SYBFM-Equity MARKET-II

1
Session-II
















2
Factors affecting share prices

Fundamental analysis in detail

Technical Analysis in detail

Macro Economic factors

Unit-2: Security Analysis And Valuation Of
Securities

Factors affecting share prices
Demand AND SUPPLY
Market Cap
News
Earning/Price Ratio
Another important factor affecting stock price is the
earning/price ratio. This gives you a fair idea of a
companys share price when it is compared to its
earnings. The stock becomes undervalued if the price of
the share is much lower than the earnings of a
company. But if this is the case, then it has the potential
to rise in the near future. The stock becomes overvalued if
the price is much higher than the actual earning.
Bonus share issues

Warrants exercise
With warrants, you have the right to buy shares from a
company after the exercise date at specified price. As a
result, its earnings will be diluted as more shares are
sharing the same earnings pie. In general, the share price
drops the same proportion of the number of exercised
shares. For example, if the exercised share is 10% of the
existing number of shares, the stock price will normally
drops by 10% as well.
Unfortunately, unlike stock split, these factors are diluting
the earnings per share (EPS) of the stock, which in turn will
adjust the share price accordingly. That is why; the stock
price will get affected if any of the events happen. Although
long term investors do not care much about it, stock traders
(esp. swing traders, day trader, and position traders) should
consider these factors seriously.

Take-over or merger

Share buy-back
The act of share buy-back by a company will reduce
the number of share available in the open
market. Due to the law of supply and demand, a
reduction in share available for trading in this case will
cause a drop in supply, this will normally help increase
the share price. Also, the continuing buying back of
share of a company will also acts as a support for the
share price that helps to maintain or increase the
share price. The investors may also see the share
buy-back by company as a confidence booster for
them in the company itself. Therefore, share buy-
back is quite often used as a tool to deliver value to
the investors.

Market Analysis

To begin, let's look at three ways on how you would
analyze and develop ideas to trade the market.
There are three basic types of market analysis:
1. Fundamental Analysis
2. Technical Analysis
3. Sentiment Analysis
There has always been a constant debate as to
which analysis is better, but to tell you the truth, you
need to know all three.

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 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
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
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 Porters 5 Force Model


Threat of New Entrants

The easier it is for new companies to enter the industry, the more cutthroat competition there will
be. Factors that can limit the threat of new entrants are known as barriers to entry. Some examples
include:
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 can place on a business. If one supplier has a large enough
impact to affect a company's margins and volumes, then it holds substantial power. Here are a few
reasons 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 one customer has a large enough impact to
affect a company's margins and volumes, then the customer hold 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 a competitive product or service? If the cost of switching is low,
then this poses a serious threat. Here are 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 firms in an industry. Highly competitive industries
generally earn low returns because the cost of competition 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 of
manufacturing. Meanwhile, the appearance and success of "fabless" chip makers
suggests 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 of large
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 while riding
volatile business conditions.
Valuation of Stock
= +
= +

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.


INTRINSIC VALUE
DIVIDENDS
CAPITAL
APPRECIATIO
N
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 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 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







PRICE
YESTERDAYS BLUE CHIPS EMERGING BLUE CHIPS






EVERGREEN STOCK







NON BLUE CHIPS TURN AROUND STOCK




QUALITY
PRICE QUALITY MATRIX
LQ
HP
HQ
HP
LQ
LP
HQ
LP
MQ
MP
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. Dont 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