This document summarizes a presentation on financial analysis and the practitioner's approach to analyzing companies. It discusses ratio analysis, comparing liquidity and profitability ratios across companies and over time. It also addresses factors such as business risk, valuation metrics, market dynamics, and qualitative assessments that are important to consider beyond just ratios. The presentation emphasizes taking a holistic view and considering both quantitative and qualitative factors to make informed investment decisions.

1. Practictioners’ Approach to
Financial Analysis
MFC, DFS
University of Delhi, South Campus
September 19, 2009
Important Disclosure: All data, information, examples discussed here for academic purpose only. Nothing contained in this document should be
construed as an offer to buy or sell any securities.
Ashok Jainani
Khandwala Securities Limited
MUMBAI - 400 0023

2. Contents
• Introduction
• Approach to Ratio Analysis
• Innovation
• What Works
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3. It’s all your position
From where you look
>
>
>
>
Mind takes shortcuts
Anchors guide your outlook
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4. What Do These Figures Say
• Jay Bharat Textile Ltd INR Cr FY2008 FY2009
• Market Cap ~ 14,000 Cr Revenue 424 488
• Owner Comment: Cautious PAT 33 27
• RNRL INR Cr FY2008 FY2009
• Market Cap ~ 14,500 Cr Revenue 367 417
• Court Case Continues PAT 69 70
Don’t Understand, AVOID
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5. Who Decides Right Value
• Company
• Shareholder
• Fund Manager
• Analyst
• None of the Above
• Valuations don’t always drive prices
• Liquidity – Financial (flows), Market (volumes) MMTC
• Fundamentals over long term, what about short term
• Technicals – shadow, not determinant but anchor projections
• Sentiment
• Market Dynamics
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6. Inflation
15 (%) Inflation YoY WPI Index (RHS) 250
12
240
9
6 230
3
220
0
-3 210
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09
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7. Financial Statement Analysis
• Financial Statements
• A Possible Framework for Analysis
• Ratio Analysis
• Trend Analysis
• Bondholders -- Focus on long-term cash flow of the firm
• Shareholders -- Focus on profitability and long-term health
of the firm
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8. Frame Work for Financial Analysis
Health of a Firm
Financial Ratios
Analysis of the financial 1. Individually
condition and profitability 2. Over time
of the firm. 3. In combination
4. In comparison
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9. Frame Work for Financial Analysis
Business risk relates to the risk
inherent in the operations of
Analysis of business risk the firm.
of the firm.
Examples:
– Volatility in sales
– Volatility in costs
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10. Liquidity Ratio Comparisons
Current Ratio
Year MW Industry
2008 2.39 2.15
2007 2.26 2.09
2006 1.91 2.01
Ratio is stronger than the industry average
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11. Liquidity Ratios
Acid-Test (Quick)
Balance Sheet Ratios
Current Assets - Inventory
Liquidity Ratios Current Liabilities
Shows a firm’s ability to For Market Wonders
meet current liabilities with December 31, 2008
its most liquid assets.
1,195 – 696
= 1.00
500
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12. Liquidity Ratios Comparison
Acid-Test Ratio
Year MW Industry
2008 1.00 1.25
2007 1.04 1.23
2006 1.11 1.25
Ratio is weaker than the industry average
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13. Summary: Liquidity Ratios
Comparison
Ratio MW Industry
Current 2.39 2.15
Acid-Test 1.00 1.25
• Strong current ratio and weak acid-test ratio indicates a
potential problem in the inventories account.
• Note that this industry has a relatively high level of
inventories.
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14. Summary: Liquidity Trend Analysis
• The current ratio for MW has been rising at the same time
the acid-test ratio has been declining.
• The current ratio for the Industry has been rising slowly at
the same time the acid-test ratio has been relatively stable.
• This indicates that Inventories are a significant problem for
MW.
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15. Activity Ratio Comparison
Inventory Turnover Ratio Total Asset Turnover Ratio
Year MW Industry Year MW Industry
2008 2.30 3.45 2008 1.02 1.17
2007 2.44 3.76 2007 1.03 1.14
2006 2.64 3.69 2006 1.01 1.13
MW has a very poor inventory MW has a weak total asset turnover
turnover ratio ratio.
Why is this ratio considered weak?
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16. Profitability Ratio Comparison
Gross Profit Margin (%) Net Profit Margin (%)
Year MW Industry Year MW Industry
2008 27.7 31.1 2008 4.1 8.2
2007 28.7 30.8 2007 4.9 8.1
2006 31.3 27.6 2006 9.0 7.6
MW has a weak Gross Profit MW has a poor Net Profit Margin.
Margin.
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17. Profitability Ratio Comparison
Return on Investment (%)
Year MW Industry
2008 4.2 9.8
2007 5.0 9.1
2006 9.1 10.8
MW has a poor Return on Investment.
