India's most reputable companies - 2009 Forbes ranking

Forbes has published the list of top 200 most reputable companies in world. The list is available at Forbes website.

In the list there were following 17 Indian companies with Tata group at the helm:

Company	Global Rank	Industry
Tata	11	Conglomerate
State Bank of India	29	Banking
Infosys Technologies	39	Computer
Larsen & Toubro	47	Construction/Engineering
Maruti Udyog	49	Automotive
Hindustan Unilever	69	Consumer Products
ITC Limited	95	Conglomerate
Canara Bank	102	Banking
Hindustan Petroleum	111	Energy
Indian Oil	112	Energy
Wipro	116	Computer
Reliance Group	132	Conglomerate
Mahindra & Mahindra	137	Automotive
Bharti Airtel .	163	Telecommunications
Bank of Baroda	174	Banking
Bharat Petroleum	175	Energy
Punjab National Bank	177	Banking

Source: Forbes

47 Indian companies in Forbes 2000 List

The following 47 companies have figured into the Forbes 2000 list:

Company	Sector
Reliance Industries	Oil & Gas Operations
SBI	Banking
ONGC	Oil & Gas Operations
IOCL	Oil & Gas Operations
NTPC	Utilities
ICICI Bank	Banking
Tata Steel	Materials
Bharti Airtel	Telecommunications
SAIL	Materials
Reliance Communications	Telecommunications Services
L&T	Capital Goods
BPCL	Oil & Gas Operations
BHEL	Capital Goods
HDFC	Banking
TCS	Software & Services
Hindalco Industries	Materials
HDFC Bank	Banking
DLF	Diversified Financials
Infosys Technologies	Software & Services
Punjab National Bank	Banking
ITC	Food, Drink & Tobacco
Wipro	Software & Services
Bank of India	Banking
HPCL	Oil & Gas Operations
GAIL (India)	Utilities
NMDC	Materials
Canara Bank	Banking
Power Grid of India	Utilities
Tata Motors	Capital Goods
Bank of Baroda	Banking
Power Finance	Finance
Axis Bank	Banking
Union Bank of India	Banking
Grasim Industries	Construction
Indian Overseas Bank	Banking
Sun Pharma Industries	Drugs & Biotechnology
Mahindra & Mahindra	Consumer Durables
Allahabad Bank	Banking
Indian Bank	Banking
Syndicate Bank	Banking
IDBI Bank	Banking
Central Bank of India	Banking
Jindal Steel & Power	Materials
National Aluminium	Materials
Oriental Bank of Commerce	Banking
UCO Bank	Banking
Hero Honda Motors	Consumer Durables

Rank	Companies	Sales (b $)
121	Reliance Industries	34.03
150	State Bank of India Group	22.63
152	Oil & Natural Gas Corp	24.04
207	Indian Oil Corp Ltd	51.66
317	NTPC	9.63
329	ICICI Bank	15.06
463	Tata Steel	32.77
508	Bharti Airtel	6.73
582	Steel Authority of India	9.82
689	Reliance Communications	4.26

Forbes global 2000 list is published every year and takes into consideration the assets, sales, profits, and market capitalization of the corporations.

Source: Forbes

Head of the top Banks in India

Public Sector Banks
State Bank of India Shri O.P. Bhatt Chairman
Punjab National Bank Dr. K.C. Chakrabarty Chairman and Managing Director
Bank of India Shri T.S. Narayanasami Chairman and Managing Director
Bank of Baroda Shri. M. D. Mallya Chairman & Managing Director
Union Bank of India Shri M.V.Nair Chairman & Managing Director
Canara Bank SRI. A. C. Mahajan Chairman & Managing Director
Indian Bank Shri M S Sundara Rajan Chairman & Managing Director
Private Sector Banks
ICICI Bank Ms Chanda Kochhar Managing Director & CEO (effective May 1, 2009)
HDFC Mr. Jagdish Capoor Chairman
Mr. Aditya Puri MD
Axis Bank Ms. Shikha Sharma CEO
Kotak Mahindra Bank Mr. Uday Kotak Executive Vice Chairman & Managing Director

