Appendix 4 – Business Communication for Managers

Appendix 4

A SAMPLE LONG REPORT

Investment Opportunities for Equityplus' Open-ended Growth Fund

Date: February 3, 2010
Junior Analyst Core Team, EquityPlus
Anubhav Mukherjee,
Kalyan R.
Vimal Anandh G.
Sornam A.R.

 

Acknowledgements

We would like to express our gratitude towards EquityPlus and Louise Xavier for providing us with an opportunity to work on this challenging assignment. This opportunity has helped us improve our equity analysis skills, besides giving the joy of being part of an exciting new endeavour. The idea of contributing towards the larger goals of the organization was a great satisfaction in itself.

Table of Contents

Abstract

List of Illustrations

1. Introduction

1.1 Background

1.2 Problem Statement

1.3 Motivation

1.4 Coverage and Scope

1.5 Limitations

1.6 Report Organization

2. Methodology

2.1 Objectives

2.2 Research Techniques

2.2.1 Stock price gains

2.2.2 Financial ratio analysis

2.2.3 Comparative analysis with industry and peers

2.2.4 Evaluation of future projects and management's vision for firms

2.2.5 Ratings of stock analysts and brokerages

3. Findings

3.1 Infosys Technologies

3.1.1 Analysis of financial ratios

3.1.2 Future projects

3.1.3 Management's vision and expert opinion

3.1.4 Brokerage and analyst ratings

3.2 Larsen and Toubro

3.2.1 Analysis of financial ratios

3.2.2 Future projects

3.2.3 Management's vision and expert opinion

3.2.4 Brokerage and analyst ratings

3.3 State Bank of India

3.3.1 Analysis of financial ratios

3.3.2 Future projects

3.3.3 Brokerage and analyst ratings

4. Conclusions

5. Recommendations

References

Abstract

EquityPlus Mutual Funds is planning to launch a new Open-ended Growth Fund at the end of next quarter. This requires the analysts at the firm to select suitable stocks in line with the fund's objectives. This report is the outcome of research undertaken to analyse potential investment opportunities for the new fund. The major findings of the research were as follows:

  1. As the global economy emerges out of the 2008 financial meltdown, some specific industry verticals are set to witness enormous growth rates; these include information technology, infrastructure, and banks
  2. Based on the key financial ratios, the stocks with lowest price to earnings ratio and price to book value ratio seem lucrative as they have been undervalued
  3. Comparisons among peers, future growth prospects, and recommendations of brokerages confirmed the findings of the financial ratios. The management's vision of the future of the firm has also been considered in the selection of stocks. The study recommends that Infosys Technologies Ltd. (information technology), Larsen & Toubro (infrastructure) and State Bank of India (banks) are ideal investments for the new fund.

List of Illustrations

Serial No. Description Page no.
Table 4.1A Stock Prices: Current and Past
346
Figure 4.1A P/E ratio of Infosys from Jan 2003 to Jan 2010
346
Figure 4.2A P/BV ratio of Infosys from Jan 2003 to Jan 2010
346
Figure 4.3A Comparison of current ratio of Infosys with that of software industry
347
Figure 4.4A Interest coverage ratio of Infosys from Jan 2003 to Jan 2009
347
Figure 4.5A Comparison of earnings performance of Infosys with that of software industry
347
Figure 4.6A Comparison of ROCE of Infosys with its peers
348
Figure 4.7A P/E ratio of L&T from Jan 2003 to Jan 2010
349
Figure 4.8A P/BV ratio of L&T from Jan 2003 to Jan 2010
350
Figure 4.9A Comparison of current ratio of L&T with that of capital goods industry
350
Figure 4.10A Interest coverage ratio of L&T from Jan 2003 to Jan 2009
350
Figure 4.11A Comparison of earnings performance of L&T with that of capital goods industry
351
Figure 4.12A Comparison of ROCE of L&T with its peers
351
Figure 4.13A P/E ratio of SBI from Jan 2003 to Jan 2010
352
Figure 4.14A P/BV ratio of SBI from Jan 2003 to Jan 2010
353
Figure 4.15A Comparison of earnings performance of SBI with that of public sector banking Industry
353
Figure 4.16A Comparison of earnings performance of SBI with other public sector banks
353
1. INTRODUCTION

1.1 Background

EquityPlus's Mutual Funds include a range of offerings. The new fund, which is planned as an Open-ended Growth Fund, is expected to ride high on the booming economic scenario and capitalize on the post-recessionary investment drive of investors. In this frenzy of investment, selection of stocks based on their growth potential and strong fundamentals becomes all the more important. These stocks should be in line with the stated investment objectives of the new fund, which is to generate long-term capital appreciation along with risk minimization through diversification. Such a fund, which seeks cautious growth, needs to identify specific industry verticals to diversify investments. The current post-recessionary phase indicates the presence of industries that are set to grow at stupendous rates in the near future.

