satyam assignment

8/8/2019 Satyam Assignment

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TERM PAPER

OF

Security and portfolio analysis

On

M M a a h h i i n n d d r r a a S S a a t t y y a a m m Fundamental and technical analysis

Submitted By Submitted To

Dinesh Kumar Mr.krishan gopal Roll no :- RT1901B50 Regd. No :- 10901690

Class :- MBA-3 sem

Section :- T1901

L L o o v v e e l l y y P P r r o o f f e e s s s s i i o o n n a a l l U U n n i i v v e e r r s s i i t t y y P P u u n n j j a a b b


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Acknowledgement

I would like to take this opportunity to express mygratitude towards all those people who have helpedme in the successful completion of this term paper,directly or indirectly. I would also like to express my

sincere gratitude towards ms .sukhwinder kaur (myterm paper guide) for her guidance and help whichshe willingly provided at every step of my termpaper.

Dinesh Kumar

MBA-3nd Sem


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Introduction of sat yam computer service

On 24th June company was incorporated as a Private Limited Co. for providing Software

Development and Consultancy Services to large corporations. The company was promoted by B

Rama Raju and B Ramalinga Raju. The company has set up two software Technology

Parks,one at Mayfair Centre, Secunderabad and other at Qutuballapur of Ranga Reddy Dist. of

A.P. The company also developed a software Development center in Bangalore. The company is

a 100% EOU under the STP scheme of the Dpt. of Electronics Government of India and exports

software to USA, Canada, Sweden and Germany etc. 1991 - On 26th August it was converted

into a Public Limited Company. 1992 - The Company went in for a Public Issue of Equityshares. The company has set up facilities at Secunderabad, Hyderabad and Bangalore. The

Company has created infrastructural facilities consisting of workstations with modern

communication and networking equipment. Satyam went in for a public issue of equity shares

with the main objective of setting up a software technology park and a 100 percent export

oriented unit for software development with a dedicated 64 KBPS satellite link.1993 - During the

year company has entered into a joint venture agreement with Dun & Bradstrret Corp., U.S.A.

for development of softwares.1994 - On January 26th a joint venture company called Dun &

Bradstreet Satyam Software (P) Ltd. was incorporated. 1995- During the year company issued

37,17,000 12% unsecured fully convertible debentures part A of Rs.100 each on right basis for

the shareholders in proportion of 1 FCD for every 5 shares held. The company also issued

37,17,000-12% FCD's-part `B' Rs.60 per debentures in August which can be converted into

equity shares of Rs.10 each at premium of Rs.50 per share on August 1996. During the year

Two offices were set up, one in USA and other in Japan. And the company has added new

business partners in Australia, Canada, Japan and Europe. During the year company promoted 4

subsidiaries. Viz Stayam Renaissance Consulting Ltd., Satyam Enterprise Solutions Pvt. Ltd.,

Stayam Infoway Pvt. Ltd and Satyam Infoway Pvt. Ltd.

1997 - During the year company has added additional space in Secunderabad and Bangalore.

And new software development centers were opened in Hyderabad, Pune, Chennai and

Bhubaneswar during the year. The company has established a school at Indian Institute of


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Information Technology at Hyderabad, joining a select band of global corporations like IBM,

Microsoft and oracle who are also participating in IIIT's activities. Satyam Computer Services

Ltd. (SCSL), the Hyderabad-based software company, setting up three more new software

development centres at Chennai, Pune and Bhubaneshwar. Satyam Infoway (P) Ltd. (SIL), a

subsidiary of Satyam Computers, has signed an agreement with Sterling Commerce,

International Group of the U.S. to provide electronic data interchange (EDI) and other value

added electronic commerce solutions throughout India.

Two new offices have already been set up in the US, and another in Japan. New business

partners have been added in Australia, Canada, Japan and Europe.nSatyam Infoway is a 100 per

cent subsidiary of the Hyderabad-based software major, Satyam Computer Services Ltd. Dun &

Bradstreet Corp. USA (D&B), is likely to buy out the 24 per cent stake of joint venture partner

Satyam Computers Services and gain majority control, 76 per cent of the stake is held by D&B.The joint venture was set up to provide software services to D&B clients world wide. Dun and

Bradstreet Satyam Software is the largest single location software unit for D&B in the world.

Satyam Computer has four subsidiaries: Satyam Spark Solutions, Satyam Infoways, Satyam

enterprise Solutions and Satyam Renaissance, Consulting, Spark solutions focuses on software

products, Infoways operates in the field of electronic commerce and electronic data interchange.

Satyam Computer Services Ltd announced that it had divested its 24 per cent ownership of Dun

& Bradstreet Satyam Software Pvt Ltd (DBSS) in favour of Cognizant Software Solutions

Corporation, a subsidiary of Cognizant Corporation, US. Satyam Computer Services Ltd., has

been selected by the Switzerland-based World Economic Forum and World Link magazine as

one of India's most remarkable and rapidly growing entrepreneurial companies.

2007 Satyam Computer Services Ltd has on March 15, 2007 has announced that it has

implemented an organization-wide, virtual learning environment called Satyam Learning World.