Tech Mahindra's acquisition of Satyam could change the Indian IT league

Continuation from previous post on Tech Mahindra's bid for Satyam
Currently, the top 10 players in the Indian IT industry (by revenues) are:

		Net Sales	Profit
		Rs. Crore	Rs. Crore
1	TCS	18534	4,509
2	Wipro	17493	3,063
3	Infosys	15648	4,470
4	Satyam*	8137	1,716
5	HCL Tech.	3769	1,102
6	Tech Mahindra	3605	326
7	Oracle Fin. (iFlex)	1793	411
8	Mphasis	1452	265
9	Financial Tech.	1254	961
10	Patni Computers	1172	388

* as per the latest audited data which may be subject to change after the revised audit by new auditors.

The top 3 players were at a much higher level compared to others. The combined revenues of Tech Mahindra and Satyam will reduce the gap and the combined entity could pose a serious threat to the top 3 in the medium to long run. However, in the short run there are strong challenges for Tech Mahindra. Retaining customers of Satyam is a crucial factor and Tech Mahindra will be doing every bit to save each customer. Besides other M&A related issues, managing diverse domain businesses will be tough task for senior management.
If managed well the synergies between the two companies can pose serious threat to TCS, Infosys and Wipro. Tech Mahindra's promoter British Telecom (BT) has businesses with all the top 3 companies and its business with Infosys is 6% of Infosys' total revenues. With Satyam in Tech Mahindra's kitty it could as well provided those services to BT which Infosys, TCS and WIpro are providing currently. Moreover its automotive IT business can be positively impacted because of Mahindra group's automobile business.

A look at Tech Mahindra’s winning bid for Satyam Computers

Recently Tech Mahindra won the bidding auction for a majority stake in Satyam Computer Services Ltd. which has been seeking some rescue since it was hit by the country’s biggest accounting fraud. Tech Mahindra outbid the other two bidders: engineering giant Larsen & Toubro (L&T) and International distressed fund investor WL Ross and Co. While Tech Mahindra bid at Rs 58/share L&T and Ross were distantly behind at Rs 45.90 and Rs 20 /share respectively. The reason for such low bid by WL Ross & Co. is cited by many that it lost interest as its partner for the bidding Cognizant Technology Solutions withdrew from the bid. As the next bidder was at less than 90% of the highest bid value Tech Mahindra was easily declared the winner.

Tech Mahindra has to pay Rs 1756 crore ($351 million) for 31 % preferential allotment of new shares. Later it has to make open offer for further 20 % at Rs. 58 /shares. If the open offer does not get fully subscribed, Tech Mahindra will have the option of going for a second preferential issue and raise its stake to 51 % to become the majority shareholder. Overall it will be investing Rs 2880 crores to get the 51% stake. This deal values the fraud-hit Satyam Computers at about Rs 5,665 crore ($1.1 billion).

Tech Mahindra will require Rs 2880 crore to sail through this deal smoothly. Moreover it may have to immediately invest for operating expenses of Satyam which according to some analysts could go up to Rs 1000 crore. In its balance sheet Tech Mahindra has about Rs 700 crore in cash. It will be looking for debt financing for the rest of the acquisition value. This is likely to put stress on its balance sheet which as on Mar 2008 had total asset value of Rs 1323 crore.

About Tech Mahindra
“Tech Mahindra is a leading provider of solutions and services to the telecommunications industry, majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc. With total revenues of Rs 37,66 crore in the year ended March 31, 2008, Tech Mahindra is India’s 6th largest software exporter, and serves telecom service providers, equipment manufacturers, software vendors and systems integrators. Tech Mahindra solutions enable clients to maximize returns on IT investment by achieving fast time to market reduced total cost of ownership and high customer satisfaction. Tech Mahindra achieves this through its domain and process expertise, distinctive IT skills, research and development, proven innovative delivery models and approach to off shoring.”

