Beruflich Dokumente
Kultur Dokumente
This program is designed to help you with the basic fundamentals of financial statements, r
and understand what is written there
This will help you to buy shares with a fundamental understanding (profits, reserves, book
growth, sales revenue) - this will create wealth in the long run
SECOND REASON
As time passes, clients will become more knowledgeable
Competition will become more knowledgeable
So in order to grow (or even survive) as an individual, you need to KNOW
This is knowledge economy
From Adam's days to 1800 - agricultural economy
From 1800 to 1975 - industrial economy
From 1975 till date - knowledge economy
TOM
1 Fair valuation of the Nifty (India)
2 Where is the market now and how do you invest in the current market
Can we get a general understanding of markets for all times
3 How can you invest to make money in the long run (creation of wealth)
4 Derivatives - Combination Strategies - Bull Spread, Ratio Spreads, Butterflies, etc
5 Option valuation - Intrinsic, Time value - how do you make money / lose on Time
6 Indicators - Open Interest, Implied Volatility, Put Call Ratio
Very simple
Technicals is not part of the program
You don’t need to agree with me
If everybody agreed with everybody in the market place
If everyone believed that ITC is a good buy - what will happen?
Market will stop, BSE will close down
The basic foundation of markets is disagreement
1 Liquidity
Cash flow - is cash coming in or is cash flowing out?
Who creates cash flow in India?
a FIIs
b All others - mutual funds, insurance sector, HNIs, retail - quite quite sm
In 2007, FIIs brought in around USD 16 bio (Rs 70,000 cr) - market zoomed up
In 2008, FIIs took out around USD 17 bio (Rs 75,000 cr) - market fell 60%
In 2009, FIIs brought in around USD 18 bio (Rs 80,000 cr) - market rose 100%
Today, the FII community is the single largest cash flow provider and the Indian
to their tune
In the long run, we believe that (a) our domestic insurance sector will become hu
(b) our provident funds will start investing in the equity market
These will provide reasonable counter-balance to the FIIs
2 Sentiment
News flow - continuous news flow from global sources to Indian sources to secto
to company level sources
Stock markets react to news all the time, driven by sentiment (not by logic)
In Nov 2009, we heard that Dubai is in trouble
Sensex crashed 300 / 400 points
Now we heard that Greece is in trouble
Sensex crashed 250 points
3 Fundamentals
We mean company's financial performance and financial prospects
How is it doing and how is it expected to do?
Sales, Operating Margins, EBIDTA, PAT, EPS, PE, RoE, RoCE, Debt - Equity ratio,
Capital Management - Sectoral issues, growth in the sector, customer demand,
leadership, management quality, dividends, bonuses, investor friendly
If Infosys over the last 15 years has gone from Rs 100 to Rs 20,000 - why?
Answer - great fundamental performance
If Infosys in the last 15 minutes has gone from Rs 2,421 to Rs 2,408 - why?
Answer - liquidity and sentiment
Someone wanted to sell very rapidly and he was happy to sell below Rs 2,421 als
Research says that over a 12 year period, almost 90% of the movement in stock prices can
fundamentals
If Infosys 12 years ago was Rs 500
Today it is 20000
Appreciation 19500
90% 10%
17550 1950
Fundamental Liquidity and Sentim
Factors
90% 10%
-2330.1 -258.9
Fundamental Liquidity and Sentim
Factors
If you allocate 10 - 15% of a good client's portfolio towards investing, that 10-15% may cr
in the long run
That can add to customer loyalty and goodwill and bring in a long term relationship
Price
Sell
Buy
11 We are very happy that market is not logical, market is driven by sentiment and
and this behaviour provides opportunity for us to make money
WHAT IS VALUE?
How is it computed / measured?
Example
There is a shop in Vijaywada - price of the shop is Rs 15
You have some surplus cash, you want to buy this shop and let it out on rent for 5 years
After 5 years, you plan to sell the shop
You want to know what is the "value" of the shop
If Interest rates rise to 12%, the shop becomes unattractive (not a good buy)
If Interest rates fall to 1%, the shop becomes very very attractive
Valuation is not only dependent on shop related data but also your cost of borrowings / op
of other investments
When we see the figure of 25, we should be able to understand whether this is too high, to
attractive ?
