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Applying Dividend Discount Model (DDM) to 'State Bank of India' (SBI)
2008-01-17 14:54:00
Dividend Discount Model values a firm's equity on the basis of the future dividends that the company is expected to give. Discounting all the future dividends gives the value of the stock as this is the only money an investor is going to get if he keeps the stock till perpetuity.The general valuation formula for DDM is:P = D1/(k - g)whereP - ideal price of the stockD1 - dividends for the year 1k - cost of equity/ discounting rateg - growth rate of the dividendsThere are some assumptions in this model which require careful use of this model for finding the intrinsic value of a stock based on its dividends.We will use a live example of State Bank of India (SBI) to illustrate the use of DDM. The following is the last 10 year dividend history of the company: Year End Total Dividends paid (Rs crores) PAT (Rs crores) Retained Earnings (Rs crores) Retention ratio, b Mar-98 211 1861 1650 0.89 Mar-99 211 1029 818 0.8 Mar-00 263 2051 ...

Is India's growth rate slowing down?
2008-01-16 19:55:00
India touched GDP growth rate of 9% last financial year. It is a big achievement for the country and initially people were apprehensive of sustaining over 8% growth rate for reasonable time. For the last three years India has continued to grow at more than 8% and last year it recorded 9.3% growth. All the while people have been talking of signs of heating of the economy. This fiscal year the growth has slowed down a bit but is still above 8% level. This slowdown has been indicated by Reserve Bank of India (RBI). According to the report a slowdown in the growth of demand has led a slow down in the growth of sales in the first half of 2007-08.According to Moody's India's growth rate will come down to 8% in 2008 due to the tighter monetary policies taken by RBI to curb inflation. Goldman Sachs has also lowered India's growth to 7.8%.Recession in United States of America is not likely to have any significant effect on the India's GDP growth as it is mainly domestically driven growth...
More About: Growth , Rate

Rupee appreciation and its after-effect
2008-01-16 19:25:00
The rupee has witnessed around 12% appreciation last year, the most since at least 1974. On 16’th Jan 2008, it was quoting at 39.068 per US dollars (USD) against 44.28 at the end of 2006. The strong economic fundamental is one of the major factors for attracting Foreign Direct Investment (FDI). The appreciation got further strengthened by the sub-prime crisis in US. The sub-prime crisis in US led to fall in US market and investor started taking their money out. They looked for the best market to invest and found Indian market more attractive. According to Security and Exchange Board of India (SEBI), the net investment in India by FII was 19.53 bn USD in 2007 as compared to 8.87 bn USD in the year 2006, a 120% increase in the FII inflow. As per the data from commerce ministry, Foreign direct investments through august last year totaled $12.9 bn USD as compared to $11.1 bn for the whole of year 2006. This high inflow of money from the international market has increased the demand of...
More About: Effect , Rupee , Appreciation

What moves Sensex or Nifty?
2008-01-16 16:43:00
We have seen in the previous post the constituents of Sensex /Nifty and their weights in the index. Lets see what is the effect of price change of a stock on the index. We will take the example of S&P CNX Nifty. As discussed before Nifty is an index based on full market capitalization i.e. the index is proportional to the sum of the market capitalization of all its constituent stocks. The weights of the stocks in the index will vary. Lets take the data of 31 December 2007 for understanding the concept. Nifty closed at 6138.6 on December 31, 2007. The top four weighted stocks in Nifty were: Stock Name Market Capitalisation Weightage (Rs. Crores) % Reliance 4,19,043 11.89% ONGC 2,64,568 7.51% NTPC 2,06,879 5.87% Bharti Airtel 1,89,100 5.37% Total 35,22,527 100% Suppose Reliance's stock price changes by 10%, how will Nifty change?This is a very simple question. Since market capitalization is directly propor...
More About: Moves