About Satyam
“Satyam (NYSE: SAY) is a leading global business and information technology services company, delivering consulting, systems integration, and outsourcing solutions to clients in 20* industries and more than 65* countries.”
* Figures as of September 30, 2008


Before Satyam's scandal was disclosed in January, Satyam was ranked India's fourth-largest outsourcing firm and Tech Mahindra was sixth-largest.

Major Securities Scams in India

There have been many occasions in the past where some people have taken advantages of knowledge of how the system works and manipulated the system to gain huge amount of money for themselves or their organization. While many of these cases do not come to public, the major ones that have been disclosed in public have shown the enormity of the scale at which these perpetuators have operated and the weakness of our system to stop them or catch them early. To get an idea of the size of these frauds let us have a look at India’s one of the most famous scam. Harshad Mehta’s securities scam, which came into light in 1992, involved misappropriation of funds well above 3500 crores INR (about a billion USD in 1992). The aftermath of this scam led to investors losing more than 100,000 crore INR (about 25 to 30 billion USD) in 2 months in stock market. Though after this scam regulation were strengthened and legal penalty was given to the accused, yet the steps were not enough to avoid another major scam which shook the markets. This time it was Ketan Parekh in 2001 and the scale of the damages were similar. And recently in 2009 another major scam came into public and shook the already feeble markets: the Satyam Accounting Fraud to the tune of 7000 crore INR (about 1.5 billion USD). The reoccurrence of these scams may suggest the lacuna in the current regulatory system which provides the scope for such practices.

There is always information asymmetry between different players in the financial markets. This being a necessary part of the system cannot be eliminated. However, appropriate rules and regulations can be put in place to prevent the misuse of this information asymmetry by any players. Rules for insider trading are in place in almost every country; still these can’t be fool-proof.

Year	Major Victims	Size of scam	Major accused
1991/92	Investors in related shares	Rs. 3500 crores	Harshad Mehta
	State Bank of Saurashtra	Investors lost market value
	SBI Caps	to the tune of 100,000 crores
	Standard Chartered Bank	rupees
	National Housing Bank
2001	Investors in related shares	~ Rs. 3000 crores	Ketan Parekh
	Calcutta Stock Exchange	20,000 crores rupees lost in
	UTI	the market capitalization
	MMCB
2008/09	Satyam Computers Ltd.	~Rs. 7000 crores (approx. $1.5 b USD)	B. Raju

Introduction of exchange traded currency derivatives in India

Over the years the foreign exchange market in India has shown significant growth in terms of volumes, product range, liquidity, and participation level. The average daily turnover in the foreign exchange market in March 2007 was a whopping 33 billion USD. Due to lack of exchange traded currency instruments, these transactions were done in over-the-counter (OTC) market like currency forwards, swaps, and options. There was always a need for a more developed currency markets in India to match the international standards.

Benefits of Exchange traded over OTC
The exchange trading makes the transaction more transparent. The price discovery is more efficient in case of exchange trading because of presence of large number of market players. It also offers trading opportunity for relatively smaller players because of small contract size compared to OTC market. Moreover, in exchange traded products the counter-party risk is eliminated by the clearing corporation. Using electronic trading superior risk management systems can be used for exchange trading thereby minimizing the overall risk in the portfolio.

In August 2008, RBI and SEBI allowed selected exchanges to offer currency trading and issued guidelines for the same. RBI & SEBI allowed USD-INR to be traded on exchange. The size of the contract will be USD 1000. The contract can have a maximum maturity of 1 year and it should be quoted and settled in Indian Rupees. Settlement price will be the RBI’s reference rate. Some more specific details in the guidelines about the currency derivatives were:

Underlying

• US Dollar – Indian Rupee (US$-INR)

Trading Hours

• The trading on currency futures would be available from 9 a.m. to 5 p.m.

Size of the contract

• US$ 1000

Quotation

• The currency futures contract would be quoted in rupee terms.

Tenor of the contract

• The currency futures contract shall have a maximum maturity of 12 months.

Available contracts

• All monthly maturities from 1 to 12 months would be made available.

Settlement mechanism

• The currency futures contract shall be settled in cash in Indian Rupee.