Satyam Computer signs multi-year deal with Applied Materials. Satyam Computer Services Ltd

on June 04, 2007 has announced that it recently won Computer Associates Vision, Impact,

Progress (VIP) Award for an internal implementation and optimization of CA's service desk

platform. Satyam Computer Services Ltd on June 11, 2007 has announced that it has forged an

alliance with US-based JDA Software Group Inc., the leading provider of supply and demand

chain solutions to 5,500 of the world's top retailers, manufacturers, and suppliers.Satyam

partners in developing Hera FxV-India's first Digital Car launched at CII Conclave.


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2008-Satyam Computer Services Ltd has informed that Satyam BPO, the business process

outsourcing arm of Satyam, a leading global business and information technology services

Company, on April 10, 2008 announced that it has won two prestigious Shared Services

Excellence awards from the International Quality and Productivity Council.-Satyam Computer

has announced it has inked a pact with Infospectrum to give third-party maintenance, repair and

overhaul (MRO) and component repair services for the global aviation industry.

2009 - Tech Mahindra has announced the name change of scam hit Satyam Computers as

Mahindra Satyam. This rebranding exercise symbolises an amalgamation of the values of

Mahindra Group with Satyam's fabled expertise, even as it retains that part of Satyam's identity

which signifies commitment, purpose and proficiency of the organisation and its people,

according to Anand Mahindra, vice-chairman and managing director of the Mahindra Group. -

Mahindra Satyam stated that it has secured contracts worth Rs 38 crore in the middle east andnorth america region (MENA) in Q2 of FY 2009-10. Mahindra Satyam appointed Deloitte as

auditors.

2010- Mahindra Satyam has inked a new 4 year offshore contract which is worth about mill

INTRODUCTION TO FUNDAMENTAL ANALYSIS

An investor can make more money if his investment decisions are based on actual movement

of share price measured both in money and percentage terms. It is also very important to predict

the future movements and also the true value of the securities.


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Equity analysis is used in order to find the true value of the securities and also to know where

the prices are moving. It covers many aspects including the calculating various financial ratios

and charts to extremely sophisticated indicators.

Equity Analysis is broadly divided into fundamental and technical analysis. Technical

analysis looks at the price movement of a security and uses this data to predict its future price

movements. Fundamental analysis, on the other hand, looks at economic factors, known as

fundamentals.

The following are the major differences between fundamental and technical analysis:

Fundamental analysis focuses on what is ought to happen while technical analysis

focuses on what has already happened.

Fundamental analysis analyses the economic indicators and financial statements whiletechnical analysis makes use of the historic market data

Fundamental Analysis advocates that every security has an intrinsic value which is not

reflected by the market price while technical analysis advocates that market price

accounts for everything.

Fundamental Analysis uses tools like ratio analysis other valuation methods to find the

intrinsic value while Technical Analysis primarily depends on charts and technical

indicators.

EQUI TY ANALYS IS

FUNDAMENTAL ANALYS IS

TECHN ICAL ANALYS IS


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Fundamental Analysis

Fundamental analysis is the study of a companys financial strength, based on historical data;

sector and industry position; management; dividend history; capitalization; and potential for

future growth. It is a stock valuation method that uses financial and economic analysis to predict

the movement of stock prices. The analysis attempts to find the intrinsic value of a security that

helps investors to make decisions.

The fundamental information that is analyzed can include a company's financial reports, and

non-financial information such as estimates of the growth of demand for products sold by the

company, industry comparisons, and economy-wide changes, changes in government policies

etc.

The various steps involved in the fundamental analysis are:

1. Macroeconomic analysis, which involves considering the overall health of the

economy and its future.

2. I ndustry analysis, which involves the analysis of the industry in which the company is

operating.

3. S ituational analysis of the company, studying their business model, management,

products and services, its current position, its future, etc.

4. F inancial analysis of the company, which involves analyzing the financial statements

like balance sheets, income statements, cash flows and ratios.

5. V aluation, which attempts to find the intrinsic value of the securities of the company.

The approach to fundamental analysis is often referred to as E-I-C Approach. The E-I-C denotes

the three parts of the fundamental analysis. The three distinctive parts of fundamental analysis

are:

1. Economic Analysis

2. Industry Analysis and

3. Company Analysis


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ECONOMIC ANALYSIS:-

Economic analysis is the analysis of forces operating the overall economy a country. It is a

process whereby strengths and weaknesses of an economy are analyzed and is important in order

to understand exact condition of an economy.

INDIAS STRENGTH IN IT SECTOR Large growth potential

Increasing outsourcing trend

Export and global outsourcing will drive future growth

Leveraging India advantages

Rapidly improving infrastructure

Indian technology production companies have demonstratedcapabilities to compete in the global market.

Government Policy

The duty cuts on telecom hardware and fiber will have a minimum impact.

The new fringe benefits tax has been introduced at the rate of 30 % of a specified portion of various benefits. Its an irritant as its parable by the employer.

NASSCOM, MAIT and other research firms such as IDC that suggest that the industry couldgrow at CAGR of 40 % between now and 2008.

