Fundamental analysis
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Fundamental analysis

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Fundamental analysis Fundamental analysis Presentation Transcript

  • 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
  • Padmini Srinivasan © iimb Financial Statements Accounting System Measurement & Reporting Business Activities Operating Investment Financing Accounting Environment Capital Market Structure, GAAP,Audit, &Legal system Business Environment Labor Market Capital Market Product Market: Suppliers Customers Accounting Strategy Choice of: Accounting Policy Reporting Format Supplementary- Disclosures Business Strategy Key factors And Risk From Business Activities to Financial Statements
  • 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