Comparative PE
Company 30.00 Most expensive
Shop 25.00
Post Office 12.50 Cheapest
EPS / PE
Trailing Based on past 4 quarters profits
Forward Based on future projected profits (could be FY 11, 12)
Future number of shares are those shares which the company is legally obligated to issue
These are not mere plans
Examples:
1 Convertible Debentures
2 FCCBs - Foreign Currency Convertible Bonds
3 Convertible Preference Shares
4 Warrants
5 ESOPs
1 P&L
Net Sales 2,449.8 Core Income
Operating Costs 1,882.7 Raw Materials, Labour, Mfg, Admin, Selling
Operating Profit 567.1
Other Income 21.2 Interest, Dividends, Capital Gains (Non Core In
EBIDTA 588.3 Earnings Before Interest, Depn, Tax and Amort
Depreciation & Amort 165.6
EBIT 422.7
Interest 104.6
PBT 318.1 Before Exceptional Items
Exceptional Item 7.6
PBT 310.5 After Exceptional Items
Tax 52.5
PAT 258.0
Adjusted PAT 265.6 Regular PAT plus Exceptional Item added back
Exceptional items could be VRS, loss due to floods, strikes (non-routine items, un
PAT is also called Net Profit
Adjusted PAT is the realistic PAT as estimated by the analyst. In this case, he has
added back Exceptional Items. In other cases, he may make other adjustments
If you buy a car for Rs 8 lakhs and it has a life of 10 years, the annual expense w
and this will be called as Depreciation
If you buy a patent for Rs 8 lakhs and it has a life of 10 years, the annual expens
and this will be called as Amortization
RPAT - Reported PAT - Reported as per the Company's P&L in their Annual Repo
This profit would be Profit After Tax before Minority Interest
UPL has many subsidiaries (children) - where UPL holds more than 50% shareho
If UPL holds a company in Europe where its shareholding is 60% and Tony Blair
UPL Europe makes a profit of Rs 100 cr
How much of that belongs to UPL India?
Rs 60 cr
Rs 40 cr belongs to who?
Tony Blair
Tony Blair is the minority shareholder in UPL Europe
RPAT 282.1
Minority Interest must be 24.2
PAT after Minority Interest 257.9
Fully Diluted EPS (given) 15.0 This you cannot calculate (compan
This depends on CD, FCCB, CPF, W, ESOPs
BV - Book Value
BV = Shareholders Funds / No of Shares
Shareholders Funds means funds provided by shareholders (owners)
Shareholders Funds = Capital + Reserves
Reserves means past accumulated profits + Share Premium if any
Book Value indicates the amount invested by shareholders historically into the co
If you compare this book value with the CMP, you get the PBV (Price to Book Val
Price 163.0
BV 79.8
PBV 2.0 Times
The actual PBV is 4.1 Why?
There was a bonus issue in FY 09 of 1:1
So the price of 163 of today would have been double before FY 09
If you want the PBV of FY 07, then the price should be adjusted (double)
Accounting Goodwill
Arises only on "acquisitions"
If UPL acquires a Spanish company for Rs 200 cr but gets assets of only Rs 175 cr, the extr
is recognized as Goodwill
Working capital indicates the amount blocked in day to day running of the business
This capital employed includes funds provided by shareholders as well as funds provided by
Business
CE RoCE
EBIT
For the Owner to generate a healthy RoE, the business should generate a healthy RoCE
KEY RATIOS
1 Check the ratios for FY 09, FY 10, FY 11
2 Valuation ratios PE, PBV for same 3 years
3 From the P&L, check the EPS for same 3 years
4 Read the Research Report carefully
Key ratios for FY 09
FY 09 FY09 FY 09
OPM 944.9 4,931.7 19.2%
EBIDTAM 986.7 4,931.7 20.0%
PATM 475.2 4,931.7 9.6% He has considered Adjusted PAT fo
Net Debt : Equity 1,562.8 2,604.6 0.6 Gross Debt 2,072.3
RoCE (EBIT/CE) 794.0 4,794.4 16.6%
RoNW 485.1 2,604.6 18.6% He has considered RPAT
EBIDTA 986.7
Depreciation 192.7
EBIT 794.0
Cash = 509.54
Valuation Ratios
FY 09
PE Multiple 163.0 11.0 14.8 The analyst has considered simple
Book Value 2,604.6 44.0 59.3
PBV 163.0 59.3 2.7
EPS 485.1 44.0 11.0
CAGR
Fundamental analysis is all about long term - patience
In the long term, growth is very important
Growing companies will get good multiples (high multiples)
What is growth? How do we measure growth?