It is estimated that by March 2005 the IT industry will be worth a cool $ 28.2 billion (RS 12080crore) and the industry is expected to by 25- 30 % annually over the next year.

IT companies are happy at the importance given to the infrastructure development by thegovernment and the announcement that 7 million jobs will be created by the IT sector 2009.

GDP

Year Mar Jun Sep Dec Average


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2010 8.60 8.80 8.702009 5.80 6.00 8.60 6.50 6.732008 8.50 7.80 7.50 6.10 7.48

India Gross Domestic Product (GDP) expanded 8 .80% in the second quarterof 20 10 from a year earlier . The India Gross Domestic Product is worth 1217 billion dollars or 1.96 % of the world economy . The economy has posted anaverage growth rate of more than 7% in the decade since 1997, reducingpoverty by about 10 percentage points .

Interest

Rate

Growth

Rate

Inflation

Rate

Jobless

Rate

Current

Account

Exchange

Rate4.50% 8.80% 13.73% 7.32% -13 46.7650

INFLATION

The Reserve Bank Of India has stated that it had seen an annual growth of 8.5%

steadily. The main priority of the Reserve Bank is to curb the ongoing inflation,

which peaked at 11% last month. Interest rates have been increased by the banks to

contain the inflation, but it could slow down the growth of the Indian economy in

the coming months. But even thought there has been a rise in the interest rates

there hasnt been much change in the distribution of loans, the Indian customer is

hardly affected with the hiked interest rates.


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F D I

The huge size of the market in the power sector in India and high returns on

investment are important factors in boosting FDI inflows to power. 100% FDI is

permitted to this sector under automatic route in almost all the power sectors in

India except the Atomic energy. There are huge opportunities of FDI in power

sector in India.

Economic Analysis:-

y The export of the company is good. They receiving huge export orders.

y The value of Rs. is increase as compare to previous.y The Govt. taking more steps to manipulate the economy. They providing tax

assumptions to grow of industry. Many schemes have been launched by the

govt. to increase the GDP of india.

y The GDP of India increases from last year . it is the good indication for

investing in Indian market.

y

The FDI in IT sector is 100% . so it can be good option for investment.

The overall economic condition of India is good. it can be a good option to

invest in Stock market specially in power sector.


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INDUSTRY ANALYSIS OF ITThe importance of industry analysis is now dawning on the Indian investor as never

before. It is very important to analyze the health of an industry because no company is

operating in isolation.

AN-OVERVIEW

The Indian software industry has grown rapidly since the 1980s, with revenues increasing

from less than $ 100 million in 1985-86 to nearly $ 8.4 billion by 2000-01. During this

period, exports grew even faster, with their share increasing from less than a third to

nearly three quarters of revenues. This essay will analyze the domestic conditions under

which this export led industry has grown. Although global demand for software,

sustained by the PC, networking and internet revolutions of the 1970s, the 1980s and the

1990s respectively, played an important role in facilitating the growth of the Indian

industry, it was also available to other countries. Indias main software market, India is

hardly unique in possessing such labor force characteristics. Indeed, global demand and

the availability of high skill, low wage workface are necessary, but not sufficient

condition. If they were sufficient conditions, one must explain why India failed to take

similar advantage, unlike her East Asian counterparts such as Taiwan, South Korea and

increasingly China, of the globalization of semiconductor design and manufacturing sincethe 1960s. In other words, the growth of Indias software industry must be explained in

terms of how shifting domestic policy conditions allowed her to take advantage of global

demand and her labor force characteristics to become, along with Israel, the leading

software

exporter by the end of the millennium.

Important large software players such as Infosys Wipro, satyam Computer Services

managed to beat the market expectation and continuously grow. The important thing is

stay in top of the computer software companys current ranking. Other big fishes Patni

Computer Systems, Emphasis BFL try to improve its position in industry and win the

confidence of investors.


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Through the 107 large and small software companies managed to see an improved sales

growth in compare to just 34 companies are under expectation and its near about 32%.

Out of all the 8 large computer software companies managed to see an improved sales

growth and reach to Rs. 15363.1 crore. Their OPM have just increase from 26.2 % to

27.0 %. Budget 2006 has all the ingredients for growing the domestic IT market faster,

the government focus on rationalization of custom duty is positive step to stimulate

domestic demand. The government decision to hike teledensity across all villages by

2007 will positively impact connectively, helping rural Indians to be part of the digital

revolution .

Industry StructureThe Indian software industry, a high growth sector, is fragmented, with the top 10 Playersaccounting for less than 20 percent of the total industry size in 2001. The IT Services

industry is characterized by players of varying sizes, providing solutions to Myriad

verticals, the Indian software and services industry had around 2,810 companies

Operating within its domain.

The structure of the industry can be gauged from the followingtable:

Annual turnover No .of companies Above Rs.1000 crore 5 Rs.500 crore- Rs. 1000 crore 5 Rs.250 crore- Rs . 500 crore 15 Rs.100 crore- Rs . 250 crore 27 Rs.50 crore- Rs . 100 crore 55 Rs.10 crore- Rs . 50 crore 220 Below Rs. 10 crore 2,483


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Sunrise Industry and the Growth for the Millennium

A growth of 20.4 % in rupee terms and 28 % in dollar terms in exports

during 2003- 04

Achieved a CAGR of 30 % in turnover and 37 % in export during last 5

tears.

