FUNDAMENTAL ANALYSIS

The are three stages in the Fundamental Analysis 1. Economic analysis 2. Industry analysis 3. Company analysis

ECONOMIC ANALYSIS
What to buy and sell will also depend on the fair value of a share and the extent of overvaluation and undervaluation. As per research studies available so far, nearly 50%of the stock price changes can be attribute to market influence which are general and are caused by the economic & industry factor. Cost Benefit Analysis The major costs are the risk involved and major benefits are the returns involved. The costs are the expenses to be incurred in acquiring the assets say registration brokerage charged etc.

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ECONOMIC ANALYSIS
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Uncertainties and risks involved due to possible non payment of interest or dividend or capital loss etc Benefits capital appreciation, safety and security of funds, marketability and liquidity of investment. Environmental Consideration Rural side people are not more aware about corporate securities they purchase real assets gold etc Urban metropolitan centre is different they are invested in consumer durable, mutual fund, corporate securities other instrument Tax planning in investment mngt.

ECONOMIC ANALYSIS
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Income tax = interest & dividend income up to Rs.2500 is not subject to TDS Wealth tax = Investment in shares & debenture are totally exempt from wealth tax without limit . TDS The current rate of tax deduction at source is 10% for interest income and 20% for dividend income Capital gains tax Long term capital gains are taxable at 20% for individual and 30% for corporate unties. Gift tax Gift made by NRI to resident relatives and friends

ECONOMIC ANALYSIS
7. GDP Measure to qualify national income and is the total value of the output of goods and services produced in the economy. 8. Total saving & investment of country How much individual to can save money and it is necessary to 5% of total national income can be save. 9. Sources of investment information The securities market is a perfect auction market where demand supply pressures determine the price. A World affair = wars, political affairs, FIIs B Domestic Economic and Political factor (monsoon, money supply and agriculture output)

ECONOMIC ANALYSIS
C Industry information International demand and market share D Company Information Corporate data, annual data, pore files E Security market information SMA, Listing of the company and beta, book closure F Security price quotation Price indices, price & volume and volatility G Data on related market money market and forex market, ADR, GDR, G sec. H Data on mutual fund NAV and repurchase price I New Issue

ECONOMIC ANALYSIS
Analysis Of the data The broker firms, sub broker, investment consultancy firms Inflation adjustment (price level) Additional depreciation Cost of sales Monetary working capital Agriculture & monsoon situation Monsoon is good increase saving ratio Monsoon is bad, harmful to the economy Balance of payment situation Interest structure and rate Government budget

ECONOMIC ANALYSIS
Infrastructure Communication, power, service centre, mechanical facility and technology. Monetary and Fiscal Policy Fiscal concern with saving and investment & expenditure = Barometric and Economic indicators 1 Leading indicators Data series of the variable that reach their high points as well as their low points in advances of the economic activity. - Contract of plant and machinery - Index of consumer expectation - Average weekly hours of manufacturing production w.

ECONOMIC ANALYSIS
2 Coincidental Indicator These are the indicator that reach their peaks and the through at approximately the same time as the economy. - Index of industrial production. - Personal income less transfer payments - manufacturing and trade sales 3. Legging Indicator That are reach their turning points after economy has already reached its own - Change in consumer price index for services - Commercial & industrial loans outstanding - Ration of manufacturing and trade incentives to sales

INDUSTRY ANALYSIS
= In India assets based industry grouping used to exist under MRTP act and FERA act = Normal size wise classification A small scale industries ( paid up capital 1 corer) B Medium scale industries ( paid up capital 5 corer) C Large sized industries ( paid up capital 10 corer or more) = Proprietary based classification A Private sector industries B Public sector industries C Joint sector (both private and public) = use based classification A Basic industries (coal, cement, steel, chemical) B Capital goods industries ( equipment, wires, cables)

INDUSTRY ANALYSIS
C Intermediate goods (automobile parts, tubes, bolts) D Consumer goods industries (silk, cotton, tobacco, sugar) = Input based classification A Agro based products = papers, wood, plywood B Forest based products = fisheries C Metal based industries = copper, gold D Chemical based industries = fertilizer, drug, plastic Industrial Life Cycle I Pioneering stage perfect both the way product & technology risk level is also very high many compound could not survive in this stage.

INDUSTRY ANALYSIS
II Expansion Stage In this stage few companies continue to get stronger, both in share of the market and financially. Strong companys and steadier, more efficient firms become more attractive for investment purpose. Paying dividend interest for that making them an even more desirable investment. III Maturity Stage The investor or analyst must monitories industries development constantly High labor cost, change in technology, demand also high.

