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FUNDAMENTAL

ANALYSIS

By

Anand Shankar(49)

Saurabh suman (35)Shaurya punit (38)



WHAT IS FUNDAMENTAL ANALYSIS?

Fundamental analysis is a technique that

attempts to determine a securitys 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 companys 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 includeslooking 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

POSITION

HIGH LOW

DEFICIT FINANCING/FISCAL

DEFICIT

LOW HIGH

AGRICULTURAL PRODUCTION HIGH LOW

INFRASTRUCTURAL

FACILITIES

GOOD NOT GOOD



Industry analysis

Industry analysis is a type of investment research thatbegins by focusing on the status of an industry or anindustrial 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 techcompany to that of a utility. Because you are, in effect,comparing apples to oranges, the analysis is next touseless.



2. Industry Analysis

INDUSTRY ANALYSIS LOOKS AT

a) Past sales and earning performanceb) Labor condition within the industry

c) Attitude of government towards industry

d) Competitive conditione) Stock prices of firm in the industry


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Michael Porters 5 Force

Model



Threat of New Entrants - The easier it is for new companies toenter the industry, the more cutthroat competition there will be. Factors that canlimit the threat of new entrants are known as barriers to entry. Some examplesinclude:

Existing loyalty to major brands

Incentives for using a particular buyer (such as frequent shopper programs)

High fixed costs Scarcity of resources

High costs of switching companies

Government restrictions or legislation

Power of Suppliers- This is how much pressure suppliers canplace on a business. If one supplier has a large enough impact to affect acompany's margins and volumes, then it holds substantial power. Here are a fewreasons that suppliers might have power:

There are very few suppliers of a particular product

There are no substitutes

Switching to another (competitive) product is very costly

The product is extremely important to buyers - can\'t do without it

The supplying industry has a higher profitability than the buying industry



Power of Buyers - This is how much pressure customers can place on a business. If onecustomer has a large enough impact to affect a company's margins and volumes, then the customerhold substantial power. Here are a few reasons that customers might have power:

Small number of buyers

Purchases large volumes

Switching to another (competitive) product is simple

The product is not extremely important to buyers; they can do without the product for a period of

time Customers are price sensitive

Availability of Substitutes - What is the likelihood that someone will switch to acompetitive product or service? If the cost of switching is low, then this poses a serious threat. Hereare a few factors that can affect the threat of substitutes:

The main issue is the similarity of substitutes. For example, if the price of coffee rises substantially,a coffee drinker may switch over to a beverage like tea.

If substitutes are similar, it can be viewed in the same light as a new entrant.

Competitive Rivalry - This describes the intensity of competition between existing firmsin an industry. Highly competitive industries generally earn low returns because the cost ofcompetition is high. A highly competitive market might result from:

Many players of about the same size; there is no dominant firm

Little differentiation between competitors products and services



Semiconductor Industry Threat of New Entrants. setting up a chip fabrication factory requires billions of dollars in investment.

Semiconductor companies are forming alliances to spread out the costs ofmanufacturing. Meanwhile, the appearance and success of "fabless" chip makerssuggests that factory ownership may not last as a barrier to entry.

Power of Suppliers. For the large semiconductor companies, suppliers have little power

many smaller chip makers are becoming increasingly dependent on a handful oflarge foundries.

Power of Buyers. Most of the industry's key segments are dominated by a small number of large

players. This means that buyers have more bargaining power.

Availability of Substitutes. depends on the segment.

Copy-cat suppliers and reverse engg.

Competitive Rivalry. Intense rivalries between individual companies

The result is an industry that continually produces cutting-edge technology whileriding volatile business conditions.



Valuation of Stock

= +

= +

The intrinsic value of a share is the present value of all future cashflows

Investment decision:

a) If the market price of a share is currently lower than its intrinsicvalue, such a share would be bought because it is perceived to beunder-priced.

b) A share whose current market price is higher than its intrinsic

value would be considered as overpriced and hence sold.

INTRINSIC VALUE DIVIDENDS CAPITALAPPRECIATION



Company Analysis-Non

FinancialAspects :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 ProductionReview 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 DistributionReview Question:

What is the companys 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 PersonnelReview Question:

How important is the labour component?

What is the labour situation in general?

Aspect:EnvironmentReview 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 WeaknessesLatest 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 WarExpanding export markets Intensive competition

Cheap labour Undependable component

Booming capital markets Suppliers

Low interest rates Infrastructure bottlenecks

Power cuts



PRICE

YESTERDAYS BLUE CHIPS EMERGING BLUE CHIPS

EVERGREEN STOCK

NON BLUE CHIPS TURN AROUND STOCK

QUALITY

PRICEQUALITY MATRIX

LQ

HP

HQ

HP

LQ

LP

HQ

LP

MQ

MP



Low Quality, Low - Price (LQLP): The non-blue chipsThese 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 appearscheap may ultimately prove very expensive.

High Quality, Low - Price (HQLP): Turnaround stocksThese are high quality stocks but quoted at relatively low prices because the market isyet to recognize their true worth. They are blue chips in the making. You shouldpick 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 representcertain special situations like a turn around after a bad period, takeovers, change ofmanagement 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 themis that their price/earnings (P/E) ratio i.e. market price divided by earnings per shareis relatively low when compared to the aggregate P/E ratio of the market as a wholeand of that particular industry.



Low Quality, High - Price (LQHP): Yesterdays blue chipsYou 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 shareagain until the company returns to the growth track.

Medium Quality, Medium - Price (MQMP): Evergreen superstock

These are steady scrips. They can last for two to three generations fairly intact.Hold on to them. Dont be in a hurry to sell them, not withstandingtemporary ups and downs.

High Quality, High - Price (HQHP): Emerging blue chipsThe 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. Butbe careful, partial booking of profits at high price may be desirable.



FUNDAMENTAL ANALYSIS OF A

COMPANY



Questions

Q1 : Tell 5 competitive forces of Michel

Porters 5 force model.



What is balance of payment?

A record of all transactions made between

one particular country and all other countries

during a specified period of time. BOP

compares the dollar difference of the amountof exports and imports, including all financial

exports and imports. A negative balance of

payments means that more money is flowingout of the country than coming in, and vice

versa.

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