Settlement price

• The settlement price would be the Reserve Bank Reference Rate on the date of expiry.

Final settlement day

• The currency futures contract would expire on the last working day (excluding Saturdays) of the month.

The excerpt, from the guidelines, about the trading member is shown below:

"
The Trading Member will be subject to a balance sheet net worth requirement of Rs. 1 crore while the Clearing Member would be subject to a balance sheet net worth requirement of Rs 10 crore. Banks authorized by the Reserve Bank of India under Section 10 of the Foreign Exchange Management Act, 1999 as 'AD Category - I bank' are permitted to become Trading and/or Trading-cum-Clearing Members of the Currency Futures market, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:

a. Minimum net worth of Rs. 500 crore.
b. Minimum CRAR of 10 %.
c. Net NPA should not exceed 3 %.
d. Bank should have made a net profit in last 3 years.

The Trading Members and sales persons in the Currency Futures market must pass a Certification Programme which is considered adequate by SEBI. BSE Training Institute offers a training course and it also separately runs a Certification Programme. All approved users and sales personnel of the Trading Member are required by SEBI to have passed the Certification Programme.

"

Pursuant to the guidelines BSE and NSE have started currency derivative trading. The Currency Futures trading at BSE takes place through a fully automated screen-based trading platform called BSE-CDX (BSE's Currency Derivatives Exchange). The CDX is designed to allow trading on a real-time basis. In addition to generating trades by matching opposite orders, the CDX also generates various reports for the Member participants.
















Source: BSE, NSE, RBI, SEBI websites

Top Investment banks, brokerage companies of India

We have looked at the exchange listed investment and or brokerage companies: companies which either are directly into investment banking companies or provide brokerage services to retail and corporate investors. Based on the market value of these companies, as on Jan 17 2009, we have listed the top in this field along with their market capitalization.

	Market Cap (Rs. Billion)
Religare Enterprises Limited	24.5
Edelweiss Capital	17.9
JM Financial	15.8
India Infoline	13.1
Centrum Capital	11.1
Future Capital	9.9
Motilal Oswal	9.0
Geojit Fin Services	4.9
Indiabulls Securities	4.8
IL & FS Investmart	4.6
Apollo Sindhoori	2.9

Below is some information about these companies as provided on their websites.

Religare Enterprises Limited (REL) is an integrated financial services groups. It offers a diverse services ranging from investment in equities & commodities, wealth management, portfolio management services, personal financial services, insurance broking, investment banking and institutional broking services. The Investment Banking business is offered through Religare Capital Markets Limited (RCML), a wholly owned subsidiary of the Religare Enterprises Limited. It deals in merchant banking, transaction advisory and corporate finance servicing the Corporate, Entrepreneurs and Investors.

Edelweis is one of the leading investment bank of India. It ranked first in Mid-market Private Equity placements 2007 and IPOs in Mid-market segment in 2008. Edelweiss’ operations are broadly divided into Agency and Capital business lines. The Agency business line includes Investment Banking, Broking - both Institutional and HNI, Asset Management and Investment advisory services. The Capital business line includes Lending and Treasury Operations.

JM Financial is an integrated financial services group, offering a wide range of services. It offers research-based investment advisory and equity broking services to corporates, high net-worth individuals and retail investors across a wide range of financial products.

India Infoline Investment Banking offers service rangeing from Merchant Banking and Mergers & Acquisition transactions to Private Equity and High Yield Debt Syndication for both public and private companies.

Centrum is a financial services company in India with a network of over 75 branches operating in India. It has provides debt and equity services to some esteemed corporates.

It offers investment advisory services with domain expertise in private equity and real estate. It claims to be in capital management business which is beyond the traditional banking and brokerage businesses.

Motilal Oswal Financial Services Ltd(MOFSL) is an Indian Investment Banking firm with wide network of brokerage facility. It services include equity broking, commodity broking, distribution of third party products, investment banking and venture capital management. With over 1500 offices and franchisees in about 500 cities it is a well established brand among retail and institutional investors in India.

Geojit is a leading retail broking house of India. It has a network of over 450 branches in India and abroad. It also provides automated online trading services.