India's IT and Business Process Outsourcing (BPO) industries are all set for a major change in economic fortunes. As the IT industry exits its worst year ever, it will return to growth in 2010, with IT spending expected to total USD 3.3 trillion, a 3.3 per cent increase from 2009, according to Gartner. This phase will be driven by demand from emerging markets in the Asia-Pacific region in addition to the usual IT hubs of the United States and Eastern Europe. The IT spending of Australia alone is set to reach USD 56.4 billion by 2013, at a compound annual growth rate of 1.3 per cent. Gartner expects the global IT spending in 2010 alone to be USD 3.3 trillion. This is heartening news as far as IT services vendors in India are concerned. The established players like Infosys, TCS, and Wipro are expected to make the most of this boom, a fact confirmed by the hiring sprees that these companies have engaged in recently.

India's infrastructure industry is also set to see a revival of its fortunes. Riding on the back of an economic revival, the major infrastructure companies will be shaping urban India in the next few years. As the residential sector faces a shortage of 19.4 million units, the future of these companies looks bright with near certain huge cash inflows. Recognizing the critical importance of the infrastructure sector, the Government of India has accorded it a high priority. Accordingly, both the central and the state governments have been working in tandem to upgrade infrastructure to meet international norms and standards. It is but certain that the government will rope in the services of private players at the earliest in this endeavour. By sheer virtue of their size, infrastructure giants like RIL, L&T, GMR, and Gammon will be walking away with the lion's share of this pie.

The domestic economic outlook in India continues to look positive and is set to replicate a close-to-2009 level of GDP growth. In this regard, the banking industry is expected to do well. Banking should do well on account of an increase in credit growth. However, according to Gartner, the common man has yet not recovered from the trauma of the financial meltdown and is unlikely to place his faith in the private sector banks. Public sector banks are likely to capitalize on this opportunity. While this growth story is likely to be replicated in both commercial and retail banking, it is the latter that will be a major driver of growth for these companies. Public sector banks like Punjab Bank, SBI, and Bank of Baroda are all likely to cash in on the euphoria.

1.2 Problem Statement

The study aims at a detailed analysis of the performance of Infosys Technologies Ltd., Larsen & Toubro, and State Bank of India (SBI) stocks. Past data for stocks has been gathered from various sources. This data has been analysed along various parameters to decide the suitability of these stocks for the new fund offering.

The following parameters were used to arrive at the viability of the stocks:

  1. Key financial ratios
  2. Stock performance over the last year
  3. Comparative analysis with peers
  4. Future outlook for the industry in general and the company in particular
  5. The management's vision
  6. Opinions of experts and stock market analysts

1.3 Motivation

The purpose of this research is gather information about three viable industry verticals and specific stocks belonging to those industries. Such viable stocks would then be recommended for the new open-ended growth fund of EquityPlus.

1.4 Coverage and Scope

The present research focuses on analysing and testing the viability of the three stocks (Infosys Technologies Ltd., Larsen & Toubro, and SBI.

  1. The study does not include an analysis of the individual competitors of the stocks identified. However, a comparative study with the industry and competitors has been included.
  2. The study performs a stock analysis of the data spread across seven years. This is to ensure that a holistic picture of the stock's performance emerges.
  3. The current study has sought to minimize risk by diversifying investments across industries.
  4. The opinions of experts and management have been duly considered.
  5. The analysis used to select the specific industries (IT, infrastructure, and banking) studied for the purpose of stock selection is out of the scope of this research.

1.5 Limitations

The limitations of the research methodology are:

  1. The methodology and models assume that there would be no drastic changes in the international scenario that would impact these industries.
  2. The study fails to consider the correlation among the three stocks. To decrease the overall risk of the fund's portfolio, non-correlated assets are recommended.

