risk-higher return formula in mid-cap stocks
in the past year. "Equity funds have gained tremendously from their exposure to midcap stocks, which have done much better than large-caps in the past year or so," notes
Adenwala.
For example, the top-performing SBI Magnum Global Fund had a 63.54 per cent
exposure to the CNX Midcap 200 Index as of September, 2007. Other big gainers like
Tata Growth Fund (55.97 per cent), Reliance Growth (52.9 per cent), Alliance Equity
Fund (48.80 per cent) and Franklin India Prima Fund (68.72 per cent) also followed
suit.
But the high exposure to mid-caps has not been without reason. Fund managers seem to
have realized early during the bull rally that the mid-cap segment is where the big gains
are going to come from. With most large-caps already running high and considering the
re-rating potential of many stocks in the midcap segment, their choice was but natural.
The benchmark index for the mid-cap segment, the CNX Midcap 200 Index was the
best performer among broader indices in the past year. The index gave a return of

64

128.60 per cent for the year ended September, 2007, much better than the 90.01
per cent managed by the Sensex and the 75.49 per cent by the Nifty.
In fact, the CNX Midcap 200 Index was the second best of all the indices (including
sectoral indices) behind the BSE Consumer Durable Index (182.20 per cent) for the
year. The former is in fact the best performing index for the past two-year period with
returns of 92.40 per cent.
Many mid-cap funds have assets as big as large-cap schemes. But liquidity in mid-caps
is only about 16-17 per cent of that in large-caps
The good run in the mid-cap segment has also given rise to a spate of new fund
launches in the segment. Tata Mutual Fund was the latest to launch a mid-cap fund,
while it was preceded in the previous months by new funds such as Kotak Midcap, SBI
Magnum Midcap, Sahara Midcap, Cholas Midcap, Sundaram SMILE, HSBC Midcap
and ING Vysya Midcap.
However, if recent trends are to be believed, the mid-cap mania seems to be coming to
an end - to an extent, at least. Fund managers are decreasing their exposure to the midcap segment, keeping in mind rising valuations and lack of liquidity in many counters.
The CNX Midcap 200 Index has a P/E in the mid-20s compared to 15 for the Sensex.
This means that fund managers will be paying a higher price, and keeping in mind the
lack of liquidity that is a big risk to take on their books.
The problem is that liquidity in mid-caps is only about 26-32 per cent of that in largecaps. The total market capitalization of large-caps (say, above Rs 1,900 crore) is around
Rs 19, 82,620 crore, while that of mid-caps (say, Rs 2000-Rs 2,500 crore) is about Rs 3,

65

81,771 crore. And only half of it is free float. "It is difficult to say at this point how this
boom in mid-caps is going to pan out," says a fund manager. "Let me put it this way.
These days the size (assets under management) of mid-cap funds is getting larger and
many of them have AUMs as big as large-cap funds (for example, Franklin Prima Fund,
a predominantly mid-cap fund, had an AUM of Rs 1,617 crore, while Franklin's largecap fund, Franklin India Bluechip Fund held a size of Rs 1,609 crore). So when a midcap fund of a size of Rs 45,000 crore wants to invest 25 per cent in a mid-cap stock of
Rs 8,500 market cap, it owns nearly 5 per cent of the stock itself. The higher exposure
will mean that the fund will also be exposed to higher liquidity risk if the market goes
down," says the fund manager. Keeping in mind this risk, the recently launched HSBC
Midcap Fund kept an upper limit of Rs 2700 crore to its AUMs. Another fund which
has taken the same route is Reliance Growth Fund, which is planning to suspend sales
in the fund for three months. According to the fund, the move was to protect the interest
of existing investors in the fund in view of the increasing fund size and to facilitate
better performance. The Reliance Growth Fund currently has a corpus of Rs 3,582
crore. The suspension will take effect when the fund's corpus reaches Rs 3,200 crore or
September, 2008, whichever is earlier.