Indiabulls Securities Limited is one of the premier capital markets company and has a strong client base. Its brokerage house was assigned the highest rating BQ – 1 by CRISIL.

IL&FS Investsmart Limited is one of the top financial services organizations providing individuals and corporates with customised financial management solutions.

It is a financial services company promoted by Apollo Hospitals Group. It provides Trading facility in Equity and Derivative segment, commodity segment, IPOs, and MFs. It has 700 offices across the country.

Performance of Indian Navratna companies (contd.)

(Contd. from previous post)

The market performance of the 16 listed Navratna CPSE out of total 18 are as below:

	Market Cap. (billion Rs.)	P/E	P/BV
NTPC	1,483	21.4	2.8
ONGC	1,386	8.9	2.0
BHEL	684	25	6.4
NMDC	602	19.2	7.3
IOCL	522	7.3	1.3
SAIL	327	4.7	1.4
Power Grid	317	20.9	2.3
GAIL	263	10.7	2.0
PFC	150	13.2	1.5
BPCL	139	9	1.2
NALCO	118	7.5	1.3
HPCL	95	7.6	0.9
REC	67	8.3	1.3
Bharat Electronics	62	8	1.9
MTNL	47	8.3	0.4
SCI	34	4.4	0.6
Coal India	Not Listed
HAL

The biggest of them by market capitalization is the power sector giant NTPC with 1.48 trillion rupees ($30 billion). It is trading at 21 times its FY08 earnings because of expected high growth of power sector in India.

Performance of Indian Navratna companies

Department of Public Enterprises (DPE), an organizing body of government of India confers status of Navratna to some state owned companies, Central Public Sector Enterprises (CPSE). As of today there are 18 Navratna companies. The selection criterion is based on financials like net worth, revenues, net profits, etc. To be specific, there are six parameters to be evaluated by DPE when assigning Navratna title to a company. Each company is benchmarked on

(1) ratio of employee cost to the production cost,
(2) ratio of net profit to net worth,
(3) ratio of PBDIT to revenues,
(4) ratio of PBDIT to capital employed,
(5) EPS, and
(6) relative performance in its sector

Below is the performance of 18 Navratna companies in the FY08.

Figures in billion rupees	Block Assets	Sales	Net Profit
ONGC	1232.2	598.5	167.0
IOCL	568.3	2467.6	71.9
NTPC	533.7	370.9	74.2
Power Grid	354.2	46.1	16.0
SAIL	309.2	397.7	73.0
BPCL	215.0	1102.1	15.5
HPCL	195.7	1052.2	12.7
GAIL	169.6	180.1	26.1
MTNL	158.4	47.2	6.1
NALCO	91.4	50.2	16.3
SCI	67.4	37.3	8.1
HAL	52.1	86.2	16.3
BHEL	44.4	194.9	28.6
Bharat Electronics	14.3	40.6	8.1
NMDC	14.2	57.1	32.5
PFC	3.7	50.6	12.1
Coal India	3.5	2.7	17.1
REC	0.8	35.4	8.6
Composite	4,028	6,817	610

Acronym expanded:

BHEL	Bharat Heavy Electricals Limited
BPCL	Bharat Petroleum Corporation Limited
GAIL	(erstwhile) Gas Authority of India Ltd
HAL	Hindustan Aeronautics Limited
HPCL	Hindustan Petroleum Corporation Limited
IOCL	Indian Oil Corporation Limited
MTNL	Mahanagar Telephone Nigam Limited
NALCO	National Aluminium Company Limited
NMDC	National Mineral Development Corporation Ltd.
NTPC	National Thermal Power Corporation Ltd
ONGC	Oil & Natural Gas Corporation Limited
PFC	Power Finance Corporation Limited
REC	Rural Electrification Corporation Limited
SCI	Shipping Corporation of India Limited
SAIL	Steel Authority of India Limited

ONGC is the biggest in terms of assets and profits whereas IOCL has the highest turnover.

Navratna status comes with a great degree for these state run firms. Also, its government endeavour to support these Navratnas to grow up to global giant.