1.6 Report Organization

The report explains the methodology followed to evaluate stocks. The “Methodology” section begins with a discussion of how the objectives influenced the choice of research techniques. It is followed by a detailed explanation of the evaluation criteria and the justification and relevance of choosing the selection criteria. The methodology section ends with a description of the research methods followed to evaluate the stocks within the chosen criteria. The “Findings” section follows the “Methodology” section. It elaborates on all the findings for the three recommended stocks under each evaluation criteria. The analysis ends with the conclusions and recommendations. The “Conclusions” section contains all the conclusions made regarding the three recommended stocks. The “Recommendations” section contains our suggested course of action for investment in the three stocks.

2. METHODOLOGY

The first step in the research process was a thorough industry analysis to identify the sectors for investment. This was followed by an analysis of the performance of Nifty 50 Index stocks. Data regarding the stocks under consideration was collected from authentic sources such as the Web site www.moneycontrol.com. Further, the data was cross-checked with that available on CapitalLinePlus to ensure its authenticity. Then the relevant stocks were evaluated along the following parameters:

  1. Appreciation in stock price over the last year
  2. Key financial ratios
  3. Comparative analysis with their respective industries and peers
  4. Evaluation of future projects and the management's vision for the future of the firm
  5. Recommendations of stock analysts and brokerages

The research techniques and financial analysis undertaken are elaborated in detail in the following section.

2.1 Objectives

The objective of the research was to select three stocks that offer the best investment opportunity for the new fund to be launched by the firm. The suitability of the stocks was measured based on the following criteria:

  • Maximization of invested capital
  • Minimization of risk
  • Investing in sectors that are robust

The research undertaken to select the three stocks was developed to evaluate the stocks on the above parameters.

2.2 Research Techniques

2.2.1 Stock Price Gains

The gain in stock price for the relevant companies was calculated from the stock data gathered from www.moneycontrol.com. Then, the gains in share prices of the companies under consideration were compared to identify the stocks that posted the highest gains in the last year.

2.2.2 Financial Ratio Analysis

Relevant financial ratios were calculated for the companies under consideration. The ratios calculated and their significance is explained in brief below:

  • Price to Earnings Ratio:
    P/E Ratio = Market price of a share/EPS

    Its numerical value indicates what multiple the market capital of a firm is of the earnings of the firm.

  • Price to Book Value Ratio:
    P/BV Ratio = Market price of a share/Book value per share

    Its numerical value indicates what multiple the market capital of a firm is of the book value of the equity of the firm.

  • Current Ratio:
    Current Ratio = Current Assets/Current Liabilities

    It is a measure of how easily the firm can meet its short-term liabilities from its short-term assets.

  • Return on Capital Employed:
    ROCE = (Earnings after Tax + Interest − Tax Advantage on Interest)/Average Total Assets

    It is a measure of how the firm is able to generate a return on capital employed in its business.

  • Interest Coverage Ratio:
    Interest Coverage Ratio = Earnings before Interest and Taxes/Interest

    Its numerical value indicates what multiple the earnings are of the interest obligations of the firm.

  • Net Profit Ratio:
    Net Profit Ratio = Earnings after Interest and Taxes/Net sales

    It is an indication of the profitability of the firm.

    The above ratios were calculated for each of the firms for the last 7 years, that is, from 2003 to 2009. The ratios were then analysed to evaluate the companies on the following factors:

  1. Financial health of the company: The current ratio was analysed to ensure that the company has enough liquidity to continue its operations.
  2. Consistence of its earnings: The ROCE and the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margins generated by the company over the period were used to test how consistently the firms have generated earnings in the past.
  3. Valuation of the stock: P/E ratio and P/BV ratios were used to evaluate whether the stock is available at a lucrative price.
  4. Ability of the firms to service its debts: The interest coverage ratio was used to evaluate the ability of the firms to make interest payments on debts out of their earnings.