All these are short term growth measurements which are not useful for long term investing
These growth metrics create "noise"
Short term data by itself can be highly volatile and therefore misleading
Practical applications
Examples
Price of a bus ticket many years ago 0.50 1995
Price of the same bus ticket today 10.00 2010
20 15
times years
CAGR 15th root of 20 times 1.2210553 0.2210553 22%
t market
f wealth)
ds, Butterflies, etc
oney / lose on Time Value
tail - quite quite small
arket zoomed up
ket fell 60%
arket rose 100%
der and the Indian market dances
rs is bad strategy
trol or even understand
(not by logic)
Debt - Equity ratio, Working
ustomer demand, technological
r friendly
OTHERS
elationship
verpriced or underpriced
or miserable)
t time twice a day
lakhs
rent for 5 years
15
of borrowings / opportunity cost
obligated to issue
Admin, Selling
tents, IPR)
achinery)
d (double)
Rs 175 cr, the extra amount paid
e business
funds provided by banks
RoE
a healthy RoCE
ed Adjusted PAT for this purpose
Diff is Cash 509.5
considered simple EPS and not diluted EPS
ous geographies
ic player
FY 09-10 FY 09-10
Q3 Q4
183 234
-14% 28%
829
10%
-9% 29%
You can understand the Nifty level at any time (too high, too low, reasonable band) - buy /
Future of India
How to make money from the market
Systematic Investing
Importance of PE
What is the PE of India today?
India PE means Sensex PE or Nifty PE
PE is "number of times"
For every one rupee that I am earning, what is the price
The Nifty PE on 9th April, 2010 was 23.21 times
For every one rupee that the Indian corporate is earnings, we are paying a price
History of the PE
Sensex started in 1979
Early 1980s 7 times
Mid 1980s 8 - 9 times
Late 1980s 9 - 11 times
Early 1990s Over 70 times Harshad Mehta period
Mid 1990s 10 - 14 times
Late 1990s, Early 2000 28 times Ketan Parekh period
Early 2000 - mid 2003 10 - 14 times
Mid 2003 to Jan 2008 10 - 28 times
Jan 2008 - Sept 2008 28 - 10 times
Sept 2008 - March 2010 10 - 23 times
21000 Sensex (Jan 2008) is lower than 4600 Sensex (Sept 1994)
Sensex PE in Jan 2008 was 28 times, while the PE in Sept 1994 was 72 times
If you compute the average PE over the last five to ten years, it will give you a good sense
Also study the max PE and the min in this period
We buy when Price < Value and sell when Price > Value
When PE rises too much, that means Price is rising too fast and vice versa
If PE goes above 28 times, the market looks overpriced and you should be selling and getti
If PE goes below 11 times, the market looks underpriced and you should be buying buying
Data of 30 people
Average of these people 165 cms
Standard deviation of this data 15 cms
1 sigma 15 cms
2 sigma 30 cms
3 sigma 45 cms
Standard deviation
Distance from the average 168 165
Square of this distance
Sum of the squares of 30 observations
Square root of this sum
PE - Standard Deviation
5 years 3.46 18.92 3.46 6.93 10.39
10 years 3.46 17.68 3.46 6.92 10.38
5 year Prob
Less than 3 sigma 8.53 0.50% Very very low priced
3 sigma to 2 sigma 8.53 11.99 2.00%
2 sigma to 1 sigma 11.99 15.45 14.50%
1 sigma to Average 15.45 18.92 33.00%
Average to 1 sigma 18.92 22.38 33.00%
1 sigma to 2 sigma 22.38 25.84 14.50%
2 sigma to 3 sigma 25.84 29.31 2.00%
Above 3 sigma 29.31 0.50% Very very high price
Portfolio rebalancing based on statistical modeling of PE
10 year Prob
Less than 3 sigma 7.29 0.50% Very very low priced
3 sigma to 2 sigma 7.29 10.75 2.00%
2 sigma to 1 sigma 10.75 14.21 14.50%
1 sigma to Average 14.21 17.68 33.00%
Average to 1 sigma 17.68 21.14 33.00%
1 sigma to 2 sigma 21.14 24.60 14.50%
2 sigma to 3 sigma 24.60 28.06 2.00%
Above 3 sigma 28.06 0.50% Very very high price
Concept of PEG
Price Earnings to Growth
What should be the right PE level?
