Fundamental analysis

Padmini Srinivasan

Padmini Srinivasan © iimb

Padmini Srinivasan
 Types of analysis
• Technical Analysis
– Charting
• Patterns in Price Behaviour or volume history
• Predict future price movement

• Fundamental analysis
– Determining value without price
– Analyzing and Interpreting the fundamentals

Padmini Srinivasan © iimb

Padmini Srinivasan
 Research analysis
• Economic Wide factors = 30 - 35 %
• Industry factors = 15 - 20%
• Company Factors = 30 - 35%
• Others = 15 - 20%

Padmini Srinivasan © iimb

 Fundamental analysis
• Understanding the Economic Environment
• Analyzing the Industry
• Assessing the projected performance of
the Company

• (One must hone the skill needed for the

above)
Padmini Srinivasan © iimb
 Economic Environment
• Global economic scenario
• Central Government Policy
– Key Variables
– Growth rate of GDP
– Industrial Growth rate,
– Agriculture and Monsoon,
– Savings and investments,
– Price level and inflation,
– Interest rates
– Infrastructure facilities

Padmini Srinivasan © iimb

 Industry analysis
• Analyze the prospects of each industry
• Difficult to forecast the future
• Consists of 4 parts
– Sensitivity to the business cycle
– Industry life cycle analysis
– Structure and characteristics
– Profit Potential of the industry

Padmini Srinivasan © iimb

Padmini Srinivasan
 Industry analysis
• Sensitivity to the business cycle
– Eg: Auto industry vs Pharmaceutical
• Industry life cycle analysis
– What stage of industry eg Start phase, growth
phase, maturity or decline stage
• Structure and characteristics
– Profit Potential of the industry

Padmini Srinivasan © iimb

Padmini Srinivasan
 Industry analysis
• Structure and characteristics
– Nature of competition
– Demand Prospects
– Technology and research
• Profit Potential of the industry
– Porter: Threat of new entrants, Rivalry among
existent firms, substitute products , bargaining
power of buyers and sellers

Padmini Srinivasan © iimb

Padmini Srinivasan
 Fundamental Analysis
• To determine the valuation of the share,
the analyst must forecast earnings,
dividend and the appropriate discount rate
• Earnings potential and the risk are linked
to the prospects of the industry and the
developments in the macro economy

Padmini Srinivasan © iimb

 From Business Activities to Financial Statements

Business
Environment Business
Business Strategy
Labor Market
Activities Key factors
Capital Market
Operating And Risk
Product Market:
Investment
Suppliers
Financing
Customers

Accounting Accounting Strategy

Accounting System Choice of:
Environment Measurement Accounting Policy
Capital Market & Reporting Format
Structure, Reporting Supplementary-
GAAP,Audit, Disclosures
&Legal system

Financial
Statements
Padmini Srinivasan © iimb
 4 Step Process of analysis
• Strategy analysis
• Accounting analysis
• Financial analysis
• Prospective Analysis (Growth etc)

Padmini Srinivasan © iimb

 others
• Order positions
• Regulatory framework
• Technology capabilities
• HR
• Evaluation of management “mark of a
good management is not how it runs its
business but how it changes them”

Padmini Srinivasan © iimb

Padmini Srinivasan
 Company Analysis
• Important parameters for analysis
– EPS of the coming years
– And a reasonable earnings multiple, given the
growth prospects, risk exposure and other
characteristics of the firm
• For this we need historical data
– Of Earnings, Growth, Risk and Valuation

Padmini Srinivasan © iimb

Padmini Srinivasan
 Earnings Level
• Return of Equity
– Equity Earnings
Net worth

Denoting the earnings for the shareholder

Padmini Srinivasan © iimb

Padmini Srinivasan
 Earnings analysis
• ROE can be decomposed into

• PAT X Sales X Asset

Sales Assets NW(SC+RS)
• PBIT X Sales X PBT X PAT X Asset
Sales Assets PBIT PBT Equity
Op. eff Asset eff, int , tax, Leverage

Padmini Srinivasan © iimb

Padmini Srinivasan
 Other important calculations
• Book Value of the share
– Paid up capital / number of shares
• Earnings per share
PAT / number of Equity shares
• Dividend Payout
– Equity Dividend / PAT
• Dividend per share
• Growth performance of sales and EPS(CAGR)
• Look out for Beta

Padmini Srinivasan © iimb

Padmini Srinivasan
 Growth
• Look at Growth : Compounded annual
growth rate
• Sustainable growth rate without Loans:
= ROE X retention ratio
where retention ratio = ( PAT – Dividend) / PAT

Using this model: we can estimate the stock price

as
Padmini Srinivasan © iimb
 Stock Price Model 1
• If Rs. 2 per share is the dividend and 15%
is ROE and .6 is the retention ratio,
estimate the share price ?
• Price = Div per share / ROE – Growth rate
• = 2 / (.15 -.06) = Rs. 22.22

• Useful for sensitivity analysis

Padmini Srinivasan © iimb

 Intrinsic value using PE Ratio
• Estimate the future EPS
• Based on correct forecasting of the PAT in the
future based on growth assumptions etc)
• Establish a PE multiple
– based on last years earnings or trailing 12 month PE
or based on some expected earnings also look out for
similar companies PE
• Projected EPS X Projected PE = Value Anchor
• Always give a range

Padmini Srinivasan © iimb

 Strategy for identifying securities

• Intrinsic Value > Market Value Buy

• Intrinsic Value < Market Value Sell

• Intrinsic Value = Market Value Hold

Padmini Srinivasan © iimb

Padmini Srinivasan
 Some keys to investing
• Establish Value Anchors
• Assess the market Price behaviour (Psychology)
• Combine fundamental and technical analysis
• Develop sound strategies for growth stocks
• Beware of games operators play
• Take Swift corrective action ie keep stop loss
• Have discipline
– Source: Investment Analysis and Portfolio Management by
Prasanna Chandra

Padmini Srinivasan © iimb

Padmini Srinivasan
 Thanks
Any Questions

Padmini Srinivasan © iimb