2.2.3 Comparative Analysis with Industry and Peers

A comparative analysis was also done to evaluate the company's performance with that of the industry as a whole and with some of its peers. The following ratios were compared with those of the industry and its peers:

  1. ROCE & EBITDA margins: The consistency of the firm's earnings, as indicated by ROCE and EBITDA, were compared with those of their respective industries and peers. This was done to determine how the returns generated by the companies fared in comparison to the industry aggregate and to its peers.
  2. Interest Coverage Ratio: The debt default probability as indicated by the interest coverage ratio of the companies was compared with those of their respective industries and peers. The aim was to see how consistently the companies were able to generate earnings enough to repay their interest obligations in comparison to their respective industry and peers.
  3. Current Ratio: The ability to meet obligations as indicated by the current ratio of the companies was compared with that of their industry and peers.

2.2.4 Evaluation of Future Projects and Management's Vision for Firms

The analysis of future prospects and quality of future ventures was done by identifying the latest focus area of the company. Information was taken from valid sources to identify important deals made and important decisions taken by the firms recently. The companies' annual reports and expert interviews with the firms' top executives were used to gauge future prospects and areas of focus. In addition, industry coverage reports from different sources and magazines were researched to form an opinion on the outlook of the different sectors.

2.2.5 Ratings of Stock Analysts and Brokerages

The stock reports shared by different brokerages such as India Infoline, Karvy Stock Broking, and so on, and the opinions of reputed technical analysts were read to understand the expert opinion on the outlook of the stocks. The experts' opinions were taken into account in final selection of the stocks.

3. FINDINGS

The evaluation methods discussed in detail in the previous section were used to select the following three stocks:

  1. Infosys Technologies
  2. Larsen & Toubro
  3. SBI

Table 4.1A Stock Prices: Current and Past

 

Table 4.1 A shows the prices of the three selected stocks one year ago, six months ago and one month ago. It is clear from the data that there has been considerable appreciation in the stock prices of all three companies, which makes the stocks a lucrative investment opportunity.

In the report, only the data, analysis, and associated findings for the selected stocks are presented. The findings are reported separately for each of the three companies below.

3.1 Infosys Technologies

3.1.1 Analysis of Financial Ratios

Stock price valuation Figure 4.1A shows the P/E ratio of Infosys. Currently, Infosys is trading at a lower P/E ratio (23.62) than the P/E ratio (28.91) of the software industry. This indicates that the Infosys stock is undervalued and has the potential to rise in the near future.

Figure 4.2A shows the P/BV ratio of Infosys. It is evident from the graph that the Infosys stock is trading at a low P/BV ratio (6.98) as compared to its historical value (around 9). So, it is a suitable time to invest in Infosys stock, as it is poised to go up.

 

Figure 4.1A P/E ratio of Infosys from Jan 2003 to Jan 2010

 

Figure 4.2A P/BV ratio of Infosys from Jan 2003 to Jan 2010

 

Ability to meet liabilities Figure 4.3A compares the current ratio of Infosys with that of the software industry. The graph clearly indicates that Infosys has maintained a higher current ratio than the software industry. One can infer from this that Infosys has high liquidity, and its business is robust.

Ability to service debts Figure 4.4A shows the ability of Infosys to fulfil interest payments on the loans it has taken. The high interest coverage ratio that Infosys has maintained over time indicates its commitment to meeting its obligations towards its debtors. Its earnings have been constantly robust enough to easily enable it to make interest payments.

Consistency of earnings Figure 4.5A compares the returns (ROCE and EBITDA) Infosys has generated over the years with those of the software industry. It is clearly visible that the returns generated by Infosys have consistently beaten the industry's returns. This highlights the profitability of Infosys' business and the acumen of its management. The consistency of its earnings performance makes Infosys a very lucrative investment option.

 

Figure 4.3A Comparison of current ratio of Infosys with that of software industry

 

Figure 4.4A Interest coverage ratio of Infosys from Jan 2003 to Jan 2009

 

Figure 4.5A Comparison of earnings performance of Infosys with that of software industry

 

Figure 4.6A Comparison of ROCE of Infosys with its peers

 

Figure 4.6A compares the returns generated by Infosys with those of its peers. It is clear from the graph that Infosys has consistently outperformed its peers such as HCL, TCS, and Wipro. This indicates that Infosys is the most reliable investment option in the Indian software industry.

