Tenth AIMS International Conference on Management

January 6-9, 2013

Fundamental Analysis Strategy A Study with Reference to FMCG Stocks

Zabiulla wasimzabi@yahoo.co.in Sambharam Academy of Management Studies, Bangalore Geetha. S geethasalageri@gmail.com Administrative Management College, Bangalore
If an investor had impeccable information and insight about dividends and stock prices over subsequent periods, he would do well on his way to get riches. However, these can only be estimated but not predicted with certainty. These values are primarily driven by the performance of the company, industry and socio-economic factors. In this regard, the present study attempts to examine the fundamental analysis of FMCG stocks in the Indian capital market using the Economy-Industry-Company (EIC) framework. The study is based on the stocks that constitutes S&P CNX FMCG index for the recent 5 year period that span from 2008-2012. Key words: EIC, FMCG Stocks, Fundamental Analysis

1. Introduction
Fundamental analysis is a logical and systematic way of estimating the future dividends and share price. It calls for thorough analysis of the information about the company the industry to which the company belong and the economy as a whole. It describes the approach that investors adopt for taking rational and scientific investment decisions; estimate the intrinsic value of company equity share, which depend on multitude of factors such as a sales, earnings, profits, dividend, management efficiency, growth rate etc. An approach to determine the intrinsic value of a stock, fundamental analysis relates to analysis of external and internal factors which will affect the stock market and setting the expectations and checking the market price to verify the expectations along with economy and industry performance to which company belongs to and considering the financial status of the particular company. Fundamental analysis is technique used to describe the intrinsic value of the share; it is always assumed that market value and intrinsic value differ from time to time. The investor who can apply fundamental analysis and spot the differences between market price and intrinsic value, are able to gain by taking decisions before difference is eliminated from the market. Estimating the intrinsic value of the stock depends upon the profitability, capital structure and earnings, dividend policy of the company, investment environment and the growth of the specific industry.

2. Literature Review
Tarek Ibrahimm Eldomity (2006) studied the role of fundamental analysis in transitional market to support the shareholder value in Egypt. The study showed one more approach to fundamental analysis by considering the income statement and balance sheet and market to book value ratios and ratio analysis information and significance of the each factor. Further, it showed that the ratio analysis information is more significant over the balance sheet and income statement. Robert D. Gay, Jr (2008) investigated the effect of macroeconomic variables on stock market returns for four emerging Economies: Brazil, Russia, India and China. The research explained the relationship between stock price and macro economic variables of exchange rate and oil price among the emerging markets. The result shows that there is no significant relationship between macro economic variables and stock market price. Julia Bistrova and Natalja (2010) discovered the importance of fundamental analysis during pre-crisis, crisis, post crisis, on the Baltic equity market. The study concluded that during the pre-crisis the investors are praised the higher earning companies and focused on the growth of the companies and during the crisis, companies with lower turnover and higher equity ratios performed well and during the post crisis period the investors selected the companies with better fundamentals . Venkatesh C.K. and Madhu Tyagi (2011) based on the survey examined the application of fundamental analysis and technical analysis among stock brokers and fund managers in Indian stock market. The study observed significance of each technique used to predict the market behavior by the experts in the market and concluded that both the techniques are complimentary to each other. A study by Gil Cohen, Andrey Kudryatsev and Shlomit Hon Snir (2011) examined the differences between professional and non- professionals approach towards to technical analysis and fundamental analysis in Israel. 547

