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. 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 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 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 The fundamental analysis thus involves 3 steps: Economic analysis Industry analysis Company 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. 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. Growth Rates of National Income Inflation Interest Rates Budget The balance of payment Infrastructure Monsoon Economic and Political Stability 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 The stage of the economic cycle through which a country passes has a direct impact on the performance of industries an

1. Fundamental Analysis
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

2. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

3. 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
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

4. 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
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

5. Fundamental Analysis
• The fundamental analysis thus involves 3 steps:
Economic analysis
Industry analysis
Company analysis
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

6. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

7. 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
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

8. 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
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

9. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

10. 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).
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

11. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

12. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

13. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

14. 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
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

15. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

16. 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 finalizing his investment plans.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

17. 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
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

18. 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.
Dr.R.K.Sudhamathi, Associate Professor, MBA, NGPiTECH

19. 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.

20. 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.

21. 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.
Economic
Indicators
Leading Indicators Lagging Indicators
Coincidental
Indicators

22. 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.

23. 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.

24. 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.

25. 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

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. References
• Donald E. Fischer & Ronald J. Jordan, Security Analysis and Portfolio
Management, PHI Learning, Delhi
• S. Kevin, Security Analysis and Portfolio Management, PHI Learning.
• Punithavathy Pandian, Security Analysis and Portfolio Management,
Vikas Publishing house Pvt. Ltd.