Nifty falls below 6000 mark first time in 2008 led by Mutual funds sell off
2008-01-16 12:44:00
Indian stock market has seen heavy sell off in the past two days. The benchmark indices Nifty and Sensex have touched a low level of about 4-5% from the closing value two days back. We will try to analyse the reasons for this abrupt selling, but first we shall look into the trends of the Indian stock market for past one year. The following graphs are self-explanatory:Variation of Nifty-50 over one year. Returns in excess of 50% in one year.Past one month variation in Nifty index. Highly volatile. Nifty fell sharply in mid December 2007, and also rise sharply the next week. Touched new highs of 6300 in January 2008 before falling back sharply below the 6000 level in mid January. Will Nifty rise back sharply as seen in December last year, perhaps no one can say so for sure.The last two days heavy sell off can be seen in this chart. On January 15, and 16 Nifty has fallen sharply and only in last hour of trading on January 16, bulls have tried to come back.Reasons for sharp fall:If we ...
More About: Time , Mutual Funds , Sell , Mark

Economic Fundae - GDP
2008-01-15 20:40:00
Good Accounting turns data into information!This article is aimed at people trying to understand the basics of national accounting.GDP:Gross Domestic Product is the value of all the goods and services produced in the country within a given period. This includes all the goods and services produced in the geographical boundaries of the country irrespective of who produces. The other slight variant is the GNP which include receipts from abroad made as factor payments to domestically owned factor production. For example, part of India's GDP corresponds to the profits made by Hyundai Motors from its Indian operations. But these are part of the Korea's GNP because they are income of Korean-owned capital.Although the difference is not significant in countries like U.S. it certainly is important where most of the countries labor is abroad working for a multinational company.The fundamental national accounting equation will be asY= C + I + G + NXConsumption spending by household sector, in...
More About: Economic

BSNL may sell stocks worth $10billion (Rs 40,000 crores) through India's bi
2008-01-14 20:52:00
Indian Government announced on monday that it may sell $10 billion(Rs. 40,000 crores) stake in BSNL , one of the India's biggest telecom company. This will be done through initial public offering (IPO) of shares and fund will be used for expansions plans. BSNL will be the second biggest telecom company in Asia after China Telecom by market capitalization.The IPO will value the BSNL at Rs 400,000 crore, much ahead of Bharti Airtel, the country’s No.1 company whose market capitalization is Rs. 172,179 crores (January 14, 2007). BSNL will also become the India's second biggest listed company after Reliance Industries Limited(RIL) which has market capitalization of about Rs 448,193 crore.On Tuesday India's biggest IPO so far will be opened for subscription. A $3 billion (Rs 11,700 crore) IPO by Reliance Power will break the previous best record of 9,190 crores by the real estate major DLF Ltd.
More About: Stocks , Worth , Sell

Soaring Crude Oil price and its impact on India
2008-01-14 14:24:00
With the crude oil touching $100 per barrel in the very first week of the year, it is expected to brings a bitter taste all over the world except the oil-producing countries. But how about India ? India imports around 76% of its domestic demand and the increase in oil price is always a matter of concern for the policy-makers. But this time story is not all the same, while one side the international crude oil price is at all time high, the Rupee has appreciated by more than 12% which is highest at least last 20 years. The appreciation of domestic currency has offset the impact of high price to some extent. The last increase in the domestic oil price was there in June, 2006 and which was followed with downward revision twice. The oil price has huge impact on general pricing and hence inflation. With the moderate and negligible increase in oil price government has well maintained the inflation and common man is happy about it. But, the bigger picture is quite ominous. The major supp...
More About: Price , Soaring , Crude Oil

Monetary Policy
2008-01-14 13:15:00
Monetary policy intends to achieve a balance between excess and shortage of money supply in the market/economy. These policies are concerned to the supply/control of money. It influences the pace and direction of economic activity, money supplies, interest rates, borrowing and price level. In the case of shortage of money on the economy the growth gets hampered which has negative impact on the prosperity of people. On the other hand if there is excess of money in the market, the prices of goods and services goes up and severely impacts the poor. The government/RBI needs to make sure that the sufficient money is available with market for the growth without affecting the poor. The main objectives of monetary policy are – Maintaining the price stability Inflation has strong negative impact on social welfare and needs to be maintained at lower level. High and stable employment Employment opportunities could be increased by higher investment and economic activities, which in turn...
More About: Monetary Policy , Policy