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January 6-9, 2013

The research is about the tools used by the professional and non-professional for buying and selling of stocks. It found that non-professionals use fundamental analysis to buy the shares and use technical analysis to sell the shares; while the professionals rely on both the tools to buy and sell the shares. Sugandharaj Kulakarani (2011) examined the application of fundamental analysis with reference to ONGC. The changes in the share value depends not only how company is performing but also the industry and economical factors inspire the value of the stock and that will be reflected in the share price. The fundamental analysis influence the fluctuation of price in the market and use of fundamental analysis help investors to find the intrinsic value of stocks that they wishes to buy. Dyna Seng Jason . R Hancock (2012) examined the importance of each phases of fundamental analysis in their study fundamental analysis and the prediction of earnings. The study suggested that the economy and industry related factors have slight influence on earnings and it concluded that financial statements are more useful to predict the earnings and returns. C. Viswanatha Reddy and J. Viswa Pavani (2012) studied the application of fundamental analysis to estimate the intrinsic value with reference to Dr. Reddys Laboratories Ltd, Hyderabad. The study concludes that if the market price is more than intrinsic value sell the shares and if the market price is less than the intrinsic value purchase the shares and if the market price and intrinsic price are same the investor can hold the shares. Venkatesh C.K., Madhu Tyagi and Ganesh (2012) present the importance of fundamental analysis and technical analysis among brokers, fund managers and portfolio managers in the Indian stock market to foresee the share price movement. The outcome of the study shows that among EIC factors economy and company factors play a major role in forming the forecast and respondents rely on both the techniques to pretend the market movement. Atika Jauharia Hatta and Bambang Sugeng Dwiyant (2012) identified the effect of company fundamental factors and systematic risk in explaining the variances of stock prices in Indonesian stock exchange. The outcome says that EPS, Price Earning ratio have positive approach towards to estimation of stock prices. The DPS and Net Profit Margin ratio have negative and significant effects. The EPS play a major role in describing the stock price. Osamwonyi Ifuero Osad and Igbinosa (2012) examined the economic fundamentals as a long-run explanation for the stock price behavior in Nigeria. The data employed for this study 1992-2006 and the study concluded that overall economy fundamentals especially interest rate and exchange rate and also GDP, inflation and liquidity ratios cause the fluctuation in stock price.

3. Objectives of the Study

The objectives of the study are: a) To examine the relevance of fundamental analysis in investment decisions making process. b) To carry out an economic analysis and industry analysis that provides cues to investors. c) To analyse the financial health of the selected FMCG stocks.

4. Methodology
Sample: This study is based on a sample of 12 stocks that constitutes S&PCNX FMCG Index. Nature of sampling: Cluster sampling used for this purpose. Period of study: The study is undertaken for recent 5 year period i, e, 2008-2012 Data collection: The relevant data is taken from the annual reports of the companies,, websites, books and journals in connection with this study. Tools used for analysis: Financial ratios are used to analyse the performance of selected stocks. In order to test the statistical significance of deviations between the estimates across various stocks, ANOVA is used for the purpose of data analysis.

5. Results and Discussions

The results of the analysis are presented in three sub-sections followed by related discussions thereto.

6. Economy Analysis
The macroeconomy is the overall economic environment in which all firms function. The key dimension that are used to illustrate the state of the macro economy include Gross Domestic Product(GDP) ,industrial growth rate, agriculture and monsoons, savings and investments , government budget and deficit ,price level and inflation, interest rates , balance of payment, foreign exchange reserves, and exchange rate, infrastructural facilities and arrangements, investor sentiments. 548