FUTURE SCENARIO
These companies may appear to be volatile. But if one looks at them over a long period
of time, the profits, which may accrue, are far higher than the risk taken. Further, in the
last few years, companies have been performing in a tough economic environment. Mid
cap companies have been improving their performance. The changes in the bottomline

66

havent been significant enough to attract enough attention. All of a sudden, we now
have a favorable environment. Thus more attention would be paid to these companies.
We therefore see a bright future for mid cap sector too.
Also there is a lot of foreign money coming in through this route. However, FIIs deals
with volumes. The mid-caps usually suffer on account of illiquidity. Large caps would
always be the preferred routes of investments of FIIs because these counters are liquid.

As the economy is in a progressive state the FIIs and the domestic investors , both
institutional and retail are showing the red silk to the bull generating a rise in the
market that can even touch the 10K point. Not only the large equity stocks, but also
the mid cap & the penny stocks are a substantial part of this growth.
The mid caps unlike before have a large part to contribute in the current market
scenario. Therefore, the future scope of study is quite relevant.
1. THE MARKET INDEX
To begin with, lets take a look at the CNX Midcap 200 and the concepts related to it. It
is the market index that records the daily movements, (ups and downs) in the prices of
mid cap stocks.
The medium capitalized segment of the stock market is being increasingly perceived as
an attractive investment segment with high growth potential. The primary objective of
the CNX Midcap index is to capture the movement and be a benchmark of the midcap
segment of the market.

67

g.

Method of Computation
CNX Midcap is computed using market capitalization weighted method, wherein the
level of the index reflects the total market value of all the stocks in the index relative to
a particular base period. The method also takes into account constituent changes in the
index and importantly corporate actions such as stock splits, rights, etc without
affecting the index value.

h.

Base Date and Value


The CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000.

i.

Criteria for Selection of Constituent Stocks


The constituents and the criteria for the selection judge the effectiveness of the index.
Selection of the index set is based on the following criteria:

All the stocks, which constitute more than 5% market capitalization of the
universe (after sorting the securities in descending order of market capitalization), shall

68

be excluded in order to reduce the skewness in the weightages of the stocks in the
universe.

After step (a), the weightages of the remaining stocks in the universe is
determined again.

After step (b), the cumulative weightage is calculated.

After step (c) companies which form part of the cumulative percentage in
ascending order unto first 75 percent (i.e. upto 74.99 percent) of the revised universe
shall be ignored.

After, step (d), all the constituents of S&P CNX Nifty shall be ignored.

From the universe of companies remaining after step (e) i.e. 75th percent and
above, first 100 companies in terms of highest market capitalization, shall constitute the
CNX Midcap Index subject to fulfillment of the criteria mentioned below.

j.

Trading Interest
All constituents of the CNX Midcap Index must have a minimum listing record of 6
months. In addition, all candidates for the Index are also evaluated for trading interest,
in terms of volumes and trading frequency.

k.

Financial Performance
All companies in the CNX Midcap Index have a minimum track record of three years of
operations with a positive net worth.

69

l.

Others
A company which comes out with a IPO will be eligible for inclusion in the index, if it
fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6
month period.
2. THE MARKET REGULATOR
The Securities And Exchange Board of India (SEBI) oversees and monitors the
performance of the mid cap stocks .Like others , even mid cap companies have to
follow SEBI guidelines , rules and norms for operating in the stock market.
These Guidelines are then changed depending upon the dynamics of the economy.
Amendments are made in the acts for making them more effective from time to time.
SEBI covers various areas relevant for the finances, such as :

Bankers to an issue.

Buyback of Securities.

Collective Investment Scheme.

Corporate Governance.

Credit Rating Agency.

Regulator to an Issue.

Securities Appellate Tribunal.

70

Circulars and Clarifications on Relevant Provisions of Companies Act.

5.