How securities are traded

The involvement of retail investors in capital market has increased significantly. While many of them invest in market passively through mutual funds, there are quite a few who either invest using demat account or get help of the broker for investment. Many might wonder how shares come to their account and money is deducted online? Why the exchange trading in India is termed as T+2? And what do clearing and settlement means?

The whole trading starts with decision to trade, when the investor looks for some script and place order for that. If the order matches with the counter order placed by some other investor, it gets executed. Once the order gets executed, on the next day it goes to the clearing house where all trades are confirmed. Which is shown in the diagram at T+1 days. Then these cleared trades get settled, where pay-in & pay-out of all the securities and funds takes place. This settlement takes place on T+2 days. Such settlement is called rolling settlement.

In India, rolling settlement was first introduced by Over the counter exchange of India (OTCEI). In the year 2000, SEBI made rolling settlement compulsory for 10 selected securities which had volume more than Rs 1 crore. With time by December 2001, other stocks were also included for rolling settlement. SEBI introduced T+5 rolling settlement in equity market from July 2001, which was subsequently shortened to T+3 from April, 2002. To reduce the risks in settlement like counterparty risk and system risk, SEBI mandated rolling settlement of T+2 days for all the scripts from April 1, 2003.

Where to get the FII and Mutual Fund investment activity in Indian stock/equity & debt markets?

FII (Foreign Institutional Investors) and Mutual funds activities are very important for short term traders to speculate the trend. Being major players most of the time their actions moves the market up or down. Fortunately SEBI (Securities and Exchange Board of India) publishes the total amount of buying and selling done by FIIs and Mutual Funds in the Indian equity and debt market.

The data are made available to the public through SEBI's website in the "FII / Mutual Funds Trends" column. The webpage gives the last trading day's activities by FIIs and MFs and has archives for each day of current month. To visit the archieves for periods earlier than one month another archive section for both FIIs and Mutual Funds is available. To access any historical data enter the closing date of that month and click 'go'.

According to a note on SEBI's website:

"Note: The data pertains to all the activities undertaken by FIIs in Indian Securities Market, including trades done in secondary market, primary market and activities involoved in right/bonus issues, private placement, merger & acquisition etc."

SEBI has a 'investors awareness campaign' and provides the investors with the latest data/information to help them make informed choices.

Reliance Power IPO subscribed for more than market value of the Portuguese and Czech stock markets (Update 1)

As per Bloomberg, the bid for Reliance Power initial public offer (IPO) exceeded Portugal Market Value. The company is likely to raise more than Rs 10000 crore from this public issue excluding promoters’ contribution. This is the largest IPO in Indian market till date. The company sought to raise around 117 billion Rs ($3 billion) through 228 million shares on offer. The offer had got subscribed within 60 seconds on the day of opening and finally got oversubscribed by 73.04 times as per National Stock Exchange (NSE). The offer received an order worth more than $190 billion, which is equivalent to combined value of Portugal and Czech stock markets.

The 3’rd richest man of India, Mr. Anil Ambani will increase his wealth further with listing of this Stock. Reliance energy has got 50% stake on Reliance Power. Power stocks have driven the market well in the year 2007 and the trend is expected to continue. Reliance Energy share price increased from around 600 Rs in February, 2007 to more than 2400 Rs in January this year. The addition of Reliance Power is expected to receive a good demand in the market when it gets listed early next month.

The issue price was fixed at 450 Rs today (19'th Jan) and is expected to gain 300-400 Rs on the day of listing. With already $45 billion of wealth with him, Anil Ambani might take a leap with this addition in his asset and that could make him the richest person of the world. The next update from Forbes magazine on official ranking of richest people of the world will certainly bringing more Indians among top rankers. According to the earlier update from Forbes, the wealth of Ambani brothers together with L. N. Mittal and K. P. Singh is more than the 40 richest Chinese. This IPO was one of the most talked and coming month might change fortunes of many.