IT exports likely to grow by 26-28 % in dollar terms during 2004-05.

Indian Industry Grow at over 32 % CAGR between 1999 and 2004.

Key factors behind growth in exports are: US IT investment boom

Onsite staff supplementation growth fuelled by major technology waves

Offshore growth led by anchor MNC customers

New emerging service lines (R & D services, BPO)

Significant Strengths in R & D

175 of the Fortune 500 companies have R&D operation in India

A vast network of state-owned national research


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Laboratories Provides world-class support

IT R&D services currently account for more than 15 % of Total IT

exports.

Opportunity in Software Sector

YEAR 2008 Market

IT Service Export $28-30 bn

Software products $ 8-11 bn

IT Enabled Service $21-24 bn

Domestic Market $13-15 bn

Total $70-80 bn

Export $57-65 bn

Strong Performance and Growth Potential

CAGR: 96-97 to 02-03: 24 % 02-03 to 08-09: 24 % By 2008, India will build a US$ 40 billion Electronics Hardware Industry

IT industry by the year 2008 IT export 35 % of Indias Total Export in 2008 from21.3 % during 2003-04 Share of IT Software & Services Industry in GDP ITExport Likely to be 7 % of GDP in 2008 From 2.64 % of GDP during 2003-04


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Company Analysis

Company analysis is the final stage of fundamental analysis. The economy analysis provides

the investor a broad outline of the prospects of growth in the economy. The industry analysis

helps the investor to select the industry in which investment would be rewarding. Now he has to

decide in which company he has to invest. Company analysis provides the answer to this

question.

In company analysis the investor tries to predict the future earnings of the company because

there is strong evidence that the earnings have a strong effect on the share prices. The level, trend

and safety of earnings of a company, however depend upon a number of factors concerning theoperations of the company.

The different issues regarding a company that should be examined are:

The Management

The Company

The Annual Report

Ratios

Cash flow

Abount Satyam Computer Service Ltd . Satyam Computer Service Ltd (SCSL) is a leading global service company , offering a wide a

wide array of solution customized for a key vertical and horizontals. From strategy consulting

right through to Implementing IT solution for customer , Satyam straddles the entire IT space. Ithas excellent domin competencies in verticals such as Automotive, Banking and Financial

Service, Insurance and Helthcare, Manufacturing , Telecom-Infrastructure-Media-Entertainment-

Semiconductors(TIMES). As a driverse end-to-end IT Solutions

provided, satyam offers a range of expertise aimed at helping customers re-engineer and re-

invent their business to compete successfully customers ever-changing marktplace. SCSL to


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report that the company has achieved Net Sales of Rs 20236.51 million in corporate to the one

year before it was 17319.43 million . The company growth was driven by a double digit offshore

volume increase and stable prices. Revenue for quarter three in 2004 of Rs 891.26 crore was

better than the guidencde of Rs 886 crore EPS AT Rs 5.49 was highest than the guidance of Rs

5.47. At Present , company have 372 active customer including 139 Fortune Globle 500 and

forture US 500 corporations. Company believe that the proporation of such customer to our total

customer base is one of the highest in the industy, reflectinthe strong brand. Satyam has been

ranked amongst the top 10 employers in India by the CNBC.

INTERPRETATION

With customer IT Budgets expected to grow at a rate higher than last year, thecompany believes that they are in a strong position to garner a larger share of their

IT spending . In light of the improved prospects and better-than-expected

performance for the current year . Company revising revenue guidance upwards

for fiscal 2005. Company expectes revenue between Rs 3429 crore and Rs 3433

crore , implying an annual growth of Rs 34.9% to 35.1%.


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Financial analysis

Directors Report Year End : Mar '08 The directors are pleased to present their report for the financial year 2007-08.

Financial highlights

Rs. in croresParticulars 2007-08 2006-07 Growth%

Income from software services 8,137.28 6,228.47 30.65

Other income 257.20 181.61 41.62

Total income 8,394.48 6,410.08 30.96

Operating profit (PBIDT) 2,085.74 1,710.73 21.92

Interest 5.94 7.61 (21.94)

Depreciation 137.94 129.89 6.20

Profit before tax 1,941.86 1,573.23 23.43

Provision for tax 226.12 150.00 50.75

Profit after tax 1,715.74 1,423.23 20.55

Equity share capital 134.10 133.44 0.49

Reserves 7,221.71 5,648.07 27.86

Transfer to general reserve 171.60 142.32 20.57Earnings per share


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(Rs. Per equity share of Rs. 2 each)

-Basic (Rs.) 25.66 21.73 18.08

-Diluted EPS (Rs.) 25.12 21.25 18.21

Dividend rate(Interim plus Final) (%) 175 175

OverviewFor the financial year ended March 31, 2008, your Company reported a total income of Rs.

8,394.48 crores, comprising income from software services of Rs. 8,137.28 crores, and other

income of Rs. 257.20 crores. Total revenues grew by 30.65% over the previous financial year. The

company recorded an operating profit of Rs. 2,085.74 crores, and a net profit of Rs. 1,715.74

crores, representing a growth of 21.92% and 20.55% respectively, over the previous financial year.