TREND OVER THE PAST FEW MONTHS

Dividend
Date

Open

High

Low

Close

Price/Earnings Price/Bookvalue
Yield

January
2008
9,822.29 10,245.81 6,542.71 7,766.62
February

24.26

5.23

0.75

2008

18.75

4.37

0.89

7,813.61

8,119.08 7,012.72 7,594.41

Source BSE
The case with the Indian mid-caps (defined by NSE as scrips with average six months
market capitalization ranging between Rs. 750 m and Rs. 7,500 m), which continue to
defy gravity despite little fundamental backing. While their larger peers have shown
some moderation in valuations, the 'positive sentiment' on mid-caps shows no signs of
abating.
Clich as it may sound, but mid-caps have time and again proven to be the worst hit at
the slightest sign of a rally sizzling out. While the larger entities have better resistance
to sectoral cyclicalitys, economic downturns and competitive pressures, the smaller
entities often succumb to the same. Concerns on factors like management quality,
earnings volatility and lack of operational transparency get further highlighted in
unfavorable times. While their larger counterparts get active media coverage, mid-caps
garner little interest and the lack of information on them puts investors at a

71

disadvantage. Also, by not disclosing information proactively, some companies actually


encourage the 'rumor mill' to work overtime.
Warren Buffet, in one of his letters to the shareholders of Berkshire Hathaway wrote,
"Management cannot determine market prices, although it can, by its disclosures and
policies, encourage rational behavior by market participants." Managements of
smaller companies, however, tend to shy away from such 'disclosures', thus keeping the
investors in the dark.
All said and done, it calls for some wisdom on the part of the investor to acknowledge
the fact that an incessant upswing in the prices of mid-cap stocks, which are devoid of
any fundamental backing, is not what they should get lured by. Especially at times
when even the best of the mid-cap 'stories' seem fully priced, the time is ripe for one to
contemplate on the longevity of their rally and mull on the correction rationales

Major Tools of Analysis for Mid Cap Stocks:


1)

BETA:
Beta is a risk metric employed primarily in the equity markets. It measures the
systematic risk of a single instrument or an entire portfolio. Beta describes the
sensitivity of an instrument or portfolio to broad market movements. The formula for
beta is.
Cov (Zp, Zm)

72

where
is the covariance between the portfolio (or instrument) return and the
market return, and

is the variance of the market's return (volatility squared).

Both quantities are calculated using simple returns. Beta is generally estimated from
historical price time series. For example, 60 trading days of simple returns might be
used with sample estimators for covariance and variance.
It is possible to construct negative beta portfolios. Approaches include
Holding stocks (such as gold mining stocks) that tend to move against the market,
Shorting stocks, or
Putting on suitable options spreads.
Beta is sometimes used as a metric of a portfolio's market risk. This can be misleading
because beta does not capture specific risk. Because of specific risk, a portfolio can
have a low beta but still be highly volatile. Its price fluctuations will simply have a low
correlation with those of the overall market.
2)

MACD:
A trend-following momentum indicator that shows the relationship between two
moving averages of prices. The MACD is calculated by subtracting the 26-

73

day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the
MACD, called the "signal line", is then plotted on top of the MACD, functioning as a
trigger of buy and sell signals.
There are three common methods used to interpret the MACD:
1. Crossovers
2. Divergence
3. Dramatic
4. Traders

3) BOLLINGER BANDS:

74

Developed by John Bollinger, Bollinger Bands are an indicator that allows users to
compare volatility and relative price levels over a period time. The indicator consists of
three bands designed to encompass the majority of a security's price action.
1.

A simple moving average in the middle

2.

An upper band (SMA plus 2 standard deviations)

3.