Special Section for CAT / MBA entrance GD/PI Finance articles
2008-01-14 12:42:00
This post contains the list of all the Finance articles, in this blog, that may be relevant for CAT or other MBA aspirants preparing for GD/ PI. You may send your request for any relevant article that you want on this blog.We have two authors for this section: Saurav & Selwyn. They shall be presenting their views & relevant facts on the current topics in Finance.So far we have these articles in this category. The list will get updated with the new posts.List of finance articles:Soaring crude oil prices and its impact on IndiaMonetary PolicyRupee appreciation and its after-effectEconomic Fundae - GDPEconomic Fundae - InflationEconomic Fundae - Exchange RatesEconomic Fundae - Business CyclesEconomic Fundae - Fiscal PolicyEconomic Fundae - Interest RatesTo view all the posts with tag CAT in a single page.
More About: Articles , Special , Section , Entrance

How did various Indian stock market indices performed in 2007
2008-01-13 07:52:00
Returns of the four major indices of National Stock Exchange(NSE) of India in the year 2007 are are: CNX 100 CNX 500 Midcap Nifty 56% 61% 78% 53% While late rally in midcap stocks lead to its overall better performance, CNX500 also outsmarted Nifty50. This suggests that the appreciation of stock prices in the year 2007 was across the market and not limited to the stocks in benchmark indices like Nifty and Sensex.The graph showing the variation within the year of the above indices:Relative performance of the four indices is shown in the graph below:
More About: Stock Market , Market , Indian

Correlation of Sensex and Nifty
2008-01-12 21:04:00
How much correlated are Sensex and Nifty ? Lets look at the graphs of the two indices for last five years:Analyzing the data for last five years using regression shows a high correlation between them. Lets look at the picture for last one year.Based on the past data, one can easily conclude that Sensex and Nifty are highly correlated indices.

Finding Beta of a stock
2008-01-12 20:13:00
Beta is a measure of the systematic risk pertaining to a security. It is an estimate of the returns on a stock when the market changes by a unit percentage. A beta of 1 means that the stock is in perfect correlation with the market, if the market moves up by 1% the particular stock will also move up by 1% and vice-versa. There are many ways to estimate beta the most common one being using the historical data. Since beta estimates the returns using historical beta may not always yield the exact future returns, but most of the times they explain the trend.Historical beta is calculated by regression of the stock return and market return for a particular time period unit. This may be daily, weekly, fortnightly, monthly, or quarterly depending upon the available data, accuracy required and relevance. The market returns are measured by taking the returns of some index which takes the representation of almost all the sectors of the market.Lets find beta for State Bank of India (SBI). We ha...
More About: Beta , Stock

What is BSE Sensex? What constitutes Sensex?
2008-01-12 11:26:00
SENSEX (Sensitive Index) is the India's most popular stock market index developed by Bombay Stock Exchange (BSE) in 1986. SENSEX has 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100.The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period.The selection of constituents in SENSEX is based on several factors including the listed history, trading frequency, rank based on market capitalization and liquidity, industry representation, etc.The index is reviewed every quarter and in the case of a revision in the Index constituents, the announcement of the change is made at least six weeks in advance of the actual change.The present constituents of SENSEX...
More About: Sensex

What is S&P CNX Nifty? What constitutes Nifty?
2008-01-12 10:04:00
S&P CNX Nifty (Standard & Poor's CRISIL National Stock EXchange index-NSE fifty) is the benchmark index of NSE reflecting the performance of Indian stock markets. The fifty stocks in the index have market capitalization more than that of rest of the traded stocks at NSE. Nifty is managed by India Index Services and Products Ltd. (IISL), a joint venture between NSE and CRISIL.Nifty is computed using market capitalization weighted method. Hence, the level of the index reflects the total market value of all the stocks in the index relative to base period (index base value of 1000 on November 3, 1995).The stocks for inclusion in Nifty have to satisfy several criterias like liquidity (measured by impact cost), market capitalization, floating stocks, etc.The present constituents of Nifty are: Company Name Industry ABB Ltd. Electrical Equipment ACC Ltd. Cement Ambuja Cements Ltd. Cement Bajaj Auto Ltd. Automobile - 2/3 wheeler Bharat...