1. Fundamental Analysis
 Fundamental analysis is really a logical and
systematic approach to estimating the future
dividends and share price.
 It is based on the basic premise that share price
is determined by a number of fundamental factors
relating to the economy, industry and company.
 It is a detailed analysis of the fundamental factors
affecting the performance of companies.
 Each share is assumed to have an economic
worth based on its present and future earning
capacity. This is called its intrinsic value or
fundamental value.

2. Fundamental Analysis
 The purpose of fundamental analysis is to
evaluate the present and future earning
capacity of a share based on the economy,
industry and company fundamentals.
 The investor can compare the intrinsic value
of the share with the prevailing market price to
arrive at an investment decision.
 If the market price of the share is lower than
the its intrinsic value, the investor would
decide to buy the share as it is underpriced.
 The price of such a share is expected to move
up in future to match with its intrinsic value.

3. Fundamental Analysis
 When the market price of a share is
higher than its intrinsic value, it is
perceived to be overpriced.
 The market price of such share is
expected to comedown in future.
 The investor would decide to sell such a
share.

4. Economy-Industry-Company
Analysis Framework
 The analysis of economy, industry and
company fundamentals constitute the main
activity in the fundamental approach to
security analysis.
 The logic of this three tier analysis is that
the company performance depends not
only on its own efforts, but also on the
general industry and economy factors.
 The multitude of factors affecting the
performance of a company can be
classified as

5. Economy-Industry-Company
Analysis Framework
 Economy-wide factors such as growth rate
of the economy, inflation rate, foreign
exchange rates, etc. which affect all
companies.
 Industry-wide factors such as demand-
supply gap in the industry, the emergence
of substitute products, changes in
government policy relating to the industry.
 Company-specific factors such as the age
of its plant, the quality of management,
brand image of its products, its labour-
management relations, etc.

6. Steps in Fundamental Analysis
 Economic Analysis
 Industry Analysis
 Company Analysis

7. Economic Analysis
 The performance of a company depends
on the performance of the economy.
 If the economy grows rapidly, the industry
can also be expected to show rapid growth
and vice versa.
 When the level of economic activity is low,
stock prices are low, and when the level of
economic activity is high, stock prices are
high reflecting the prosperous outlook for
sales and profits of the firms.

8. Economic variables
 A study of these economic variables would give an idea
about future corporate earnings and the payment of
dividends and interest to investors.
 The following are the some of the key economic variables
that an investor must monitor as part of his fundamental
analysis.
1. Growth Rates of National Income
2. Inflation
3. Interest Rates
4. Budget
5. The balance of payment
6. Infrastructure
7. Monsoon
8. Economic and Political Stability

9. Growth Rates of National
Income
 GNP (Gross national product), NNP (Net
national product) and GDP (Gross domestic
product) are the different measures of the total
income or total economic output of the country
as a whole.
 The growth rates of these measures indicate
the growth rate of the economy.
 The estimate of GNP, NNP and GDP and their
growth rates are made available by the
government from time to time.
 An economy typically passes through different
phases of prosperity known as the different
stages of the economic or business cycle.

10. Growth Rates of National
Income
 The stage of the economic cycle
through which a country passes has a
direct impact on the performance of
industries and companies.
 While analysing the growth rate of the
economy, an investor would do well to
determine the stage of the economic
cycle through which the economy is
passing and evaluate its impact on his
investment decision.

11. Inflation
 Inflation prevailing in the economy has
considerable impact on the performance of
companies.
 High rates of inflation in an economy are likely
to affect the performance of companies
adversely.
 Industries and companies prosper during
times of low inflation.
 Inflation is measured both in terms of
wholesale prices through the wholesale price
index (WPI) and in terms of retail prices
through the consumer price index (CPI).

12. Interest Rates
 Interest rates determine the cost and
availability of credit for companies
operating in an economy.
 A low interest rate stimulates investment
by making credit available easily and
cheaply.
 It implies lower cost of finance for
companies and thereby assures higher
profitability.
 Higher interest rates result in higher cost
of production which may lead to lower
profitability and lower demand.

13. Interest Rates
 The interest rate in the organised sector
of the economy are determined by the
monetary policy of the government and
the trends in the money supply.
 An investor has to consider the interest
rates prevailing in the different segments
of the economy and evaluate their
impact on the and profitability of
companies.

14. Budget
 The budget draft provides an elaborate
account of the government revenues
and expenditures.
 A deficit budget may lead to high rate of
inflation and adversely affect the cost of
production.
 Surplus budget may result in deflation.
 Hence, balanced budget is highly
favorable to the stock market.