A lower band (SMA minus 2 standard deviations)


Standard deviation is a statistical term that provides a good indication of volatility.
Using the standard deviation ensures that the bands will react quickly to price
movements and reflect periods of high and low volatility. Sharp price increases (or
decreases), and hence volatility, will lead to a widening of the bands.
4) VAR:
VAR summarizes the worst loss over a target horizon with a given confidence interval.
Ft = E*(e-r(T-t) F(St))
Where the asterisk is the reminder that the price path is under risk neutrality both
changing the expected return & the discount rate to be risk free rate. Instead VAR
measures variation in the value of the asset on the target date:
VAR(c, T ) = E(Ft) Q(Ft, c)
Where Q (Ft, C) is the quartile corresponding to the confidence interval c. Valuation
models focus on the mean of distribution. VAR on the other hand describes the
potential variations in the payoffs.

75

Perhaps the greatest advantage of VAR is that it summarizes in a single easy to


understand number the downside risk of an institution due to financial market variable.
Trading Signals
Different signals are used in trending and ranging markets. The most important signals
are taken from overbought and oversold levels, divergences and failure swings.
Use trailing buy- and sell-stops to time entry into trades.
Ranging Markets

Set the Overbought level at 70 and Oversold at 30Go long when RSI falls below
the 30 level and rises back above it or on a bullish divergence where the first trough is
below 30.

Go short when RSI rises above the 70 level and falls back below it
or on a bearish divergence where the first peak is above 70.
Failure swings strengthen other signals.

Trending Markets
Only take signals in the direction of the trend.

76

Go long, in an up-trend, when RSI falls below 40 and rises back above

it.

Go short, in a down-trend, when RSI rises above 60 and falls back

below it.
Exit using a trend indicator.
Take profits on divergences. Unless confirmed by a trend indicator, Relative Strength
Index divergences are not strong enough signals to trade in a trending market.
7) PRICE OSCILLATOR:
The Price Oscillator displays the difference between two moving averages of a
security's price. The difference between the moving averages can be expressed in either
points or percentages.
The Price Oscillator is almost identical to the MACD, except that the Price Oscillator
can use any two user-specified moving averages. (The MACD always uses 12 and 26day moving averages, and always expresses the difference in points.)

77

Chapter 6
RESEARCH METHODOLOGY

78

RESEARCH METHODOLOGY

RESEARCH DESIGN
The research design to be adopted for this project will be an exploratory research
design .It would help us in assimilating and understanding better, the issues and
problems faced in the daily transactions in the emerging market for mid Caps.
DATA COLLECTION
The Sources for collecting the data and information related to the project would be
partly primary and partly secondary.
Primary source: Questionnaire method with questions developed to assimilate the
understanding and attitude of stock brokers and analysts on the price behavior of
middle capital stocks.
Secondary sources: Articles by Market Experts, Stock Analysts, Journals, and
Business Magazines and to some extent current information extracts from brokers and
traders are going to be the sources for data collection.

79

Chapter 7
ANALYSIS AND FINDINGS

80

ANALYSIS AND FINDINGS

1.

How do you price the mid-cap stocks?


a) Fundamental Criteria

b) Judgmental Criteria

Criteria for Pricing:


Fundamental 85%
Judgmental

81

15%

1.1

If Fundamental then do you include the market criteria:


a) Potential Price Range
b) Stock Image

Potential Price Range


Stock Im age

82

What factors do you think affect the pricing of mid-cap stocks?


a) Corporate Results
b) Other institutional investors
c) Management Quality
d) Speculative Interest
e) FII Investment
f) Market regulators(Sebi)
g) Any other

12
10
8
6
4
2
0
Co
rp
O
or
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at
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2.

83

What all factors do you consider while advising your client for investing in a midcap stock?
a) Management Quality
b) Turnaround Story
c) Sustained Growth
d) Any other ..

9
8
7
6
5
4
3
2
1
0
M
an
ag
em
en
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3.

84

Which particular sectors would you like to invest in a mid-cap company?


a) Auto Ancilliaries
b) Pharmaceuticals
c) Banks
d) Construction
e) Textiles
f) Brokerages
g) Steel and steel products
h) Computer Software
i) Any other..