Applying Dividend Discount Model (DDM) to 'State Bank of India' (SBI)

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)

where
P - ideal price of the stock
D1 - dividends for the year 1
k - cost of equity/ discounting rate
g - growth rate of the dividends

There 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	1788	0.87
Mar-01	263	1880	1617	0.86
Mar-02	316	2423	2107	0.87
Mar-03	447	3105	2658	0.86
Mar-04	579	3681	3102	0.84
Mar-05	658	4305	3647	0.85
Mar-06	737	4405	3668	0.83
Mar-07	737	4534	3797	0.84

Using this we find that SBI has policy to retain about 85% of their earnings and distribute 15% as dividends to its shareholders. The retained earnings add on to the shareholder's equity and should earn profits for SBI. For each year we also looked into the returns on the equity (ROE) for SBI. the data is as follows:

Year End	Retention ratio, b	ROE	Growth rate, g
Mar-98	0.89	21.2	18.8
Mar-99	0.8	10.3	8.2
Mar-00	0.87	18.2	15.9
Mar-01	0.86	14.7	12.6
Mar-02	0.87	17	14.7
Mar-03	0.86	19.2	16.4
Mar-04	0.84	19.7	16.6
Mar-05	0.85	19.4	16.5
Mar-06	0.83	17	14.2
Mar-07	0.84	15.4	12.9

We have calculated the growth rate of dividends using:
growth rate = retention ratio X Return on equity ; g = b*ROE
Since dividends next year will be equal to this year's dividends plus the earnings on the retained earnings of this year with SBI.

The average growth rate for the 10 year period was about 14.7%.

SBI paid dividends of Rs 14 per share in 2007. Hence D0 = 14.
D1= 14*(1+g) = 14 * 1.147 ~ 16

Finding the discount rate is the trickiest part of the valuation and it depends on many factors and can be estimated using CAPM or other similar models. For simplifications we will take cost of equity as given in this case. We will take cost of equity as 15% and assume that SBI will enjoy this high growth for next 20 years before settling at something less than India's GDP growth rate (~ 7 %) and find out the value in the next article. Till then you can try it on your own.

[Hint: SBI is currently trading at 2400]


[To be completed in next post...]

Is India's growth rate slowing down?

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 and the fundamentals are very strong.

The growth in the industrial production numbers jumped significantly in 2006-07 which had a major contribution in the GDP growth rate. Now, since the demand had decreased because of rising interest rates the industrial production index is feeling the direct pinch and has recorded slower growth. Automobile sales has shown very little growth over last year and the housing activities have also shown a slowdown.

Though these activities appears to put a lot of pressure on growth rates and may even be successful in short run. India's story is a long term and it has just started. One can easily bet on the long term growth prospects of the country.

Rupee appreciation and its after-effect

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 rupee significantly and that has propelled the sudden surge in value of rupee against dollars. This could have impact on various aspects including trade, inflation and government policy as well.

International Trade:

The strengthening of rupee has made import attractive while it has severely impacted the export. Export growth slowed down to an average 17% till Oct, 2007 from 21.3% a year earlier. The current account (Account for export and imports) deficit widened in the three months through September to $5.5 bn, while the capital-account (Account for FDIs , FIIs and overseas borrowings) surplus more than doubled in the quarter to $34.75 bn. IT business is one of the worst hit industries with all the companies showing slump in growth. These companies have sought for government interference, which is yet to be addressed.

Petroleum Prices:

The soaring crude oil prices has always been a cause of concern for India oil companies with no say in the domestic pricing of petroleum products. The $100 per barrel crude oil would have left government with no other choice except increasing the oil price, which no government will be willing to do when hardly a year is left for the Lok Sabha election. The appreciation in rupee has helped government to compensate the high oil price to some extent.

Impact on Inflation:

January 2007 witnessed the highest inflation in last 3 years because of increased demand for pulses and general goods with supply constraints. The appreciation in rupee made import cheaper and hence decreased price, which led to decrease in inflation to almost 5 years low in December, 2007.

As the full impact of subprime is yet to be amortized and expected further cut in Federal Reserve interest rate, the rupee is expected to further appreciate to 38 per dollar by the end of this year.