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January 6-9, 2013

The GDP represents the aggregate value of final goods and services produced in the economy for a year. The GDP rate is expected to reach 6.2% for the financial year 2012-13. The higher GDP is favourable to the stock market it is related with the industrial growth rate. The industrial growth rate prescribes the future destiny of the companies. The average growth rate is about to reach 4.6% of our GDP. The growth rate has improved compared to the growth rate 3.4% during 2011-12. Agriculture is the back bone of Indian economy which is growing at the rate of 1.6% of GDP. The agricultural growth rate is expected to change if monsoon are better than what is expected. Government budget and deficit will affect the performance of stock market and deficit is expected to reach 5.9% of GDP which will provide impetus to the borrowings from the market. Inflationary pressures affect the stock market returns. Higher inflation is considered to be favourable to the stock market. Presently the inflation rate is 7.9% for the year 2012-13. Balance of payment shows the economic transactions between the countries, BOP deficit and surplus will affect the exchange rate. Appreciation of rupee influences BOP. The current account deficit is 3.9% of GDP which is seasonal; there are chances to increase in deficit. The interests rate affects the stock market performance and returns, the interest rate may reach 10.48% for the year 2012-13. The liberalization of FDI norms into the aviation and the multi brand retail industry is unlikely to provide a boost to FDI inflows into India in current fiscal 5.2 Industry Analysis FMCG industry is an evergreen industry. The fast moving consumer goods always have demand. The food articles, soaps and detergents, personnel care products and cosmetics all are essential for our daily life. FMCG industry though affected by the changes in economy, at large always has favourable demand position because of increasing population. The leading players in the FMCG industry are HUL, P & G, Britannia, Nestle, Colgate, Nirma, etc. Most of the companies have a wide network of manufacturing. FMCG industry is in its maturity phase. The growth opportunity seems to be bleak but it can expand by offering new and customized products. FMCG manufacturers always try to rule others through product differentiation. It is wise to invest in industries, which are in growth and maturity stage. The Indian FMCG industry is the 4th largest sector in the economy with an estimated size of Rs. 1,300billion and creates employment for more than 3 million people in down stream activites. It is currently growing at a double digit growth rate and it is expected to maintain a high growth rate. The raising raw materials prices and appreciation of rupee vis--vis dollar would help FMCG companies to maintain their margins in future, with increase in disposable income and favorable government policies, net sales growth is expected to remain robust in coming quarters. Considering ongoing economic uncertainty FMCG industry is expected to remain an attractive industry for investments, being a safe heaven for investors. FDI in multi brand retain, strong macro economic fundamentals, increasing disposable income, robust consumerism, greater rural penetration and growing organized retail will drive future demand in FMCG industry. FMCG index has given return of 12% in 2011, despite negative returns from Sensex, and expected to perform well. It has proved itself very resilient to recession. It is fair to say there is never a dull moment in FMCG. The profit potential of any industry basically depends on competition, threat from new entrants, existence of substitutes, bargaining power of consumers and suppliers, marketing ability of the firms, capital requirement and government policies. The entry barriers are high in FMCG industry creating difficulties for new company to establish itself because of fierce competition and existing firms control over the distribution channels, positioning through product differentiation , brand image and customer loyalty . The industry is facing the problem of substitution long since. Indians have substitution for every product of FMCG offerings. Some of the companys are integrated backwards, which reduces suppliers clout, manufacturing is largely outsourced. In case of branded products, there is little that the consumer can influence, but intense competition within the sector results in value for money deals for consumers. Private labels which have an advantage of lower marketing expense are offered by retailers at a discount to mainframe brands.

5.3 Company Analysis

Table 1: Results of ANOVA (Earning Per Share) Source of Variation Between Groups Within Groups SS 1205.747 20572.2 df 4 55 MS 301.4367 374.04 F 0.805894 P-value 0.526738 F critical value 2.539689

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Tenth AIMS International Conference on Management

January 6-9, 2013

Total

21777.95

59

According to table 1, the calculated value of F is 0.805894 as against the critical value of 2.539689. Since the calculated value being lower than the critical value at 5% level of significance, the null hypothesis is accepted as against the alternative hypothesis. Thus, it can be concluded that EPS of selected FMCG companies dose not differ significantly.
Table 2: Results of ANOVA (Dividend Per Share) Source of Variation Between Groups Within Groups Total SS 190.3582 4398.221 4588.579 df 4 55 59 MS 47.58955 79.96765 F 0.59511 P-value 0.667655 F critical value 2.539689

The above table 2 show the calculated value of F is 0.59511 is not preferred over F critical value of 2.539689. The calculated value being lower than the critical value at 5% level of significance, the alternative hypothesis is rejected and null hypothesis is accepted. Thus, it can be concluded that DPS of selected FMCG Companys are significant.
Table 3: Results of ANOVA (Return on Capital Employed) Source of Variation Between Groups Within Groups Total SS 378.4752 79133.22 79511.7 df 4 55 59 MS 94.61879 1438.786 F 0.065763 P-value 0.991835 F critical value 2.539689

Table 3 reveals that the F critical value of 2.539689 is higher than the F value 0.065763. The outcome of the results concludes that the calculated value is lesser than the 5% level of significance; null hypothesis is preferred over the alternative hypothesis and ROCE of FMCG companies are having positive signs and does not differ much.
Table 4: Results of ANOVA (Return on Investment) Source of Variation Between Groups Within Groups Total SS 988.7398 60567.06 61555.8 df 4 55 59 MS 247.185 1101.219 F 0.224465 P-value 0.923607 F critical value 2.539689