An
c

ill
ia
r
Ph ies
ar
m
C
on B a a
st nk
ru s
ct
Te ion
B
ro xtil
ke es
ra
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s
St
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ft l
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ot
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r

9
8
7
6
5
4
3
2
1
0

Au
to

4.

85

0
2
4
6
8
10

Why would you like to invest in these sectors and what is your investment horizon?
The OTHERS Category consisted of four respondents interested in:
-

Logistics and

Financial Services.
The interest was primarily due to the booming industry and the consistency in good
corporate results. The investors believed that since more of foreign investors were
coming to India, it would lead to more of International Trade requiring more
investments and active trading of pre-existing stocks in logistics.

86

5. To what level the mid cap prices correct during an intermediate bearish phase in a
bull run?
a) < 10%
b) 10 20%
c) 20 30%
d) > 30%

4.5
4
3.5
3

<10%

2.5
2

10-20%

1.5

>30%

20-30%

1
0.5
0

87

6. What were the reasons behind the sudden rise of investments in the mid cap
stocks? ( kindly explain)
a) Price rigging
b) FIIs investment
c) Other institutional buying
d) Good corporate results
e) Any other, (please specify)--------------------------------------------------------------------------------------------------------------------------------

Pr

ic
e

Ri
gg

o o Ot
in
g
d he
C rI
or ns FII'
po ti s
r a tut
te es
An R..
y .
ot
he
r

8
7
6
5
4
3
2
1
0

88

0
2
4
6
8
10

7. What can be the possible longevity of this rise?


a) Less than 3 months
b) 3 6 months
c) 6 - 12 months
d) More than 1 year
e) Any other, (please specify)-------------------------------------

< 3 months
3-6 months
6-12 months> 1
year
> 1 year
Any other

89

8. Will the price war be just like the dotcom bubble?


It will not be the same for companies which have a strong fundamental and a
managerial vision for growth. Since the mid-cap rally was not hype and infact was
supported by strong growth, therefore it will not end up like the dotcom bubble.
9. Are you comfortable holding your mid cap stocks after a deep correction?
5 of the respondents said that they are comfortable in such a scenario, condition they
are holding the right stocks with good growth prospects. Another 5 responded but
saying that they invest in stocks by keeping in mind, long term horizon i.e. they
would still keep their investments irrespective of short-term fluctuations.

10. Do you use any theoretical models for determination of mid-cap stock prices?
90

a) P/E Based Valuations


b) P/B Based Valuations
c) DCF Valuations
d) Any other, (please specify)----

12
10

2
4

10

0
P/E Ratio

P/B Ratio

DCF Valuations

91

Any other

11. Are the following tools used in the Indian Capital Market for Analysis of Mid Cap
Stocks?
a) Beta
b) MACD
c) Bollinger Bands
d) VAR
e) Williams percentage R
f) Relative Strength Index
g) Price Oscillator
h) Stochastic
i) Price return on capital
i) Any other (please specify) -----------------------------------

92

VA
W
R
ill
ia
m
%
R

M
AC
ol
ln
D
gr
ba
nd

et
a

Pr R S
I
ic
Pr
e
O
ic
sc
St
e
o
re
ch l
tu
as
rn
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on
ca
p
An ital
y
ot
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r

12
10
8
6
4
2
0

93

0
2
4
6
8
10

Chapter 8
THEORETICAL TOOLS FOR
ANALYSIS

94

Major Tools of Analysis for Mid Cap Stocks:


3)

BETA:
Beta is a risk metric employed primarily in the equity markets. It measures the
systematic risk of a single instrument or an entire portfolio. Beta describes the
sensitivity of an instrument or portfolio to broad market movements. The formula for
beta is.
Cov (Zp, Zm)

where
is the covariance between the portfolio (or instrument) return and the
market return, and

is the variance of the market's return (volatility squared).

