ANALYSIS

TECHNICAL
FUNDAMENTAL

COMPANY
ECONOMY INDUSTRY
FUNDAMENTAL ANALYSIS
 To analyse various fundamental factors that affect risk-return of the securities.
 To identify the securities that one perceives as mispriced in the stock market.
 Market price is different from Intrinsic value an provides an opportunity

DECISION RULE

MP – Market Price (the price prevailing in the market)

IV – Intrinsic Value (the price justified by its fundamental factors)

If IV > MP – buy the security

If IV < MP – sell the security
If IV = MP – no action
ECONOMY- INDUSTRY – COMPANY ANALYSIS :
A FRAMEWORK
ECONOMY ANALYSIS

To predict the direction of the national economy

Economic activity affects corporate profits, through tax policies, foreign polices

and administrative procedure.

It implies examination of GDP, government financing, government borrowings,

consumer durable goods market, non-durable goods and capital goods market,

savings & investment pattern, interest rates, inflation rates, tax structure, FDI and

money supply
PERFORMANCE OF A MACRO ECONOMY

1. The national economy

2. The effect of the international economy on the national economy

Growth of the national economy is mainly determined by the domestic

consumption pattern.

TOOLS FOR ECONOMIC ANALYSIS

1. Money supply 7. Institutional lending

2. Industrial production 8. Stock prices
3. Capacity utilization 9. Monsoons
4. Unemployment 10. Productivity of factors of
Inflation production
6. Growth in GDP 11. Fiscal deficit
12. Credit/Deposit ratio
13. Stock of food grains and essential
commodities 21. Debt recovery and loans
14. Industrial wages outstanding
15. Foreign trade and balance of 22. Interest rates
payments position 23. Cost of living index
16. Status of political and economic 24. Foreign investments
stability 25. Trends in capital market
17. Industrial wages 26. Stage of the business cycle
18. Technological innovations 27. Foreign exchange reserves
19. Infrastructural facilities
20. Economic and industrial policies
of the government
ECONOMIC FORECASTING

Techniques used:
Economic Indicators
To find out how the economy is likely to behave in future.
(i) Leading Indicators : lead the economic activity in their outcome.
(a) Average weekly hours of manufacturing production workers (b) Average weekly in
initial unemployment claims (c) Contacts and orders for plant and machinery (d) Index of
S&P 500 stock prices (e) Money supply (M2) (f) Change in sensitive material prices
(g) Change in manufacture's unfilled orders (durable goods industries) (h) Index of
consumer expectations.
(ii) Lagging Indicators : variables that lag behind in their consequences.
(a) Average duration of unemployment (b) Ratio of manufacturing and trade inventories to
sales (c) Average prime rate (d) Outstanding commercial and industrial loans
Diffusion Index
It is an indicator of the extensiveness/ spread of an expansion or contraction.
Developed by National Bureau of Economic Research, USA
(1) Composite/ Consensus Index : combining several indicators into one single
measure

(2) Component Evaluation Index: examines a particular series taking into

consideration its components.

 Surveys

 Investors can form their opinion with respect to the future state of the
economy.
 It can also incorporate the opinion or future plans of consumers regarding
their spending.
Precautions:
(1) Survey results cannot be regarded as forecasts
(2) There is no guarantee that the intentions surveyed would certainly materialize.

 Economic Model Approach

To determine the precise relationship between the dependent and the independent
variables.
 Econometrics is a part of economic theory.
Static Model Building or GNP Model Building or Sectoral Analysis – Methods
ECONOMY AND INDUSTRY ANALYSIS
INDUSTRY ANALYSIS
Classification of Industries
(1) Growth Industry : Expected to grow consistently and its growth may exceed the
average growth of the economy.
(2) Cyclical Industry : Move closely with the rate of industrial growth and fluctuate
cyclically
(3) Defensive Industry : Move steadily with the economy and less than the average
decline
Based on Life Cycle
(1) Pioneering Stage : New Industry. Technology and Products are new (experimental
order)
(2) Fast Growing Stage : Chaotic competition. Large firms dominates the industry.
(3) Security and Stabilization Stage : Grow roughly at the rate of the economy. “ Latent
obsolescence”
(4) Relative Decline Stage: Grown Old.
Other Ways of classification of Industries:
(1) Classification by Reporting Agencies: RBI – 32 groups, Stock Exchange – 10 groups,
Financial express – 19 groups, The Economic Times – 10 groups
(2) Classification by Business Cycle :
Growth industries – high rates of earnings expansion
Cyclical industries – closely related to business cycle
Defensive industries – relatively inelastic demand
Cyclical growth industries – influenced by technologies and economical changes

KEY INDICATORS IN ANALYSIS

1. Performance Factors like:

(a) Past sales
(b) Past earnings
2 . Environment Factors like:
(a) Attitude of government
(b) Labor conditions
(c) Competitive conditions
(d) Technological progress

3. Outcome Factors like:

(a) Industry share prices
(b) Price earnings multiples with reference to these key factors, evaluations shall be
done to identify.
(c) Strengths and weaknesses
(d) Opportunities and threats
FORECASTING METHODS

1. The Market Profile:

(a) Number of establishments
(b) Geographical location of establishment
(c) Number of employees
(d) Value of sales
(e) Value added by manufacturing
(f) Capital expenditures
(g) Degree to which establishments are specialized
(h) Importance of their output in the national total
2. Cumulative Methods:
(a) Surveys: Surveys are carried out by research agencies, consultants, industry
association and the research bureau of media.
(b) Correlation and Regression analysis: Statistical methods like correlation and regression
analysis can be of much help in demand measurement.

3. Time series analysis:

The elements derived are:
Trend (T): It is the result of basic developments in population, capital formation, and
technology
Cycle (C): It captures the wave-like movement of sales.
Season (S): It refers to a consistent pattern of sales movements within the year.
Erratic Events (E): It refers to the unpredictable sales
COMPANY ANALYSIS

Buy the share at a low price

Sell the share at a high Price

Framework of Company Analysis

1. Financial
2. Non-financial

In the process of evaluating the investment-worthiness of a company’s securities,

the analyst will be concerned with two broad categories information: (i) internal and
(ii) external.
1. Non-financial Aspects:
Internal Information : Gathering and analyzing information about companies,
publicized in the media, the stock exchange directory, annual reports and prospectus.
(a) History and business of the company
(b) Top management team
(c) Collaboration agreements
(d) Product range
(e) Future plans of expansion/diversification
(f) R&D
(g) Market standing – competition and market share
(h) Corporate social responsibility
(i) Industrial relations scenario
(j) Corporate image etc.
 External Information : related to the company survival and image.
(a) Statutory controls
(b) Government policy
(c) Industry life cycle stage
(d) Business cycle stage
(e) Environmentalism
(f) Consumerism, etc.
2. Financial Aspects: Financial analysts interested in making investments in equality
shares of a company will be concerned with the prospects of rise in value of the firm.

Asset value vs. Earnings value:

The asset value is usually estimated by consultation with:

A specialist who appraises asset values and/or
An accountant who gives book value of the firm.
 Investment analysis focus their attention on the trends of earnings and the related
factors like dividends, bonus issues, rights shares, and appreciation of the market value of
the share.

The appropriate indices for a company’s performance are :

Market price Per Share (MPS)
Earnings Per Share (EPS)