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Fundamental Analysis

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Fundamental Analysis

Intrinsic value depends on the

performance of the Economy,Industry and

the companyIntrinsic Value: What should be the price

given the fundamentals

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Technical Analysis

Every stock price moves in a particularpatterns and the pattern repeats itself

Fundamentals of the company have no

bearing on the stock prices

Head and Shoulders Pattern

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Efficient market hypothesis

Market is efficient

The stock prices incorporate all publicly

available information

Strong form of efficiency

Weak form of efficiency

Semi-strong form of efficiency

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Economy Analysis

Analysis of macro economic variables

Inter related parameters

Also dependent on demographic factors

like population,urbanization

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Macro economic

Analysis:Economy wide factors

GDP

GNPNNP

Growth rate

Interest rates

Monsoon

Infrastructure

facilities

Foreign trade,BOP

and Exchange rates

Government

revenue,expenses

and deficit

Savings andinvestment

Demographic data

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Growth rate

Change in GDP

Sectoral growth rates:

1)Agriculture2)Industrial

3)Services

http://www.finpipe.com/equity/charts.htm

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Interest rates

Bank rate

PLR(Prime Lending rate)

Call market rate

High Interest rates depresses companys

profitability

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Foreign trade,BOP &exchange

rates

BOP is a measure of strength of rupee on

external account.

In other words, BOP=Export-Import

Visible and invisible imports

In deficit increases, rupee depreciatesthereby affecting cost of imports

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Forex reserves

Foreign exchange reserves indicate how

rapidly the government will have to correct

the deficit

Forex Reserves:

a)FDI

b)FIIc)Exports

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Govt. revenue, Expenses and

deficitAnnual Budget

Revenue = Expense =>Deficit in budget

Total - Total = Current account

revenue expense deficit

Revenue+ borrowings -expenses=Fiscaldeficit

Fiscal deficit is always expressed as a %of GDP

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Other Indicators

Demographic data

MonsoonInfrastructure facilities-Communication,

transportation, power etc

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Economic Forecasting

Economic Indicators:

1)Leading-Fiscal policy, rainfall, monetary

policy, indices, capital investment2)Coincidental-GNP,Interest rates

3)Lagging-unemployment rate

Econometric model building

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Industry Analysis

A group of firms that have similar

technological structure of production and

produce similar products

Classification based on:

i) Business Cycle

ii) Industry Life Cycle

http://www.finpipe.com/equity/corpdevl.htm

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Business Cycle

Classified based on the over all growth of

the specific industry

1. Growth industries

2. Cyclical industries

3. Defensive industries

4. Cyclical-Growth industries

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Growth Industry

Abnormal high rate of earnings and growth

but consistent

Independent of Business Cycle

Are born as a result of some technological

revolution

Examples: Telecom , Biotech, IT

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Cyclical Industries

Move along with the business cycle

Gain more profit in the boom period and

most likely to suffer at times of recessionExamples: FMCG, consumer durables,

steel, cement

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Defensive Industries

Defy the Business Cycle

These industries do extremely well

irrespective of the economy

Examples: Utilities, Housing and food

items

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Cyclical-Growth Industries

At good times, they perform better than

the normal business cycle but at bad

times, suffer more than normal

Examples: Airlines, Automobiles

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Industry Life Cycle

Extension of the product life cycle

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Stage 1:Pioneering

The product is launched for the first time

Very high growth rate

Competition based on differentiation

High mortality rate

No permanent positioning

STRATEGY: common investor normallyavoids these industries

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Stage 2:Expansion

Very few survivors

Sales grow at a very fast rate

Moderate growth ratesPrice based competition

Many strategic alliances

STRATEGY: An ideal investment

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Stage 3:Stabilization and

Maturity

Stagnation of growth rate

Slow increase in sales

Large dividends are paid

Fear of technology obsolescence and

shift in social norms

DIFFERENTIATION

STRATEGY: best option is to move out

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Stage 4:Decline

Low or negative growth of sales

Obsolete technology

Change in consumer preferencesShift in social norms

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Industry Factors

Past sales and earnings performance

Cost structure and profitability

Permanence

Government policy

Labor conditions

Competitive conditionsR&D and pollution standards