Both quantities are calculated using simple returns. Beta is generally estimated from
historical price time series. For example, 60 trading days of simple returns might be
used with sample estimators for covariance and variance.
It is possible to construct negative beta portfolios. Approaches include
Holding stocks (such as gold mining stocks) that tend to move against the market,
Shorting stocks, or
95

Putting on suitable options spreads.


Beta is sometimes used as a metric of a portfolio's market risk. This can be misleading
because beta does not capture specific risk. Because of specific risk, a portfolio can
have a low beta but still be highly volatile. Its price fluctuations will simply have a low
correlation with those of the overall market.
4)

MACD:
A trend-following momentum indicator that shows the relationship between two
moving averages of prices. The MACD is calculated by subtracting the 26day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the
MACD, called the "signal line", is then plotted on top of the MACD, functioning as a
trigger of buy and sell signals.
There are three common methods used to interpret the MACD:

1. Crossovers
2. Divergence
3. Dramatic
4. Traders

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3) BOLLINGER BANDS:
Developed by John Bollinger, Bollinger Bands are an indicator that allows users to
compare volatility and relative price levels over a period time. The indicator consists of
three bands designed to encompass the majority of a security's price action.
4.

A simple moving average in the middle

5.

An upper band (SMA plus 2 standard deviations)

6.

A lower band (SMA minus 2 standard deviations)


Standard deviation is a statistical term that provides a good indication of volatility.
Using the standard deviation ensures that the bands will react quickly to price
movements and reflect periods of high and low volatility. Sharp price increases (or
decreases), and hence volatility, will lead to a widening of the bands.
4) VAR:
VAR summarizes the worst loss over a target horizon with a given confidence interval.
Ft = E*(e-r(T-t) F(St))
Where the asterisk is the reminder that the price path is under risk neutrality both
changing the expected return & the discount rate to be risk free rate. Instead VAR
measures variation in the value of the asset on the target date:
VAR(c, T ) = E(Ft) Q(Ft, c)

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Where Q (Ft, C) is the quartile corresponding to the confidence interval c. Valuation


models focus on the mean of distribution. VAR on the other hand describes the
potential variations in the payoffs.
Perhaps the greatest advantage of VAR is that it summarizes in a single easy to
understand number the downside risk of an institution due to financial market variable.
Trading Signals
Different signals are used in trending and ranging markets. The most important signals
are taken from overbought and oversold levels, divergences and failure swings.
Use trailing buy- and sell-stops to time entry into trades.
Ranging Markets

Set the Overbought level at 70 and Oversold at 30Go long when RSI falls below
the 30 level and rises back above it or on a bullish divergence where the first trough is
below 30.

Go short when RSI rises above the 70 level and falls back below it
or on a bearish divergence where the first peak is above 70.
Failure swings strengthen other signals.
Trending Markets
Only take signals in the direction of the trend.

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Go long, in an up-trend, when RSI falls below 40 and rises back above

it.

Go short, in a down-trend, when RSI rises above 60 and falls back

below it.
Exit using a trend indicator.
Take profits on divergences. Unless confirmed by a trend indicator, Relative Strength
Index divergences are not strong enough signals to trade in a trending market.
7) PRICE OSCILLATOR:
The Price Oscillator displays the difference between two moving averages of a
security's price. The difference between the moving averages can be expressed in either
points or percentages.
The Price Oscillator is almost identical to the MACD, except that the Price Oscillator
can use any two user-specified moving averages. (The MACD always uses 12 and 26day moving averages, and always expresses the difference in points.)

Interpretation

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Moving average analysis typically generates buy signals when a short-term moving
average (or the security's price) rises above a longer-term moving average. Conversely,
sell signals are generated when a shorter-term moving average (or the security's price)
falls below a longer-term moving average. The Price Oscillator illustrates the cyclical
and often profitable signals generated by these one or two moving average systems.
Example
The following chart shows Kellogg and a 10-day/30-day Price Oscillator.