Table 4 discloses that there significant relationship between the ROI of sample companies selected for the study. The null hypothesis is accepted and alternative hypothesis is rejected because the F critical value 2.539689 is higher than the F value 0.224465.
Table 5: Results of ANOVA (Operating Profit Margin Ratio) Source of Variation Between Groups Within Groups Total SS 112.336 3847.716 3960.052 df 4 55 59 MS 28.08401 69.95847 F 0.401438 P-value 0.806776 F critical value 2.539689

Table 5 shows that the calculated value of F is 0.401438 as against the critical value of 2.539689.F critical value is preferred over the F value at 5 % level of significance. The null hypothesis is accepted against the alternative hypothesis.
Table 6: Results of ANOVA (Gross Profit Margin Ratio) Source of Variation Between Groups Within Groups Total SS 274.4729 5368.493 5642.965 df 4 55 59 MS 68.61823 97.60896 F 0.702991 P-value 0.593275 F critical value 2.539689

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The above table 6 shows that the value of F0.593275 is lower than the F critical value at 5% level of significance. Null hypothesis is considered over the alternative hypothesis. Thus, it can be concluded that there is significant difference between the GMR of the companies under review.
Table 7: Results of ANOVA (Net Profit Margin Ratio) Source of Variation Between Groups Within Groups Total SS 169.4004 6062.873 6232.274 df 4 55 59 MS 42.35011 110.2341 F 0.384183 P-value 0.819015 F critical value 2.539689

Table 7 show that the calculated value of F is 0.384183 is less than the critical value of 2.539689. Since the calculated value being not considered over the critical value at 5% level of significance, the null hypothesis is accepted against the alternative hypothesis. Thus, it can be concluded that NMR of selected FMCG Companys does not differ significantly.
Table 8: Results of ANOVA (Debt Equity Ratio) Source of Variation Between Groups Within Groups Total SS 0.339193 11.64723 11.98642 df 4 55 59 MS 0.084798 0.211768 F 0.400431 P-value 0.807493 F critical value 2.539689

Table 8 explains the value of F is 0.400431 which is lesser than the F critical value2.539689 at 5 % level of significance and alternative hypothesis is not accepted and null hypothesis is accepted and D/E of selected FMCG companies dose not differ significantly.
Table 9: Results of ANOVA (Book Value Per Share) Source of Variation Between Groups Within Groups Total SS 15101.58 775790.1 790891.6 df 4 55 59 MS 3775.394 14105.27 F 0.267658 P-value 0.897523 F critical value 2.539689

Table 9 supports that the calculated value of F is 0.67658 as against the critical value of 2.539689. Since the calculated critical value at 5% level of significance is higher than the F value, the null hypothesis is accepted and the alternative hypothesis is rejected. Thus, it can be concluded that BVPS of selected FMCG Companys are significant.

7. Conclusion
The fundamental analysis is technique used to find the intrinsic value of the share. The analysis calls for the forces which will be affecting the economy, industry and company performance with effect to stock market price. The economical fundamentals inspires the prices of the stock, any changes in the economical factors will be reflected in the market index. Industry growth will affect the company performance, industry structure and stages of industry life cycle define the company destiny. The company financial status will change the expectations of the market, capital structure dividend, earnings and profitability signals the investors to find the share which outperform in the market. The study concludes that future price of the stocks are significantly affected by the fundamental factors and investor can gain if the investor apply fundamental analysis technique to form the portfolio.

8. References
1. Atika Jauharia Hatta and Bambang Sugeng Dwiyant (2012) The Company Fundamental Factors And Systematic Risk In Increasing Stock Price, Journal of Economics , Business, and Accountancy Ventura Volume No 15, No.2, August (2012) 245-256. C. Viswanatha Reddy and J Viswa Pavani (2012) Intrinsic Value Estimation Through Fundamental Analysis : A Case Study of Dr. Reddys Laboratories Ltd, Hyderabad, Indian Journal of Finance Volume 6, Number 2, February 2012 49-57 Dyna Seng Jason. R Hancock (2012) Fundamental Analysis and the Prediction of Earnings, International Journal of Business and Management, Volume 7, No.3, February 2012 32-46 551

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