FUNDAMENTAL

ANALYSIS
 WHAT IS FUNDAMENTAL ANALYSIS?
• Fundamental analysis is a technique that
attempts to determine a security‘s value by
focusing on underlying factors that affect a
company's actual business and its future
prospects.
 WHY FUNDAMENTAL ANALYSIS
• Fundamental analysis answers the following
question
• Is the company’s revenue growing?
• Is it actually making a profit?
• Is it in a position strong-enough to outrun its
competitors in the future?
• Is it able to repay its debts?
• Is management trying to "cook the books"?
FUNDAMENTAL ANALYSIS
• The fundamental school of thought appraises
the intrinsic value of shares through
 ECONOMY ANALYSIS
The first step to this type of analysis includes
looking at the macroeconomic situation.
• GDP/growth rate
• Inflation
• Interest rates
• Exchange rates
• Agricultural production/monsoon
• FDI/FII
 ECONOMIC INDICATORS AND THEIR IMPACT ON THE STOCK MARKET
INDICATOR FAVOURABLE IMPACT UNFAVOURABLE
IMAPACT
GDP/GROWTH RATE HIGH GROWTH RATE SLOW GROWTH RATE

DOMESTIC SAVINGS RATE HIGH LOW

INTEREST RATES LOW HIGH

TAX RATES LOW HIGH

INFLATION LOW HIGH

IIP/INDUSTRIAL PRODUCTION HIGH LOW

BALANCE OF TRADE POSITIVE NEGATIVE

BALANCE OF PAYMENTS POSITIVE NEGATIVE

 ECONOMIC INDICATORS AND THEIR IMPACT ON THE STOCK MARKET

INDICATOR FAVOURABLE IMPACT UNFAVOURABLE

IMAPACT
FOREIGN EXCHANGE HIGH LOW
POSITION
DEFICIT FINANCING/FISCAL LOW HIGH
DEFICIT
AGRICULTURAL PRODUCTION HIGH LOW

INFRASTRUCTURAL GOOD NOT GOOD

FACILITIES
 Industry analysis
• Industry analysis is a type of investment research that
begins by focusing on the status of an industry or an
industrial sector.

• Why is this important?

• Each industry is different, and using one cookie-cutter
approach to analysis is sure to create problems.
Imagine, for example, comparing the P/E ratio of a tech
company to that of a utility. Because you are, in effect,
comparing apples to oranges, the analysis is next to
useless.
 2. Industry Analysis

• INDUSTRY ANALYSIS LOOKS AT

a) Past sales and earning performance
b) Labor condition within the industry
c) Attitude of government towards industry
d) Competitive condition
e) Stock prices of firm in the industry
Michael Porter’s 5 Force
Model
 Valuation of Stock
CAPITAL
INTRINSIC VALUE = DIVIDENDS + APPRECIATION
• = +
• The intrinsic value of a share is the present value of all future cash
flows
Investment decision:

• a) If the market price of a share is currently lower than its intrinsic

value, such a share would be bought because it is perceived to be
under-priced.
• b) A share whose current market price is higher than its intrinsic
value would be considered as overpriced and hence sold.
 Company Analysis-Non
Financial
Aspects :History, Promoters and Management
Review Questions
 How old is the company?
 Who are the promoters?
 Is it family managed or professionally managed?
 What is the public image and reputation of the company, its promoters and its products?

Aspects :Technology, Facilities and Production

Review Questions
 Does the company use relevant technology?
 Is there any foreign collaboration?
 Where is the unit located?
 Are the production facilities well balanced?
 Is the size the right economic size?
 What are the production trends?
 What is the raw material position?
 Is the process power- intense?
 Are there adequate arrangements for power?
Aspect:Product range, Marketing, Selling and Distribution
Review Question:
 What is the company‘s product range?
 Are there any cash cows among the product portfolio?
 How distribution-effective is the marketing network?
 What is the brand image of the products?
 What is the market share enjoyed by the products in the relevant segments?
 What are the effects and costs of sales promotion and distribution?

Aspect: Industrial relations, Productivity and Personnel

Review Question:
 How important is the labour component?
 What is the labour situation in general?

Aspect:Environment
Review Question:
 Are there any statutory controls on production, price, distribution, raw material, etc?
 Is there any major legal constraint?
 What are the government policies on the industry (domestic as well as related to imports and
exports of the final products and raw materials)?
 SWOT ANALYSIS

Internal Strengths Weaknesses

Latest Technology Loose controls
Lower delivered Cost Untrained labour force

Established products Strained cash flows

Committed manpower Poor product quality
Advantageous location Family funds
Strong finances Poor public image
Well- known brand names

External Opportunities Threats

Growing domestic demand Price War
Expanding export markets Intensive competition
Cheap labour Undependable component
Booming capital markets Suppliers
Low interest rates Infrastructure bottlenecks
Power cuts
 LQ HQ
HP HP
PRICE
YESTERDAY’S BLUE CHIPS EMERGING BLUE CHIPS

MQ
MP
EVERGREEN STOCK

LQ HQ
LP LP
NON BLUE CHIPS TURN AROUND STOCK

QUALITY
PRICE –QUALITY MATRIX
Low – Quality, Low - Price (LQLP): The non-blue chips
These are not quite blue chips. These shares are of low quality and hence are quoted at
low prices. Just ignore them until there is an upswing in their fortunes. Till then,
they are duds.
You should not buy something simply because it is cheap. Remember, what appears
cheap may ultimately prove very expensive.
High – Quality, Low - Price (HQLP): Turnaround stocks
These are high quality stocks but quoted at relatively low prices because the market is
yet to recognize their true worth. They are blue chips in the making. You should
pick them up as soon as you spot them, before their price shoot up to high levels.
It is in these HQLP shares that one can make a real killing! Often, they represent
certain special situations like a turn around after a bad period, takeovers, change of
management etc. Relative to their earnings potential, their market price is low. They
have not yet attracted the wide attention of the market. One way to recognize them
is that their price/earnings (P/E) ratio i.e. market price divided by earnings per share
is relatively low when compared to the aggregate P/E ratio of the market as a whole
and of that particular industry.
Low – Quality, High - Price (LQHP): Yesterdays blue chips
You can call these the stocks with the hangover effect‘. Once they had the
market on a high but they are more or less banking on their past glory now.
Once this fact is recognized, the market downgrades such stocks and their
prices tumble. Such scrips should be sold fast. Do not look at such a share
again until the company returns to the growth track.
Medium – Quality, Medium - Price (MQMP): Evergreen super
stock
These are steady scrips. They can last for two to three generations fairly intact.
Hold on to them. Don‘t be in a hurry to sell them, not withstanding
temporary ups and downs.
High – Quality, High - Price (HQHP): Emerging blue chips
The current stars are popular and command a high price. As long as their
glamour last, such shares perform well in the market. Hold on to them. But
be careful, partial booking of profits at high price may be desirable.
FUNDAMENTAL ANALYSIS OF A
COMPANY