Fundamental Analysis

Hitesh Saxena
Apeejay School of Management
 Fundamental Analysis

• a stock valuation method that uses financial and

economic analysis to predict the movement of stock
prices.

Includes

=> Economy Analysis

=> Industry Analysis
=> Company analysis
 General Strategy

• “The market price of a stock tends to move towards it's “real

value” or “intrinsic value”

• If “intrinsic/real value” > current market price, the

investor would purchase the stock because he knows that
the stock price would rise and move towards its “intrinsic or
real value”

If the intrinsic value > market price, the investor would

sell the stock because he knows that the stock price is going
to fall and come closer to its intrinsic value.
How to find out the intrinsic value of a company ?

Examination of the current and future overall health of the

economy as a whole.

=> Analyse the Industry

=> Analyze firm and the factors that give the firm a
competitive advantage in it’s sector

• Do they have any “core competency” or “fundamental

strength” that puts them ahead of all the other competing
firms?

Do they have a strong market presence and market share?

 Which stock prices are going to rise fast?
Some stocks are cheap and some are costly. But the price of the stock
is not important. What is imp is how much the price of the stock is
likely to rise.
More specifically the “%” rise in the stock price is imp.
Rise by a large %
Can we compare 2 co’s that are in different fields and different
industries? How do we know which one is fundamentally strong and
which one is week?
If try to compare 2 co’s in different industries and different customers
it is like comparing apples and elephants. There is no way to compare
them!

• So fundamental analysts use different tools and ratios to compare all

sorts of co’s no matter what business they are in or what they do!
 Top-down and Bottom-up approach

• The top-down investor starts his analysis with global

economics, including both international and national
economic indicators, such as GDP growth rates, Inflation ,
Interest rates, Exchange rates, productivity, and energy
prices. He narrows his search down to regional/industry
analysis of total sales, price levels, the effects of competing
products, foreign competition, and entry or exit from the
industry. Only then does he narrow his search to the best
business in that area.

• The bottom-up investor starts with specific businesses,

regardless of their industry/region.
 Economic analysis

• Co’s are a part of the industrial and business sector, which in

turn is a part of the overall economy. Thus the performance
of a company depends on the performance of the economy in
the first place.

• If the economy is in recession or stagnation, the performance

of companies will be bad in general, with some exceptions
however. On the other hand, if the economy is booming,
incomes are rising and the demand is good, then the
industries and the companies in general may be prosperous,
with some exception however.
 Various stages of Economy

BOOM

Recession

Recovery

Slump
=> Behaviour of the monsoon and the performance of
agriculture. As agriculture is the mainstay of 70% of population and
contributes nearly 35% of the output of the economy, it is imp for the
assessment and forecast of industrial performance. If the monsoon is
good and agricultural income rise, the demand for industrial products
and services will be good and industry prospers.

• India has a mixed economy, where the public sector plays a

vital role. The Govt being the biggest investor and spender, the
trends in public investment and expenditure would indicate the likely
performance of the Indian economy. Govt along with the budget
policy, tax levies and govt borrowing programme extent of deficit
financing will have a major influence on the performance of the
Indian economy, as these influence the demand and income of the
people. The changes in excise and customs duties, corporate taxes,
etc. are all relevant to assess the trends in the economy as they have
an impact on the industry and the companies.
• Monetary policy and trends in money supply
which mainly depend on the govt’s budget policy, its
borrowing from the public and credit from the banks and the
RBI, have a major impact on the industrial growth through
the cost and availability of credit, the profit margins of the
Co’s etc The monetary situation along with the budgetary
policy influences the movement in price level (inflation)
and interest rates. The tight money position, increasing
budget deficits and RBI creation of currency lead to an
inflationary spiral. Although a mild inflation is good for
business psychology, higher degrees of inflation,
particularly in two digits, will defeat all business planning,
lead to cost escalations and squeeze on profit margins.
These will adversely affect the performance of industry and
companies.
• General business conditions in the form of business
cycles influence the demand for industrial products and the performance of the
industry. Outputs do fluctuate depending upon the state of the economy,
performance of agriculture, availability of power and other infrastructural outputs,
imported inputs and a host of other factors. These factors do influence the costs and
profit margins of companies from both demand and supply sides. The business
earnings and profits are affected by such changes in business conditions.

• Economic and political stability in the form of stable and

long-term economic polices and a stable political system with no uncertainty would
also be necessary for a good performance of the economy in general and of
companies in particular. Political uncertainties and adverse changes in government
policy do adversely affect industrial growth. Government policy relating to projects,
clearance for foreign collaboration and foreign investment, price and distribution
controls, and listing requirements on stock exchanges and a host of other matters
like import restrictions do affect the performance of companies. The foreign
exchange position and the BOP situation at any time would also indicate the rigours
of govt policy with regard to imports, exports, foreign investment and related
matters.
Various economic factors to consider

Global Business Environment ( political, events, economic conditions)

Global indices (DJIA, NASDAQ, NEKKEI, Hangseng)
Crude Oil prices
Monsoon and Agriculture
Public expenditure (Govt expenditure)
Monetary and Fiscal policy
Political stability
Trends of national Income (GDP,GNP, NNP)
Interest rates (Bank rate, PLR, Deposit rates)
Inflation rates ( CPI, WPI)
Performance of the industrial sector (IIP)
External sector (BOP, Foreign reserve)
Banking sector
Growth in agricultural production
Trends of FII’s investment
Exchange rates ( INR vs US $)
• Market collapsed further after RBI announced the hike in Repo
rate by 50 basis points to 9% and CRR by 25 basis points to 9%,
which will be effective from 30th August 2008.

• Repo rate will be at 9% for the first time since October 2000 and
CRR at 9% for the first time since November 1999.