North America,

Europe and rest of the world accounted for 60.35%, 20.58% and 19.07% of the revenues,

respectively. Offshore revenue during the year was 51.84%, while onsite was 48.16%.

Dividend

Directors recommended a final dividend of Rs.2.50 per share for your approval. This, coupled

with the interim dividend of Re.l per share already paid, raises the total dividend for the year to Rs.

3.50 per share.

Increase in the share capital

During the year under review, the paid-up share capital of the Company increased from Rs.

133.44 crores divided into 667,196,009 equity shares of Rs. 2 each to Rs.134.10 crores divided

into 670,479,293 equity shares of Rs. 2 each, consequent to issue of 3,283,284 equity shares of Rs.


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2 each to Associates upon exercise of options under the stock option plans of the Company

Listing on Euronext

In a path-setting initiative, your Company listed its existing ADSs with Euronext Stock Exchange

(NYSEs European trading platform). With this move, Satyam became the first Indian company to

list on three major trading platforms around the world, making it a truly globally-tradeable entity.

The listing was also the first of its kind globally, under the fast-track mechanism. Europe is a

dynamic and growing market for your Company and our listing will demonstrate our continued

and growing commitment to the region.

Human resources

The total number of Associates on March 31, 2008 was 45,969, against 35,670 on March 31,

2007. The attrition rate for the year 2007-08 was 13.09%.

Balance Sheet of Mahindra

Satyam------------------- in Rs. Cr. -------------------

Mar '04 Mar '05 Mar '06 Mar '07 Mar '08

12mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 63.25 63.85 64.89 133.44 134.10

Equ ity Share Capital 63.25 63.85 64.89 133.44 134.10

Share Application Money 0.19 0.45 1.78 7.85 1.83

Preference Share Capital 0.00 0.00 0.00 0.00 0.00Reserves 2,517.52 3,153.17 4,268.75 5,648.07 7,221.71

Reval uation Reserves 0.00 0.00 0.00 0.00 0.00N etworth 2,580.96 3,217.47 4,335.42 5,789.36 7,357.64

Sec ured Loans 7.30 9.87 12.57 13.79 23.67

Unsec ured Loans 0.00 0.00 0.00 0.00 0.00T otal Debt 7.30 9.87 12.57 13.79 23.67T otal Liabilities 2,588.26 3,227.34 4,347.99 5,803.15 7,381.31

Mar '04 Mar '05 Mar '06 Mar '07 Mar '08


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12 mths 12 mths 12 mths 12 mths 12 mths

Application Of FundsG ross Block 847.16 937.70 1,153.16 1,280.40 1,486.53

Less: Acc um. Depreciation 597.76 685.41 803.74 930.45 1,062.04N et Block 249.40 252.29 349.42 349.95 424.49

Capital Work in Progress 22.17 64.68 76.84 290.05 458.63Investments 74.75 78.48 155.74 201.15 493.80

Inventories 0.00 0.00 0.00 0.00 0.00

S undry Debtors 592.82 765.17 1,122.81 1,649.86 2,223.41

Cash and Bank Balance 346.20 558.92 1,144.18 593.16 1,143.10

Total C urrent Assets 939.02 1,324.09 2,266.99 2,243.02 3,366.51

Loans and Advances 187.34 155.06 298.12 394.07 766.04

Fixed Deposits 1,469.16 1,804.38 1,908.15 3,366.66 3,318.58

Total CA, Loans & Advances 2,595.52 3,283.53 4,473.26 6,003.75 7,451.13

Deffered Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities 194.53 262.87 435.71 621.30 896.46

Provisions 159.06 188.77 271.56 420.45 550.28

Total CL & Provisions 353.59 451.64 707.27 1,041.75 1,446.74N et Current Assets 2,241.93 2,831.89 3,765.99 4,962.00 6,004.39

Miscellaneo us E xpenses 0.00 0.00 0.00 0.00 0.00T otal Assets 2,588.25 3,227.34 4,347.99 5,803.15 7,381.31

Contingent Liabilities 8.68 38.22 134.45 267.20 623.28

Book Val ue (Rs) 81.60 100.76 133.57 86.65 109.71

Interpretation company balance sheet reflect that companys financial positionis strong and its current assets are increasing every year as well as current assetsalso .due to high transaction of business its current liabilities are also increasing.

EPS-Earnings Per Share 17.57 23.50 38.21 21.33 25.59

The earning per share is show the amount per share which a investor gets on itsinvested money .company is able to provide increasing rate of per share return everyyear. It measures the investors confidence in the firms future. The higher the ratio,the larger is the investors confidence in the firms future.

Intrinsic valueThe actual value of a company or an asset based on an underlying perception of its true valueincluding all aspects of the business, in terms of both tangible and intangible factors. This valuemay or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of findinginvestments where the true value of the investment exceeds its current market value.


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INTRODUCTION TO TECHNICAL ANALYSIS

Technical analysis is a security analysis technique that claims the ability to

forecast the future direction of prices through the study of past market data,

primarily price and volume. In its purest form, technical analysis considers only

the actual price and volume behavior of the market or instrument.