INDUSTRY ANALYSIS
= Industrial Policy I) Industrial Licensing - 18 industries specified for compulsory licensing, registration, import export license. II) Policies for PSU - some reservation for public sector is being retained gradual opening of the area of private sector & privatization of some PUS is being followed III) Foreign Investment The government has assured automatic direct investment approved upto 51 % of the total equity in Indian companies by foreigner in selected industry group.

INDUSTRY ANALYSIS
- FDI is now allowed even up to 74 % to 100 % IV) Foreign Technology - A list of industries with 34 categories in it is provided automatic approved of foreign technology agreements by the govt. V) MRTP Control - MRTP companies and dominant undertaking has gone and government control on their activates have disappeared. - Its also emphasis controlling & regulating their monopolistic restrictive and unfair trade practies.

INDUSTRY ANALYSIS
VI) Industrial Growth - Competition - Capacity to used - Technology innovation - Higher rate than average

= Industrial groups listed on stock exchanges The C.S.O. publisher data on industrial production under 38 majors groups = Financial Data On Industries I In term of efficiency of capital structure II Sources and uses of funds data such as external sources to the total funds employed.

INDUSTRY ANALYSIS
III Growth rates of fixed assets, gross block IV Activity and Liquidity ratios, inventory turn over V Profitability ratio Tax planning, dividend distribution = Backward Area Development 1. Infrastructure development strategy 2. Growth centre strategy 3. Capital subsidy 4. Provision of transport subsidy 5. Income tax concession, tax holding 6. Preference in granting license

INDUSTRY ANALYSIS
7. Provision for SEZs 8.Preferential allotment of electrical connections, provision of infrastructure facility 9. Project Making 10. Entrepreneurship development programmed Other points Markets Competitive Strategy Threat of entry Economic of scale Product differentiation Switching cost Exit barriers

COMPANY ANALYSIS
The investor takes the investment decision given his goal of return maximization Buy the share at a low price Sale the share at a high price Estimation of future price : Investor always looks for increasing his returns from the investments, return are composed of capital gains and a stream of income in the from of dividend.

COMPANY ANALYSIS
Calculation of the capital gains: Rt = (Pt P1 1) + Dt Rt = Return of the holding period Pt = Price of the share at the end of the year P1 1 = Price of the share at the end of the year Dt = Dividend received at the end of the year Holding Period Return HPY = ( Pt P1 1 ) + Dt * 100 Pt 1

COMPANY ANALYSIS
A) B) A) a) Quantitative Analysis Quality Analysis Quantitative Analysis Dividend Discounted Methods The dividend discounted methods based on the premise that the value of an investment is the present value of its future returns PV = D1 Kg

COMPANY ANALYSIS
D1 = Dividend Per Share K = Discounted Rate G = Growth Rate b) Price Earning Approach The P/E ratio or Multiple is an important ratio frequently used by analyst in determining the value of the share P = EPS * P/E Ratio Decision Rules 1. Higher the P/E ratio, other things remaining the same, Higher would be the value of an equity.

COMPANY ANALYSIS
2. Lower the P/E ratio, other things remaining the same, Lower would be the value of an equity. Dividend Payout Growth Risk Free Rate Business Risk Financial Risk How to forecasting earning per share 1 Concept of financial statement 2 Concept of income statement

COMPANY ANALYSIS
I) Return On Assets Return on assets = EBIT / Assets Assets turnover = sales / assets Profit margin = EBIT / sales Rate of return on equity = R + (R I) L/E R = Return on assets I = Effective interest rate L/E = Total outside liabilities / equity The ROA approach provides a framework for analyzing the Effects and interaction between the return a firm earns on its assets and the manner it is financed. EPS = [(1-T){R+(K-I)L/E}E] + [ no. of share outstanding ]

COMPANY ANALYSIS
Income statement for the year ended Sales revenue Less Operating Expense EBIT Less Interest Earning before tax Less Tax Earning after tax Number of the share outstanding EPS/Number of the share outstanding

COMPANY ANALYSIS
= Variable Consideration 1. Net sales 2. Other incomes 3. Cost of sales 4. EBIT 5. Taxes 6. EAT 7. Average share outstanding 8. EPS 9. DPS

COMPANY ANALYSIS
= Relevant Information 1. Total Assets 2. Current Debts 3. Long term Debts 4. Equity Shares 5. Total debts & Equity

COMPANY ANALYSIS
II) Market Share Approach 1.Estimate the industrys total sales 2.Estimate the firms share in the total sales in the industry 3.Estimate the profit margin 4.Multiply sales by profit margin to get total earning 5.Divided earning by number of share outstanding 6.Multiply EPS by P/E ratio 7.HPY III) Independent Methods Estimate Approach Each and every time of revenue & expense is estimated separately.