In this example, the Price Oscillator shows the difference between the moving averages
as percentages.
I drew "buy" arrows when the Price Oscillator rose above zero and "sell" arrows when
the indicator fell below zero. This example is typical of the Price Oscillator's
effectiveness. Because the Price Oscillator is a trend following indicator, it does an
outstanding job of keeping you on the right side of the market during trending periods
(as shown by the arrows labeled "B," "E," and "F"). However, during less decisive

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periods, the Price Oscillator produces small losses (as shown by the arrows labeled
"A," "C," and "D").

Calculation
When the Price Oscillator displays the difference between the moving averages in
points, it subtracts the longer-term moving average from the shorter-term average:

When the Price Oscillator displays the difference between the moving averages in
percentages, it divides the difference between the averages by the shorter-term moving
average:

101

Chapter 9
RECOMMENDATIONS

102

Recommendations:

Depositors need to be converted into real investors. Kiosks of banks in rural


areas can sell a wide variety of financial products.
To build the investor confidence, there is need to strictly implement the best
corporate governance practices.
There is a need to teach investors how to rectify the mistakes and avoid the
repetition of previous mistakes.
Companies should educate their employees on equity investments.
Severe punishments be prescribed for wrong doers.
Every listed company should appointOmbudsman to deal with investor
grievances.
Investors Confidence need to be rebuilt through:
Enhanced Investor Protection
Better Transparency
Market Integrity
Market Efficiency
Enhanced Quality of Supervision over market intermediaries.

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Chapter 10
CONCLUSIONS

104

CONCLUSION

1.

According to the analysis, Fundamental criteria emerged out to be the most


important criteria with potential price image as well as stock image being equally
important.

2.

All the respondents gave FIIs as the most important reason for pricing of midcap stocks. Secondly, Market regulators and thirdly Good corporate results affected
their prices. Some believed that all the factors affected the determination of prices.

3.

For advising a client the most important factors found out were Management
quality, a turnaround story, sustained growth and some believed that even a good
momentum and marketability of the stock also help them in selling stocks to clients.

4.

Most of the respondents were interested in Steel and steel product, software,
Auto ancillaries, Pharmaceuticals, construction and banks.

5.

The other sectors in which investors are interested are logistics, financial
services; reason being that the economy is on a boom with an exhilarating.

6.

A majority of the investors believe that in an intermediate bearish phase in a


bull run there can be a 10-20 % fall. The remaining believed that it can be > 30%.

7.

FIIs and good corporate results were the top-notch reasons for sudden rise in
investments. Apart from these other institutional buying was also an important factor.
Another reason can be the mad rush considering the Bull Run and stretched
fundamentals along with strong growth.

105

8.

The longevity of the rise is taken to be > 1 year. Also the mid-cap rally being
backed by strong growth is believed to be by the respondents as not to burst like the
dotcom bubble.

9.

The most important theoretical models for the determination of mid-cap stock
prices was said to be the P/E BASED VALUATION,DCF VALUATION and then the
P/B VALUATION. The other method suggested by the respondents was the PEG
RATIO.

10.

Although most of the respondents, analysts and fund managers use a


combination of these models depending on their organization criteria and comfort
ability.

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Chapter 11
LIMITATIONS

107

LIMITATIONS

1. Analysis largely on the basis of secondary opinion which can be biased.


2. Analysis of a highly volatile market would be risky as the level of risk is high
especially for mid cap stocks wherein buyers make quick entry & exit to earn profits
in the short run.
3. A sample size of 8 sectors cannot capture the scenario and the trend of the entire mid
cap market.
4. Time is also a limitation as the analysis has to be conducted in a limited duration.
5. The respondents were reluctant to give information.
6. Surveyed brokers only reflect the opinion of individual investors as a result the project
lacks the opinion of corporate investors
7. The result may have been influenced by the composition of the sample and use of nonprobabilistic sampling technique.

108

Chapter 12
BIBLIOGRAPHY

109

BIBLIOGRAPHY

BOOKS:
1)

Prings Martin , 20001 , Introduction to Technical Analysis, Mc- Graw Hill


International Edition , Finance Series.