The PE multiple should be equal to Growth expected in the EPS
If you expect your EPS to grow by 14%, then your PE should be 14 times
Companies whose earnings are expected to grow fast can enjoy a higher PE
If we expect Indian corporate earnings to grow by 20% per annum, then the India PE can
If the PE is more than the growth rate, market is overpriced (good sell)
If the PE is less than the growth rate, market is underpriced (good buy)
Infosys in early 2000 was quoting at Rs 13,800 (Ketan Parekh scan time)
PE of Infosys was 160 times
Experts used to justify this PE (Infosys earnings are growing at 160%, so PE is okay)
They used the concept of PEG to justify the Infosys price
Once the scam broke, all shares collapsed including Infosys (all fell to less than 30%)
For example, UPL earnings growth rate as we saw yesterday was very high
RPAT growth of 30% over 2007-11
We don’t necessarily pay a PE of 30 times to UPL - why?
Bcoz the growth is not sustainable
Economic forecast is on Real growth. India will grow at 6.5% in Real terms.
Buy Sell
Sell
18000
2010 2040
Systematic Investing
Nifty SIP from Jan 1, 1999 to April 9, 2010 generates 36% return per annum
Even if you started on a bad day (Ketan Parekh scam height), you still earn 37% per annum
If you started on Ketan Parekh height and stopped on 27th Oct, 2008, you still earn 11% p
6 Debt Equity Ratio If this is high say more than 2 times, be careful
Infra sector can borrow upto 4 times, all others should
7 RoE Should be more than 15%
8 RoCE Should be more than 13%
able band) - buy / hold / sell
careful about
kh period
150 180
135 195
120 210
Equity Debt
100% 0%
90% 10%
75% 25%
60% 40%
40% 60%
25% 75%
10% 90%
0% 100%
Equity Debt
100% 0%
90% 10%
75% 25%
60% 40%
40% 60%
25% 75%
10% 90%
0% 100%
PE is okay)
s than 30%)
PE of more than 30 times
inable over the long term
xchange
dia will be No 3)
rn 37% per annum
u still earn 11% per annum
be careful
all others should be lower
One Up on Wall Street - By Peter Lynch
Beating the Street - By Peter Lynch
Buffetology - By Mary Buffet
www.investopedia.com
www.moneychimp.com
www.motleyfool.com
SNMJ
NIFTY - APRIL 9, 2010 1. Go long April Futures and go short April 5400 Call
NIFTY INDEX 5362
NIFTY APRIL FUTU 5367 2. Go long April Futures and go long April 4900 Put
Calls Puts
LTP Strike LTP 3. Long April Futures, Long April 4900 Put, Short 5400 Call
467.00 4900 6.45
372.50 5000 10.90 4. Long April Futures, Short April 5400 Call and April 5500
282.00 5100 18.00
193.35 5200 32.00 5. Go long April 5200 Call and go short April 5400 Call
116.95 5300 53.80
58.45 5400 92.40 6. Go long April 5400 Call and April 5000 Put
22.90 5500 157.00
6.80 5600 239.00 7. Go short on the same as 6 above
Combinations - Strategies
Valuation
Indicators
Six Graphs
Short Futures
Unlimited gains
Unlimited losses
View : Bearish
5367 Upside Risk
Downside Reward
5400 Call
Long Calls Unlimited gains
Limited losses
Strike View : Bullish
5400 Upside Reward
Downside Risk (Low)
-58.45
Premium The graph will change its direction at
5458.45
BEP
5168
BEP
Short Put
Limited gains
32 Unlimited losses
View : Bullish
5200 Upside Reward
Downside Risk
Covered Call
91
5309 5400
The upside risk on the Short Call is "covered" by Long Futures upside reward
Put Insurance
Downside Reward
4900
Downside Risk -473
3. Long April Futures, Long April 4900 Put, Short 5400 Call
-415
Limited Gains