COMPANY ANALYSIS
= Modern Methods of forecasting EPS

1. Use of regression and correlation analysis In order to find out the interrelationships of relevant variables, the techniques of regression and correlation analysis are used. 2. Trends Analysis It is useful to understand the historical behavior of the variable for the purpose of the security analysis. 3. Decision Tree Analysis Decision tree analysis the decision is assumed to be taken sequentially with probability of each sequence.

COMPANY ANALYSIS
B) Qualitative Analysis 1. Future plans 2. Quality of management 3. Quality of personnel 4. Availability Raw Material inputs 5. Marketing & Distribution 6. Product risk 7. Components of cost fixed and variable 8. Order book position 9. Availability of infrastructure facility 10. Company annual report

COMPANY ANALYSIS
11. Companys financial statement 12. Financial press, magazines etc 13. Promotional tools = Components of financial statement 1. Comparison of financial statement over 2 to 5 years 2. Ratio analysis 2 to 3 years 3. Fund flow analysis = over short period 4. Trend analysis = over 5 to 10 years Figures of one year with that of another year Inter firm comparison of figures, within the same industry Comparison of one products with another Comparison of budgeted figures with actual figures

COMPANY ANALYSIS
Ratio Analysis; The ratio is a statistical yardstick that provides a measure of relationship between any two variable. 1.Revenue statement ratio; Gross profit ratio Expense turnover Stock turnover Operating ratio Net profit ratio 2.Balance Sheet Ratio Current ratio Liquidity ratio Debt to equity ratio Assets to equity ratio

COMPANY ANALYSIS
3. Composite ratio Return on total resources Return on own funds Turnover of fixed assets Turnover of debtors Fund Flow Statement 1.Additions to assets fixed and current 2.Addition to investment 3.Decrease in liabilities by paying off loans and creditors 4.Decrease in net worth by increasing of losses withdrawal of funds from business & payment of dividend

COMPANY ANALYSIS
Cash Flow Statement; A particular time period how much cash inflows and cash Outflow Company Reports I Chairmans speech to the investors This would bring out the management views of the Companys performance in the backdrop of the economy and industrial growth, its plans for expansion or diversification or problem faced by the company. II Directors Reports Financial results of these operations, profits or loss the allocation of profit for depreciation, interest, taxes, dividend

COMPANY ANALYSIS
III Auditor Report This is a statutory report testifying the correction ness of the accounts and giving their own commit on the accounting practice & procedures of the company Corporate Performance =Nature of manufacture reputation, expansion, plans, tax Planning, technology, set up, reputation of collaborators and vocational advantages =Goodwill also depends =Government attitude to the management =Government policy for import take benefits

COMPANY ANALYSIS
=Honesty, integrity and consistency of management gives Good rating for the company. =Intrinsic value of share =Return on capital employed =Efficiency of capital use Types of share in the market I Growth shares such companies are very attractive to the long-term investors as the return to the equity shareholder in such companies are continuously expanding due to dividend growth in dividends networth, bonus, right etc.

II Cyclical Shares Others categories of shares and cyclical shares whose fortunes may depend upon the business cycle and trading like shipping business cycle and machines tools. III Defensive Shares Another category of companies is defensive shares whose prices are stable and do not fluctuate widely. IV Discount Shares Besides there is a category of discount shares whose prices are depressed due to low profits but with a hope of higher profitability in the immediately future due to the change in the management or in government policies as due to new technological changes.

COMPANY ANALYSIS

= Blue Chip Research on the companies operation and their financial results is necessary for locating emerging blue chips. This can be done through fundamental analysis which helps us to decide what to buy and what to sell. Features 1.Management Rating = Highly professionalisation 2.Gross Profit Margin = Turnover, After sale services, Brand equity, quality 3.Dividend Record = Declare reasonable dividend policy of plouging back of profit, diversification Expansion

COMPANY ANALYSIS

COMPANY ANALYSIS
4.The capital structure = The companys net worths is high relative to equity and is expanding year after year 5.The liquidity Position = Current liquidity position is strong 6.Expansion = Relation with tax planning 7.Company vision = The mngt has a vision for future of the company and their policy is ambitious expansion & growth 8.Market Price = Rising, Steadily, if its fall than temporary. 9.Fair Price = Servicing for investors, dividend, bonus allotment, share transfer etc. 10.Company rating = Rating by rating agency

COMPANY ANALYSIS
Summering Table Earning per share Relation on assets Profit margin Assets turnover Total equity / outstanding liability Effective interest rate Number of share outstanding Effective rate of interest Retention Rate