3.1.2 Future Projects

The annual report of Infosys was read to identify some of the important projects that will drive the growth of the firm. Some of the key future projects Infosys plans to invest in are listed below:

  1. Infosys plans to generate USD 1 billion in revenue from the Indian market. According to the head of its India business unit, this would be accomplished in two to three years. They are already making progress by bidding for at least 10 large government projects.
  2. METRO Group, one of the largest pioneer international retailing companies, has selected Infosys as a partner in its Future Store Initiative (FSI) for the advancement of cutting-edge technologies and innovative shopping concepts.
  3. Infosys launched Flypp, which mobile operators can use as a technology platform to offer a wide spectrum of applications, in December 2009. It has already tied up with Aircel, a unit of Malaysia's Maxis, to offer a wide range of mobile phone applications.
  4. Infosys will design and implement the Research Informatics System at Elan Pharmaceuticals, Inc., a leading biotechnology company, to accelerate discovery research using a path-breaking co-creation engagement model that leverages Infosys' existing intellectual property in this field.

3.1.3 Management's Vision and Expert Opinion

Some of the key points gathered from the management's messages in the annual report are:

  1. According to CEO K. Gopalakrishnan, Infosys is trying to shift from a capital expenditure–based model to an operational expenditure–based model post recession. Also, it would concentrate more on larger deals. Moreover, Infosys is expecting to generate at least USD 1 billion in revenue by 2013 by grooming infrastructure management, independent testing and validation, business process management, and system integration.
  2. According to CFO V. Balakrishnan, Infosys, having a cash pile of nearly USD 3 billion, may look at buying companies in the consulting, back office, healthcare, and utilities segments.
  3. Infosys is focusing on R&D in software engineering and focusing on reducing energy consumption through green buildings.

Some of the expert opinions on Infosys and the Indian IT industry are as follows:

As per the NASCOM report, IT revenue for 2010 is anticipated at USD 73–75 billion. The growth of the Indian IT industry is likely to be very good in the future.

According to the NASSCOM 2009 strategic report, India has 28 per cent of the total suitable talent pool available to work in the IT/BPO industry. With increases in the trend towards offshore technology service, cost benefit, and high-quality delivery, the Indian IT industry still has a lot of growth potential.

3.1.4 Brokerage and Analyst Ratings

The recommendations and ratings of some well-known brokerages and stock analysts are:

  1. Bank of America-Merrill Lynch upgraded Infosys stock to “buy” from “underperform” on January 12, 2010.
  2. Angel Broking recommended a “buy” rating on Infosys with a target of INR 3,020 on December 19, 2009.
  3. Karvy Stock Broking recommended a “market performer” rating on Infosys with a target of INR 2,617 on December 9, 2009.

3.2 Larsen and Toubro

3.2.1 Analysis of Financial Ratios

Stock price valuation Figure 4.7A shows the P/E ratio of L&T from 2003 to present. Currently, L&T is trading at a lower P/E ratio (21.61) than the P/E ratio (26.3) of the infrastructure industry. This indicates that the L&T stock is undervalued and has the potential to rise in the near future.

Figure 4.8A shows the P/BV ratio of L&T. It is evident from the graph that the L&T stock is trading at a low P/BV ratio (5.19) as compared to its values in 2006 to 2008. The L&T stock fell drastically in 2009, which is reflected in the fall in its P/BV ratio from 2008 to 2009. The fall was due to the Indian stock market crash brought about by the downturn in the Indian economy. As the economy has started recovering, the L&T stock has started to move up as indicated by the rise in P/BV ratio (from 3.17 to 5.19) in 2010. As the P/BV ratio is still much lower than its historical highs (9.28), one can expect the stock price to appreciate further. So, it is a suitable time to invest in L&T stock.

Ability to meet liabilities Figure 4.9A compares the current ratio mainained by L&T over the years with that of the industry. It indicates that L&T has maintained a current ratio in line with the industry average. So, one can conclude that L&T maintains a balanced current ratio as followed by its peer companies in the industry. It does not maintain excessively high current assets as that leads to its cash being blocked. On the other hand, it does not want its assets to be too low, as that can lead to a default on its obligations.

 

Figure 4.7A P/E ratio of L&T from Jan 2003 to Jan 2010

 

Figure 4.8A P/BV ratio of L&T from Jan 2003 to Jan 2010

 

Figure 4.9A Comparison of current ratio of L&T with that of capital goods industry

 

Ability to service debts Figure 4.10A shows the ability of L&T to fulfil interest payments on the loans it has taken. The high interest coverage ratio that L&T has maintained over time indicates its commitment to meeting its obligations towards its debtors. Its earnings have been constantly robust enough to easily enable it to make interest payments.

