Fundamental Analysis

Hitesh SaxenaApeejay 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.

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