Limited Losses
View : Bullish Very popular in forex markets
Upside Reward
Downside Risk
4. Long April Futures, Short April 5400 Call and April 5500 Call
114
5400 5500
Bull Spread
Gains limited
65 Losses limited
View : Bullish
5200 5400 Upside reward
Downside risk
-135
5335
Bull Spread
65 Gains limited
Losses limited
View : Bullish
5400 5500 Upside reward
Downside risk
-35
5435
4931 5469
This strategy is useful for "events". A big event is about to happen - Budget, Elections,
Election Results, RBI policy, Quarterly Results, Major announcements, Major Court Case h
4900 5000
5362
-95
4995
9. Go long April Fut and short May Fut - Calendar Spread Strategy
April Futures 5367
May Futures - suppose 5380
Spread 13 You believe that the sprea
will fall
After 4 days:
April 5391
May 5401
Spread 10
If you are very bullish, the Out of the Money Calls (5400, 5500, 5600) are good
If you are moderately bullish, the In The Money Calls are good (4900 to 5200)
OPTION VALUATION
Stock price Known 5367
Strike price Known 5400
Volatility Suspense Can be back-calculat 15.50%
Time to expiry Known 18
Interest Zero 0%
We can convert Daily Volatility into Annual Volatility (we multiply by 16)
Nifty Volatility over the past 5 years has been in the range of 15% to 45% most of the tim
Higher vol means higher Option prices (both Calls and Puts)
Example - during Budget, during Elections, options will become very expensive
HistoricalImplied Markets
Volatility Volatility
Past Future
Low Low Dull, Range Bound, Slow Bullish
High High Nervous, Panic, Crash, Bearish
High Low Expectation is dull markets
Low High Expectation is high vol, crash
The calculator is very useful for understanding when you will make money
Nifty is at 5367
You are bullish
You bott the 5400 Call for Rs 58
After 4 days, Nifty goes to 5381
Will you make money on the Call?
Call value will increase bcoz Nifty went up
Call value will fall bcoz time has passed
OPEN INTEREST
The number of open positions in any instrument
One Example
Nifty is at 5367 today
5400 Call Open Interest is 10 lakh units
Tom, Nifty moves up to 5391
Open Int of 5400 Call reduces to 8 lakh units and Open Int of 5500 Call increases by 2.5 la
units
What does this mean?
Example Two
Nifty is at 5367 today
5400 Call Open Interest is 10 lakh units
Tom, Nifty moves up to 5391
Open Int of 5400 Calls rises to 11 lakh units
What does this mean?
Traders are quite confident (sellers) that 5400 will be a strong resistance
It is not likely to be broken
ort April 5400 Call
l 5000 Put
nlimited gains
nlimited losses
ew : Bullish
pside Reward
ownside Risk
nlimited gains
nlimited losses
ew : Bearish
pside Risk
ownside Reward
nlimited gains
mited losses
ew : Bullish
pside Reward
ownside Risk (Low)
mited gains
nlimited losses
ew : Bearish
pside Risk
ownside Reward
mited gains
nlimited losses
ew : Bullish
pside Reward
ownside Risk
de reward
ut Insurance
5373
5400
5367+6-58
5315
5614
beyond 5614
nlimited Gains
mited Losses
ew : Volatile
oth sides : Gains
d range : Losses
- Budget, Elections,
ents, Major Court Case hearings
mited Gains
nlimited Losses
ew : Range bound
oth sides : Losses
d range : Gains
gh risk strategy
ou believe that the spread
00) are good
900 to 5200)
ce will be narrow
e afraid of death
reasonable levels
they understand
re constantly rehedging
y expensive
usness (Jan 2008)
w Bullish
Open Int
2
21
y are going away, they are