Returns to shareholders The graphs in Figure 4.11A compare the earnings (as represented by ROCE and EBITDA) L&T has generated over the years with the industry's average. The returns generated by L&T have consistently beaten the industry's average returns. This indicates the profitability of L&T's business and the acumen of its management. The consistent earnings performance of L&T makes it a very lucrative investment option.

 

Figure 4.10A Interest coverage ratio of L&T from Jan 2003 to Jan 2009

 

Figure 4.11A Comparison of earnings performance of L&T with that of capital goods industry

 

Figure 4.12A compares the returns generated by L&T with those of its peers. The graph clearly shows that L&T has consistently generated higher returns than its peers such as ABG Infra and Reliance Industrial Infrastructure Ltd. (RIIL).

3.2.2 Future Projects

The annual report of L&T and media sources were read to identify some of the important projects that will drive the growth of the firm. Some of the key future prospects for L&T are listed below:

  1. L&T is eyeing road and highway projects, as these have started receiving focused government attention.
  2. It is planning to expand its power equipment manufacturing as the growth forecasts for power equipment are very lucrative.
  3. Nuclear power generation, which is slated to grow by an order of magnitude over the next decade and even more in India, spells major growth opportunities for India in the long term.
  4. The defense sector, when privatized, offers large business potential as L&T is well positioned in this area.
  5. L&T's joint venture with Mitsubishi means that L&T is well positioned for business in the highly lucrative super-critical boilers and turbines segment.
  6. L&T is expecting INR 35 billion of orders from the railways in 2010.

Figure 4.12A Comparison of ROCE of L&T with its peers

3.2.3 Management's Vision and Expert Opinion

Some of the key points gathered from the management's messages in the annual report are presented below:

  1. The management is confident of maintaining its guidance of 25 per cent increase in order inflows for 2010 because of a strong order book of more than INR 700 billion. Moreover, the management sees huge upcoming opportunities in infrastructure, so the company is spending massively on capital expenditure. It has already spent INR 15 billion in forgings and INR 8 billion in installation of offshore parts.
  2. As per the statement of A.M. Naik, Chairman and Managing Director of L&T, the company is going to focus on its hydrocarbon business, both in upstream oil and gas exploration/extraction and in midstream refineries.
  3. As per Y.M. Deosthalee, Chief Financial Officer of L&T, the company has maintained its forecast of a 25 per cent growth in its orders book for 2010. This growth is most likely due to fresh addition of infrastructure projects.

3.2.4 Brokerage and Analyst Ratings

The recommendations and ratings of some well-known brokerages and stock analysts are:

  1. India Infoline recommended a “buy” rating for L&T on January 11, 2010.
  2. Motilal Oswal upgraded L&T to “buy” from “neutral” on December 21, 2010.

3.3 State Bank of India

3.3.1 Analysis of Financial Ratios

Stock price valuation Figure 4.13A shows the P/E ratio of SBI from 2003 to present. Currently, SBI is trading at a lower P/E ratio (10.12) than the P/E ratio (13.53) of public sector banks. This indicates that the SBI stock is undervalued and has the potential to rise in the near future.

Figure 4.14A shows the P/BV ratio of SBI from 2003 to present. The fall in P/BV ratio (from 2.06 to 1.17) of SBI in 2009 was due to the stock market crash of 2009. With the economic recovery, SBI's stock price has rebounded, leading to a rise in its P/BV ratio. However, there is still scope for the stock to appreciate, as the P/BV ratio is still much lower than its highest value (2.06). So, it is the right time to invest in SBI stock.

Earnings performance Figure 4.15A compares the return on net worth (RONW) of SBI with that of the public sector bank industry. It is clear from the graph that SBI has consistently performed better than the aggregate banking industry. So, one can infer that SBI is a lucrative investment option in the banking industry as it has a proven track record of beating industry performance.

 

Figure 4.13A P/E ratio of SBI from Jan 2003 to Jan 2010

 

Figure 4.14A P/BV ratio of SBI from Jan 2003 to Jan 2010

 

Figure 4.15A Comparison of earnings performance of SBI with that of public sector banking industry

 

Figure 4.16A Comparison of earnings performance of SBI with other public sector banks

 

Figure 4.16A compares the returns generated by SBI with those of its peers. The graph clearly shows that SBI has consistently generated higher returns than other public sector banks such as Bank of Baroda, Oriental Bank of Commerce, and Indian Bank.