15. The balance of payment
 The balance of payment is the record of
a country’s money receipt from and
payments abroad.
 The difference between receipts and
payments may be surplus or deficit.
 Balance of payment is a measure of the
strength of rupee on external account.
 If the deficit increases, the rupee may
depreciate against other currencies,
thereby, affecting the cost of imports.

16. The balance of payment
 The industries involved in the export
and import are considerably affected by
the changes in foreign exchange rate.
 The volatility of the foreign exchange
rate affects the investment of the FII in
the Indian stock market.

17. Infrastructure
 The development of an economy depends
very much on the infrastructure available.
 The availability of infrastructural facilities
such as power, transportation and
communication systems affects the
performance of companies.
 An investor should assess the status of the
infrastructural facilities available in the
economy before finalising his investment
plans.

18. Monsoon
 The performance of agriculture to a
very great extent depends on the
monsoon.
 The adequacy of the monsoon
determines the success or failure of the
agricultural activities in India.
 The progress and adequacy of the
monsoon becomes a matter of a great
concern for an investor in the Indian
context.

19. Economic and political stability
 A stable political environment is
necessary for steady and balanced
growth.
 Stable long-term economic policies are
needed for industrial growth.
 A stable government with clear cut long-
term economic policies will be conducive
to good performance of the economy.

20. Economic Forecasting
 Economy analysis is the first stage of
fundamental analysis and starts with an
analysis of historical performance of the
economy.
 Investment is a future-oriented activity, the
investor is more interested in the expected
future performance of the overall economy
and its various segments.
 For this, forecasting the future direction of
the economy becomes necessary.
 Economic forecasting becomes a key
activity in economy analysis.

21. Economic Forecasting
 The central theme in economic forecasting
is to forecast the national income with its
various components.
 GNP is a measure of the national income.
 It is the total value of the final output of
goods and services produced in the
economy.
 It is a measure of the total economic
activities over a specified period of time
and is an indicator of the level and rate of
growth of economic activities.

22. Economic Indicators
 The economic indicators are factors that
indicate the present status, progress or
slowdown of the economy.
 They are capital investment, business
profits, money supply, GNP, interest
rate, unemployment rate, etc.
 The economic indicators are grouped
into leading, coincidental and lagging
indicators.

23. Leading Indicators
 The leading indicators indicate what is
going to happen in the economy.
 It helps the investor to predict the path
of the economy.
 The popular leading indicators are the
fiscal policy, monetary policy,
productivity, rainfall, capital investment
and the stock indices.

24. Coincidental Indicators
 The coincidental indicators indicate what
the economy is.
 The coincidental indicators are gross
national product, industrial production,
interest rates and reserve funds.
 GDP is the aggregate amount of goods
and services produced in the national
economy.
 The gap between the budgeted GDP and
the actual GDP attained indicates the
present situation.

25. Lagging Indicators
 The changes that are occurring in the
leading and coincidental indicators are
reflected in the lagging indicators.
 Lagging indicators are identified as
unemployment rate, consumer price
index and flow of foreign funds.

26. Forecasting Techniques
 Economic forecasting may be carried out for
short-term periods (up to three months),
intermediate terms periods (three to five years)
and long-term periods (more than five years).
 An investor is more concerned about short-
term economic forecasts.
 Some of the techniques of short-term
economic forecasting are discussed below:
1. Anticipatory Surveys
2. Barometric or Economic Indicator Approach
3. Econometric Model Building
4. Opportunistic Model Building

27. Anticipatory Surveys
 Anticipatory surveys are the surveys of
intentions of people in government,
business, trade and industry regarding their
construction activities, plant and machinery
expenditures, level of inventory, etc.
 Such surveys may also include the future
plans of consumers with regards to their
spending on durables and non-durables.
 Based on the results of these surveys, the
analyst can form his own forecast of the
future state of the economy.

28. Econometric Model Building
 This is the most precise and scientific of the different
forecasting techniques.
 This technique makes use of Econometrics.
 Econometrics is a discipline that applies
mathematical and statistical techniques to economic
theory.
 In the economic field we find complex
interrelationship between the different economic
variables.
 The precise relationship between the dependent and
independent variables are specified in a formal
mathematical manner in the form of equations.

29. Econometric Model Building
 In applying this technique, the analyst is
forced to define clearly and precisely the
interrelationship between the economic
variables.
 Econometric models used for economic
forecasting are generally complex.
 Vast amounts of data are required to be
collected and processed for the solution of
the model.
 This may cause delay in making the
results available.