Technical analysis mainly seeks to predict the short term price travels.

Technical analysts do not attempt to measure a security's intrinsic value, but

instead use charts and other tools to identify patterns that can suggest future

activity.

The basic assumptions of technical analysis are:

The market discounts everything: technical analysis assumes that, at any

given time, a stock's price reflects everything that has or could affect the

company - including fundamental factors. This only leaves the analysis of

price movement for a particular stock in the market.

Price moves in trends: In technical analysis, price movements are believed

to follow trends. This means that after a trend has been established, the

future price movement is more likely to be in the same direction as the trend

than to be against it. Most technical trading strategies are based on this

assumption.

History tends repeats itself: Another important idea in technical analysis is

that history tends to repeat itself, mainly in terms of price movement. Therepetitive nature of price movements is attributed to market psychology; in

other words, market participants tend to provide a consistent reaction to

similar market stimuli over time. Technical analysis uses chart patterns to

analyze market movements and understand trends.


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Price Charts

A chart is simply a graphical representation of a series of prices over a set time

frame. Technical analysis uses various kinds of charts to show the movement of

prices over a period of time. The charts that are most commonly used for technicalanalysis are:

Line Charts

Bar Charts and

Candlestick Charts

Line Chart:

Line Chart is the most common and simple charts as it considers only the closing prices of the

stocks and ignores other values such as open, close, etc. The line chart is drawn by connecting

the closing prices of a stock over a period of time. The above figure shows the line chart for the

satyam computer Limited for 2 year period (April to June 2010)


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B ar Chart:

The chart is made up of a series of vertical lines and two small horizontal lines, one to the left

and another to the right. The vertical line represents the high and low for the trading period,

along with the small horizontal line on the left to show the open price and another on the right

side to show the closing price. The above figure shows the bar chart for sat yam computer

service limited for 3 months period (April- June 2010).

Ca ndles t ick Chart:


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Similar to a bar chart the candlestick chart also shows all the information like high, low, open

and close prices of the stock the only difference being the way it is visually constructed. Usually

traders feel that candlestick charts are easy to read because it clearly shows the relationship

between the opening and closing prices of a security. If the closing price is more than the

opening price the candle is shaded white. Conversely the candle is shaded black if the closing

price is less than the opening price. The above figure shows the Candlestick price chart of

satyam Industries Limited for a period of 2year(2008-2010) and also the patterns of candle

sticks.

Head and ShouldersThis is one of the most popular and reliable chart patterns in technical analysis. Head and

shoulders is a reversal chart pattern that when formed, signals that the security is likely to move

against the previous trend.

V SHAPE:-

Volume is simply the number of shares or contracts that trade over a given period of time,usually a day. The higher the volume, the more active the security. To determine the movementof the volume (up or down), chartists look at the volume bars that can usually be found at theBottom of any chart. Volume bars illustrate how many shares have traded per period and showtrends in the same way that prices do


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Volume:

Volume refers to the number of shares or contracts that are traded over a given period of time.

Usually a price chart is presented along with the volume which is represented by volume bars.

The higher the volume, the more active the security is. Volume is an important aspect of

technical analysis because it is used to confirm trends and chart patterns. Any price movement up

or down with relatively higher volume is seen as stronger and more relevant move than a similar

move with weak volume.

Technical indicators:

Technical indicators are mathematical formulas that, when applied to security prices, clearly

flash either buy or sell signals. Price data includes any combination of the open, high, low or

close over a period of time and most of the indicators use only the closing prices. For analysis

purposes, technical indicators are usually shown in a graphical form above or below a security's

price chart. Once shown in graphical form, an indicator can then be compared with the


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corresponding price chart of the security. Sometimes indicators are plotted on top of the price

plot for a more direct comparison. A technical indicator offers a different perspective from which

to analyze the price action.

Some, such as moving averages, are derived from simple formulas and are relatively easy to

understand while some such as MACD uses complex formulas and are difficult to understand.

Technical indicators offer many uses such as:

y To confirm the trends

y To generate Buy/Sell Signals

y To predict the direction of future prices.

The technical indicators can be broadly classified into leading indicators and lagging indicators.

The leading indicators are those indicators which are designed to lead price movements. The

most common leading indicators are RSI and ROC. Lagging indicators are those indicators

which follow price action and are commonly referred to as trend following indicators. Some of

the most common lagging indicators are Moving Averages and MACD.

Some of the most common technical indicators that are used in this project are:

1. Moving Averages

2. Moving Average Convergence Divergence (MACD)

3. Relative Strength Index (RSI)

4. Rate of Change (ROC)

1. Moving Averages:

The moving averages are the most common and widely used technical indicators because of their

simplicity. Moving averages are formed by calculating the average price of a security over a

period of time. Moving averages smooth the price data to form a trend following indicator. They

do not predict price direction, but rather define the current direction with a lag. Moving averages

form the building blocks for many other technical indicators including MACD.