2)

Hamilton Peter, 1998, Stock Market Barometer , John Wiley & Sons

3)

Nelson

Daniel,

1999,

Modelling

Stock

Market

Volatility

Changes,

Elsevier(Reprint Edition-1989)
ARTICLES:
1)

Monga Rachna,Money in the Middle (COVER STORY),

November 1 2004,

Businessworld.
2)

Roy Pinto, .Watch out fo r mid cap pharma (PORTFOLIO TALK),


September27-October10,2004,BusinessIndia.

3)

Gombar Vandana,Pharmas Mid-Cap Mania, August 3, 2003, Business Today

4)

Nathan Narendra, Mid-Cap Strategy, November 21 , 2004, Business Today.

5)

Mascarenhas Rajesh, Back From The Beyond, September 26,2005, ET Big


Bucks.

110

6)

Gaurav Vijay & Joseph Anto, Small & mid-cap companies steal the Show,
September 05, 2005, Times News Network.

WEBSITES:
www.nse.com
www.investopedia.com
www.capitalonline.com
www.rbi.org
www.stockcharts.com
RBI BULLETIN
CNX Nifty Index 200

111

APPENDICES

Respected Sir/ Maam, I am doing a project on Indian Capital Market, which is a


part of our curriculum. For this, I require your help in filling the questionnaire. I assure
you that the information provided by you shall be used only for the project work and it
will be kept confidential.
1. How do you price the mid-cap stocks?
a) Fundamental criteria
b) Judgmental criteria
If Fundamental then do you include the market criteria i.e :
a) Potential price range
b) Stock image
1. What factors do you think affect the pricing of mid-cap stocks?
a) Corporate results
b) Other institutional investors
c) Management quality

112

d) Speculative interest
e) FII investment
f) Market regulators (SEBI)
g) Any other, (please specify) ---------------------------------------------------------------------------------------------------------------2. What all factors do you consider while advising a client for investing in a mid cap
stock?
a) Management quality
b) Turnaround story
c) Sustained growth
d) Any other , please specify-----------------------------------------------------------------------------------------------------------3. Which particular sector would you like to invest in a mid-cap company?
a) Auto ancillaries
b) Pharmaceuticals
c) Banks
d) Construction

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e) Textiles
f) Brokerages
g) Steel and steel products
h) Computer Software

i)

Any

other

(please

specify)

-------------------------------------------------------------------------------------------------------------------------------------------------------------4.1 Why would you like to invest in these sectors and what is your Investment
horizon?
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------4.

To what level the mid cap prices correct during an intermediate bearish phase
in a bull run?
a) < 10%
b) 10 20%
c) 20 30%

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d) > 30%
5.

What were the reasons behind the sudden rise of investments in the mid cap
stocks? ( kindly explain)
a) Price rigging
b) FIIs investment
c) Other institutional buying
d) Good corporate results
e) Any other, (please specify) ----------------------------------------------------------------------------------------------------------

6.

What can be the possible longevity of this rise?


a) less than 3 months
b) 3 6 months
c) 6 - 12 months
d) More than 1 year
e) Any other, (please specify) -------------------------------------

7.

Will the price war be just like the dotcom bubble?

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-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------8.

Are you comfortable holding your mid cap stocks after a deep correction?
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9. Do you use any theoretical models for determination of mid-cap stock prices?
a) P/E Based Valuations
b) P/B Based Valuations
c) DCF Valuations
d) Any other, (please specify) ---------------------------------------10. Are the following tools used in the Indian Capital Market for Analysis of Mid Cap
Stocks?
a) Beta
b) MACD
c) Bollinger Bands
d) VAR

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e) Williams percentage hour


f) Relative Strength Index
g) Price Oscillator
h) Stochastic
i) Price return on capital
i) Any other (please specify) -----------------------------------

THANK YOU!!

117