• The BSE Sensex is trading below 13,800 level and NSE Nifty is
below 4,200 mark.

• The BSE Bank index fell more than 8% and Reality index more
than 6%. Banking, Capital Goods, Reality, Metal and Oil & Gas
stocks are witnessing most of the selling pressure.

• Among the Sensex pack, 28 stocks are trading in red while only 2
are in green.
 Lossers from the BSE are

HDFC Bank Ltd up by (10.04%) at Rs1,013.90 along with

ICICI Bank Ltd (7.99%) at Rs610.45,
Maruti Suzuki (6.81%) at Rs569.00, Reliance Infra (6.79%) at
Rs920.00, HDFC (6.64%) at Rs2,073.90, M&M Ltd (6.52%) at Rs495.00 and
DLF Ltd by (6.12%) at Rs468.90.

BSE Reality index is trading lower by 325.92 points at 4,758.20. Pulling it are
Pheonix Mill trading down by (9.14%) at Rs165.60 along with Indiabull Real by
(8.69%) at Rs262.00, Mahindra Life (7.27%) at Rs438.30, Unitech Ltd by (7.10%)
at Rs155.80 and DLF Ltd by (5.45%) at Rs472.25.

In auto sector Maruti Suzuki is trading lower by (6.83%) at Rs568.95 followed by

M&M Ltd down by 6.48%) at Rs495.40, Tata Motors lower by (5.32%) at
Rs403.70 and Hero Honda Motors down by (3.39%) at Rs735.50.
• Tuesday, the US stock market
ended with significant gain as
consumer confidence rose for the first time since December and the
sharp decline in the crude prices has put some comfort over the ongoing concerns
about the economy.

• On the economic front, the consumer confidence for the month of July
rose by 2% month-over-month to 51.9, the first gain in six months
DJIA surged by 266.48 points to close at 11,397.56. and the NASDAQ
Composite grew 55.40 points to close at 2,319.62.

Among the Dow’s 30 components, 29 components ended in green mainly

led by the financial stocks like Bank of America up by 14.8%.

Crude oil futures for the month of August delivery closed lower
by $2.54 at $122.19 per barrel on New York Mercantile Exchange. The crude
prices have fell to a low of $120.42 during the intraday trading. The crude prices
fell to a three month low after the dollar strengthened its position as against its rival
currencies mainly euro.

The gold prices for the month of August delivery fell by $11.20 to
settle at $916.50 an ounce on the New York Mercantile Exchange. The prices
have fell to a low of $913.80 during the intraday trading. This was backed by the
fall in the crude prices and the strengthening of dollar.
• Sensex = +255points
• Nifty = + 66.5

• TOP GAINNERS ( 30/july/2008)

• HDFC Bank (5.6%)

• Bank Of Baroda (4.86%)
• ICICI bank (3.88)
• Bank Nifty (3.46%)
• S&P, CRISIL: Inflation
over 8.5% Could
Slow India's GDP Growth To 7.8% in
2008-09

• MUMBAI, June 26, 2008-- Indian economy is expected

to be adversely affected by the surge in inflation fuelled
by energy and commodity prices. Higher interest rates
are expected to moderate growth even further.

• Dr. Subir Gokarn, Chief Economist, Standard & Poor's

Asia Pacific, said: "We expect the inflation rate to
average 8.5% to 9.0% during 2008-09. High interest
rates, along with a slowing global economy, will trim GDP
growth to 7.8% in 2008-09.
• Rising inflation, a forecast slowdown in economic growth, and
turmoil in the global financial markets have dampened investor
confidence and led to foreign capital outflow. This has led the rupee,
which was already under pressure from a rising oil import bill, to
depreciate as sharply this year as it appreciated in 2007.

• We expect India's current account deficit to swell to about 2.6% of

GDP. The rupee should remain at about its current level for the major
part of the current financial year, before appreciating to INR41-
41.5/US$ towards the end of the fiscal year, as global market
conditions become more stable and oil prices moderate.

• Fiscal improvements in the past few years are likely to be

reversed this year, due to a surge in oil, fertilizer, and food subsidies.
The central government's fiscal deficit (including off-budget
liabilities) is an estimated 6.2% of GDP, compared with the budgeted
2.5% (excluding off-budget liabilities). The consolidated fiscal deficit
of central government and states should touch 8.5% of GDP.
• Inflation: The global pressure on inflation from primary
commodities and oil, due to supply crunch, is not expected
to ease soon.

• Exchange rate: Indian economy is expected to continue

to attract foreign inflow as it presents an attractive
investment opportunity relative to most other countries. The
RBI will continue to intervene in the market to curb
volatility and will try to maintain the exchange rate at
around Rs 38.5-39.0 a dollar.

• Advances: We expect non-food credit to grow by 21 %

for 2008-09 on concerns of expected slowdown in GDP and
a high interest rate environment, coupled with delays in
capex spends due to high commodity prices.
• Fuel prices and lack of efficiencies causing airlines’
losses

• Industrial growth dips to 3.8% in May 2008

Manufacturing growth 3.9%

• Official statistics released by the ministry of statistics and programme

implementation indicated that the growth in IIP dipped again to 3.8 % in the month
of May 2008 after recovering to 7.0 % in April 2008.

• Overall growth in industrial production would have been even lower had it not been
for the 12.3 % growth in transport equipment and the 31.2 % growth in the
beverages, tobacco & related products group. Chemicals & chemical products was
another sector which put up a healthy performance with a 9.5 % growth during the
month.

• As a result of the 3.8 % growth in May 2008, the cumulative growth in industrial
production for the two months of April-May 2008 stands at 5.02 per cent.
• Inflation inches up to 11.91 per cent and is the
highest inflation witnessed since 1 April 1995.
•