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The most popular moving averages are:

i. Simple Moving Average (SMA)

ii. Exponential Moving Average (EMA)

S imple Mov ing Avera ge (SM A): A simple moving average is formed by computing the average

price of a security over a specific number of periods. Most moving averages are based on the

closing prices. A 2year simple moving average is the 2 year sum of closing prices divided by

five. As its name implies, a moving average is an average that moves. Old data is dropped as

new data comes available. This causes the average to move along the time scale.

Ex ponen t i a l moving Avera ge (EM A): Exponential Moving Average is the moving average that

is formed by applying weight to the recent price changes. This reduces the timem lag. This

makes the EMA to respond faster to the price changes than SMA. There are three steps to

calculating an exponential moving average. First, calculate the simple moving average. An EMA


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has to start somewhere so a simple moving average is used as the previous period's EMA in the

first calculation. Second, calculate the weighting multiplier. Third, calculate the exponential

moving average. The formula for calculating EMA is In the above diagram the SMA (15) and

EMA (15) are plotted where we can see that the EMA responds faster to recent price changes

than SMA. The length of the moving average depends on the analytical objectives. Short moving

averages (5-20 periods) are best suited for short-term trends and trading. Chartists interested in

medium-term trends would opt for 20-60 period moving averages. Long-term investors

will prefer moving averages with 100 or more periods.

U ses of Mov ing Avera ges :

The direction of the moving average conveys important information about prices. A rising

moving average shows that prices are generally increasing. A falling moving average indicatesthat prices, on average, are falling. A rising long-term moving average reflects a long-term

uptrend. A falling long-term moving average reflects a long-term downtrend. Two moving

averages can be used together to generate crossover signals. A bullish crossover occurs when the

shorter moving average crosses above the longer moving average. This is also known as a golden

cross. A bearish crossover occurs when the shorter moving average crosses below the longer

moving average. This is known as a dead cross. Moving averages can also act as support in an

uptrend and resistance in a downtrend. A short-term uptrend might find support near the 20-day

simple moving average. A long-term uptrend might find support near the 200-day simple moving

average.


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Calculation of 7 days moving average of sat yam Mahindra

DATE CLOSING PRICE31-102008 304.830-112008 243

31-122008 170.1531-1-2009 54.0528-2-2009 41.531-3-2009 38.530-4-2009 46.6 128.3731-5-2009 53.4 358.4230-6-2009 70.9 67.8731-7-2009 103.7 58.3730-8-2009 113.85 66.9231-9-2009 119.05 78

30-102009 102.2 87.130-112009 101.65 94.9631-122009 96.45 101.131-1-2010 99.55 105.228-2-2010 95.55 10431-3-2010 92.6 10130-4-2010 94.5 97.531-5-2010 86.5 95.2530-6-2010 91.5 93.831-7-2010 86.4 92.37

30-8-2010 80.85 89.731-9-2010 90.1 88.9230-102010 78.9 86.96

The closing prcice of satyam computer service show a falling trend in price of its share .up


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3. Relative Strength Index (RSI):

J. Welles Wilder developed the Relative Strength Index (RSI) and introduced it in the June 1978

article for Commodities magazine. RSI is an extremely popular momentum indicator.

RSI is a momentum oscillator that measures the speed and change of price movements. RSI

oscillates between zero and 100. The most popular is the 14 days RSI where the RSI is calculated

based on 14 days values. Traditionally the stock is considered to be overbought when RSI is

above 70 and oversold when RSI is below 30. Signals can also be generated by looking for

divergences and centerline crossovers.

Ca lcul at i on :

The very first calculations for average gain and average loss are simple 14 period averages.

First Average Gain = Total of Gains during the past 14 periods / 14. First Average Loss = Total of Losses during the past 14 periods / 14

The second, and subsequent, calculations are based on the prior averages and the current gain

loss:

Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

RS I S ign a ls:

y

The stock is considered to be overbought if RSI goes above 70. Since the stock isovervalued, it is the right time to sell the stock and make profits

y Conversely, a stock is considered to be oversold if RSI falls below 30. Since the stock

is undervalued, it is the right time to buy the stock.

y A RSI reading above 50 is bullish as the average gains are more than the average

losses. On the other hand a reading below 50 is considered to be bearish.

y A bearish divergence occurs when stock makes a higher high and the RSI makes a

lower high

y A bullish divergence occurs when stocks makes a lower low while RSI makes a

higher low.


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Calculation of RSI of satyam computer GAIN LOSS

DATE CLOSING PRICE

31-102008 304.8 61.8

30-112008 243 72.85

31-122008 170.15 116.1

31-1-2009 54.05 12.55

28-2-2009 41.5 3

31-3-2009 38.5 8.1

30-4-2009 46.6 6.8

31-5-2009 53.4 17.5

30-6-2009 70.9 32.8

31-7-2009 103.7 10.15

30-8-2009 113.85 5.2

31-9-2009 119.05 16.85

30-102009 102.2 0.55

30-112009 101.65 5.2

31-122009 96.45 3.1

31-1-2010 99.55 4

28-2-2010 95.55 2.95

31-3-2010 92.6 1.9

30-4-2010 94.5 8

31-5-2010 86.5 5

30-6-2010 91.5 5.1

31-7-2010 86.4 5.55

30-8-2010 80.85 9.25

31-9-2010 90.1 11.230-10-201 78.9

99.8 263.9

4.15 10.99


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RSI= 100 - ( 100/ 1+ RS)Where RS = Avg . Gain /month(4 .15 )

Avg loss/month( 10.99 )

RS= O .3776

Hence , RSI = 2 7.41

. Rate of Change:The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a

pure momentum oscillator that measures the percent change in price from one period to the

next. The value of ROC oscillates around a central zero-point level. To calculate ROC a set

period is used to compare with todays price. The most popular periods used are 10, 12 and

25 days.