30. Opportunistic Model
Building
 This is one of the most widely used forecasting
techniques.
 It is also known as GNP model building or
sectoral analysis.
 Initially, an analyst estimates the total demand
in the economy, and based on this he
estimates the total income or GNP for the
forecast period.
 This initial estimate takes into consideration
the prevailing economic environment such as
the existing tax rates, interests rates, rate of
inflation, fiscal policies, etc.

31. Opportunistic Model
Building
 After initial forecast is arrived at, the analyst
now begins building up a forecast of the GNP
figure by estimating the levels of various
components of GNP such as consumption
expenditure, gross private domestic
investment, government purchase of goods
and services and net exports.
 The two GNP forecasts arrived at by two
different methods will be compared and
necessary adjustments will be made.
 This model building approach makes use of
other forecasting techniques to build up the
various components.

32. Industry Analysis
 Industry analysis refers to an evaluation
of the relative strengths and
weaknesses of particular industries.
 An industry is generally described as a
homogenous group of companies.
 An industry is a group of firms that have
similar technological structure of
production and produce similar
products.

33. Industry Classification
 Industries can be classified on the basis
of the business cycle.
 They are classified into growth, cyclical,
defensive and cyclical growth industry

34. Growth Industry
 The growth industries have special
features of high rate of earnings and
growth in expansion, independent of the
business cycle.
 The expansion of the industry mainly
depends on the technological change.
 In every phase of the history certain
industries like colour televisions,
pharmaceutical and telecommunication
industries have shown remarkable growth.

35. Cyclical Industry
 The growth and profitability of the industry
move along with the business cycle.
 During the boom period they enjoy growth
and during depression they suffer a set
back.
 For example Refridgerator, washing
machine and kitchen range products
command a good market in the boom
period and the demand for them slackens
during the recession.

36. Defensive Industry
 Defensive industry defies the movement
of the business cycle.
 Food and shelter are the basic
requirements of humanity.
 The food industry withstands recession
and depression.
 The stocks of the defensive industries
can be held by the investors for income
earning purpose.

37. Cyclical growth Industry
 This is a new type of industry that is
cyclical and at the same time growing.
 Automobile industry experiences
periods of stagnation, decline but they
grow tremendously.
 The changes in technology and
introduction of new models help the
automobile industry to resume their
growth path.

38. Industry Life Cycle
 The industry life cycle theory is generally
attributed to Julius Grodensky.
 The life cycle of the industry is
separated into four well defined stages
such as
1. Pioneering stage
2. Rapid growth stage
3. Maturity and stabilisation stage
4. Declining stage

39. Pioneering stage
 The prospective demand for the product
is promising in this stage and the
technology of the product is low.
 The demand for the product attracts
many producers to produce the
particular product.
 There would be severe competition and
only fittest companies survive this stage.
 The producer try to develop brand
name, differentiate the product and

40. Rapid growth stage
 This stage starts with the appearance of
surviving firms from the pioneering
stage.
 The companies that have withstood the
competition grow strongly in market
share and financial performance.
 The technology of the production would
have improved resulting in low cost of
production and good quality products.
 The companies have stable growth rate
in this stage and they declare dividend
to the shareholders.

41. Rapid growth stage
 It is advisable to invest the shares of
these companies.
 In this stage the growth rate is more
than the industry’s average growth rate.

42. Maturity and stabilisation stage
 In the stabilisation stage, the growth
rate tends to moderate and the rate of
growth would be more or less equal to
the industrial growth rate or GDP growth
rate.
 To keep going, technological
innovations in the production process
and product should be introduced.
 The investors have to closely monitor
the events that take place in the maturity
stage of the industry.

43. Declining stage
 In this stage, demand for the particular
product and the earnings of the companies
in the industry decline.
 Innovation of new products and changes
in consumer preferences lead to this stage.
 The specific feature of the declining stage
is that even in the boom period, the growth
of the industry would be low and decline at
higher rate during the recession.
 It is better to avoid investing in the shares
of the low growth industry even in the

44. Factors to be considered
 Apart from industry life cycle analysis,
the investor has to analyse some other
factors too. They are as follows
1. Growth of the industry
2. Cost structure and profitability
3. Nature of the product
4. Nature of the competition
5. Government policy
6. Labour
7. Research and development

45. Company Analysis
 Company analysis deals with the
estimation of return and risk of individual
shares.
 This calls for information.
 Information regarding companies can be
broadly classified into two broad group:
internal and external.
 Internal information consists of data and
events made public by companies
concerning their operations.
 The internal information sources include
annual reports to shareholders, public and
private statements of officers of the
company, the company’s financial

46. Company Analysis
 External sources of information are
those generated independently outside
the company.
 In company analysis, the analyst tries to
forecast the future earning of the
company.