3.3.2 Future Projects

SBI's annual report and media sources were analysed to identify some of the important projects that will drive the growth of the firm. Some of the key future prospects for SBI are listed below:

  1. SBI has identified the United Kingdom as a priority market and is eyeing USD 1 billion acquisitions there. SBI's retail operation is performing well in the United Kingdom despite the economic slowdown.
  2. SBI is planning to increase its branch network in rural areas.
  3. SBI is assessing markets like Western Europe, North America, East Africa, South Africa, Far East, and West Asia. It is expected to open 20 to 25 overseas branches or representative offices in three months.
  4. SBI is planning to merge its associate banks to avail of larger resources, including human resources, and improve its operational efficiency.

3.3.3 Brokerage and Analyst Ratings

The recommendations and ratings of some well-known brokerages and stock analysts are:

  1. Analyst Sudarshan Sukhani recommends buying SBI stock.
  2. Karvy Stock Brokings recommended a “market performer” rating for SBI with a target of INR 2,555 on January 28, 2010.
4. CONCLUSIONS

A set of conclusions about each of the three stocks, Infosys, L&T, and SBI, are listed below:

Infosys

  1. Infosys' move to look for opportunities in India will lower its dependence on the U.S. market. Most of the decisions will be made in favour of high spending in India.
  2. It is constantly performing and meeting high-end technology needs.
  3. The move to venture into mobile technologies will help Infosys tap the highly competitive industry whose operator presence is increasing rapidly.
  4. The company is also making steady progress in providing technological service to the emerging biotechnology industry.

Thus, the future prospects and growth of Infosys (and of the IT industry) are very optimistic. Going by its past performance and growth rate, Infosys is a very good pick for investment.

L&T

  1. The future prospects of infrastructure are very bright as India is in acute need of better infrastructure. The Indian government has also realized the importance of infrastructure development and has sanctioned several large infrastructure projects. L&T, being the top infrastructure player in India, is poised to capitalize on these new opportunities.
  2. L&T can tap most of the future opportunities emerging from its capital expenditure spending due to the government's increased focus on infrastructure spending.
  3. L&T's focus on high-growth areas like nuclear power and infrastructure will boost L&T's growth considerably.
  4. L&T has a wide array of business portfolios. So the risk to its business and earnings potential is low.

The future of infrastructure and the capital goods industry is very bright in India, as there is massive spending and support by the government for infrastructure projects. L&T being the top infrastructure player in the country is poised to take advantage of the growth opportunities in the infrastructure industry.

SBI

  1. The core system modernization undertaken by SBI would reverse a trend of customer attrition and consolidate its affiliate banks. Additionally, the bank can now further expand its product offerings and improve customer service.
  2. With the extensive deployment of its core banking technology and other technology initiatives, SBI has emerged as one of the most cost-efficient banks, beating its private sector counterparts HDFC Bank and ICICI Bank.
  3. The move by SBI to make acquisitions in the United Kingdom will increase the volume of local business there. At present, SBI operates in the United Kingdom through its seven branches there. The bank would show an even better performance through mergers in the United Kingdom.
  4. Mobile banking for entry-level mobiles would drive more people to use the feature. Also, this would reduce SBI's operational costs considerably.

The Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets and the global economic crisis, according to a stress test done by the Reserve Bank of India. Thus, investing in SBI is a good option.

5. RECOMMENDATIONS

Based on this industry- and stock-specific analysis, the report recommends the stocks of Infosys Technologies Ltd., Larsen & Toubro, and State Bank of India for investment. The stocks of these companies have strong fundamentals. They are also highly undervalued, which is suggestive of their future prospects. These stocks have been recommended by experts and stock market players. The managements at three firms are trusted for their leadership and vision. These stocks have been found to be viable and in line with the objectives of EquityPlus's new fund.

REFERENCES

1. Financial data (2009, Mar 31). Retrieved January 30, 2010, from CapitalLinePlus Website: http://capitalline.com

2. Infosys Annual Report (2009, Mar 31). Retrieved January 31, 2010, from Infosys Website http://www.infosys.com

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