The figure above shows the prices and Rate of Change for a period of 7 months.

Ca lcul at i on :

ROC = [(Close - Close n periods ago) / (Close n periods ago)] * 100

Where n=10, 12 or 25 days.

ROC Indic ator s:

y ROC indicator which is at a high peak and starting to move down is an indication of a

sell signal, whereas an ROC at a low peak, but staring to move upward, is a buy

signal.

y A movement toward the zero line indicates that the existing trend is losing

momentum.

y ROC moving from above zero to below zero level is an indication of sell while ROC


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moving from below zero to above zero level is an indication of buy.

RUNS TESTRuns test is used to find out whether the series of price movements have occurred by chance. Arun is an uninterrupted sequence of the same observation. When the sequence of the observationschange we count it as a run.

Runs Test Z = (R-X) / o _

R = (n 1 + n2) / 2

X = (2n 1n2 / n1+ n2) +1

o-2 = {2n 1n2 (n1n2-n1-n2)} / {(n 1n2)2 (n1n2-1)}

n1 + n2 = number of observations in each categoryo- = standard deviationZ =standard normal variateDATE CLOSING PRICE

31-102008 304.8 -61.830-112008 243 -72.8531-122008 170.15 -116.131-1-2009 54.05 -12.5528-2-2009 41.5 -331-3-2009 38.5 8.130-4-2009 46.6 6.8


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31-5-2009 53.4 17.530-6-2009 70.9 32.831-7-2009 103.7 10.1530-8-2009 113.85 5.231-9-2009 119.05 -16.85

30-102009 102.2 -0.5530-112009 101.65 -5.231-122009 96.45 3.131-1-2010 99.55 -428-2-2010 95.55 -2.9531-3-2010 92.6 1.930-4-2010 94.5 -831-5-2010 86.5 530-6-2010 91.5 -5.131-7-2010 86.4 -5.55

30-8-2010 80.85 9.2531-9-2010 90.1 -11.230-10-2010 78.9

N1=10 ,n2=14

R = (10 + 14) / 2= 12

X = (2*10*14/ 24) + 1= 12.67

o-2 = {2*10*14 (2*10*14 10 14)} / {(10 + 14) 2 (10 + 14 - 1)}= {280*256}/ {576* 23}

o-2 = 5.43o- = 2.33

RUNS TEST Z = R-X / o-= (12-12.67) / 2.33 = -2.88


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CORRELATION:- Serial correlation or auto-correlation measures the correlation co-efficient in a series of numberswith the lagging values of the same series. Price changes in period t + 1 are correlated with the

price changes of the preceding period. If there is correlation between the price of t and t + 1 period, the points plotted in the graph would from a straight line.

Correlation formula:-

r 2 = (ay + b (xy) nY 2) / (y 2 nY2)

b = (xy nXY) / (x 2 nX2)

a = Y bx

DATE 2008-200 2009-10

correlation value

30-11 243 101.65 0.204325

31-12 170.15 96.45

31-1 54.05 99.55

28-2 41.5 95.55

31-3 38.5 92.6

30-4 46.6 94.531-5 53.4 86.5

30-6 70.9 91.5

31-7 103.7 86.4

30-8 113.85 80.85

31-9 119.05 90.1

30-10 102.2 78.9

10. REFERENCES

KHAN M Y, JAIN P K., 2010. Management Accounting . New Delhi: Tata McGraw Hill

Education Private Limited.


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GREWAL T S., 2005. Analysis of F inancial S tatements . New Delhi: Sultan Chand & Sons (P)

Ltd.

Available from: http://www.investopedia.com [Accessed between 1 st June 2010 and 6 th June

2010] Available from: http://www.mahindra.com [Accessed between 6 th June 2010 and 10 th June

2010]

Available from: http://www.tatamotors.com [Accessed between 6 th June 2010 and 12 th June

2010]

Avaiable from: http://www.ashokleyland.com [Accessed between 10 th June and 20 th June

2010]

Available from http://www.oica.net [Accessed between 10 th June 2010 and 16 th June 2010]

Available from http://www.siam.in [Accessed between 10 st June 2010 and 16 th June 2010]

Available from http://icharts.in/oldcharts [Accessed between 1st July 2010 and 5 th July 2010]

Available from http://nseindia.com/historicaldata [Accessed between 1st July and 10 th July]

Available from http://munothfinancial.com [Accessed on 1 st July 2010]

www.money control .com

www.nse in

www.satyam commuter.in

Security and portfolio analysis parsana chandra

satyam assignment

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