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18. Which figure is the trigger
for buy or sell decision
• Just Strong bottom line doesn’t tell truth,
– What is also required
• Sustainability of PAT growth
• Elements of bottom line
• Future outlook of the industry/company
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19. Double Check
• Power Cost Up
• Transport Cost Down
• Volumes Flat, Revenue Up
• What does it mean ?
• Price inflation, but power/freight don’t match
• Inventory Clearance, again don’t match
• Are goods actually moving ?
• Power/Diesel cost pilferage
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20. What Is A Good Buy
Which is a good buy, company 1 or 2?
P/E P/S
Company 1 15.7 2.0
Company 2 20.4 3.9
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21. A Good Buy or Good Bye
• Now look at the big picture
P/E P/S Cash/ EV/ EBITDA ROCE ROE
Share EBITDA (%) (%) (%)
Company 1 15.7 2.0 17 9.2 20.2 41.1 25.5
Company 2 20.4 3.9 22 6.9 25.8 45.0 37.8
• Ratio needs to be seen from
– different angles
– wider perspective
– compared on different performance parameters
– in combination of other ratios and industry standards
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22. No, We are TATA
• Company 1 – HCL
• Company 2 – TCS
• What is beyond Fundamental – Market Reputation of TATA
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23. PE – Fair or Mean
10 yr CAGR (%) 15.0 18.0
Discount Rate (%) 10.0 9.0
Current EPS (INR) 100.0 100.0
Target Yr EPS (INR) 351.8 443.5
Dis ValCum EPS (INR) 1,231.0 1,411.5
PE 12.3 14.1
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24. Is Investing Simple ?
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25. Investing is Simple
• Will this Company be there after ten Years?
• Will this Company make more profit in future than
What is making today???
• Good Company not necessarily a Good Investment
• HUL – Good Company, Bad Stock
• Good Investment in Bad Market
- RIL (’92), Infy (’00)
• Bad Investment in Good Market
- HFCL, Pentamedia
• Bad Investment in Bad Market, …
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26. Where do they go?
Year Cos Listed New Listings
1992-93 2,861 868
1993-94 3,585 983
1994-95 4,702 1,548
1995-96 5,603 1,591
1996-97 5,832 801
1997-98 5,853 89
1998-99 5,849 33
1999-00 5,815 69
2000-01 5,869 128
2001-02 5,782 6
2002-03 5,650 5
2003-04 5,528 35
2004-05 4,731 51
2005-06 4,781 128
2006-07 4,821 114
2007-08 4,887 111
-982 578
Source: BSE, SEBI 2008 Handbook, Companies listed on BSE
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27. Is It So
• Hind Motors - Maruti Suzuki
• Usha Steel, Rajinder Steel - Tata Steel
• Infosys Technologies - Pentamedia Graphics
• Centurion Bank, Bank of Punjab - ICICI Bank
• E and I same for all, value of C
• Management, Vision, Capability
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28. Hero Honda vs LML
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29. Where’s The Treasure ?
• Top Down or Bottom up
• Current situation
• Financial crisis required the all the analyst to revise their economic
outlook resulting in revision of valuations (de-rating)
• If with the particular news about the company or changes in the
company it becomes attractive- you adopt CIE
• Can we believe politicians
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30. News or Noise
• EIC –50%-30%-20%
• Company should be given more importance
– More frequent company news cause movement in stock prices
• To factor in only the important news
– Company valuations do no change frequently unless very important
– All important news needs to be viewed from long term perspective
• Stock prices fluctuate continuously due to sentiments
- Essar Oil 50% up (6th Apr ‘09) – rumours of likely delisting
– RNRL 26% up (11th Dec ‘08) - court verdict
– RNRL rose 15% on (15th Jun’09) - due to high court verdict, which
was only the temporary change in the fundamental, as the case is still
pending
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31. Key Differentiators
Banking, FSI IT Telecom Auto Metals Power Cap Goods
RoE (%) RoE RoE RoE RoE RoE RoE
ROA (%) RoCE RoCE RoCE RoCE RoCE RoCE
P/ABV P/E P/E P/E Cash/Share ##AR/Ton ^ PEG
NIM (%) P/S ARPU P/BV #NR/Ton EV/ EBITDA @OB/S
*Credit/Inds (%) EBITDA (%) EV/ EBITDA EBITDA (%) EBITDA (%) EBITDA (%) EBITDA (%)
Cost/Income (%) EV/ EBITDA EV/ Subscriber ***D/ EBITDA *** D/ EBITDA ***D/ EBITDA ***D/ EBITDA
Net NPA (%) Cash/Share **VAS (%) EV/ EBITDA EV/ EBITDA ###N/Cton EV/ EBITDA
Note: * O/S Credit Book/Total Industry Credit
** Revenue from Value Added Services as a Percentage of Total Revenue
*** Number of times of Operating Cashflows excluding working capital changes that covers the outstanding
debt
# Net Realization / ton
## Average Realization / KW
### Replacement Cost ( EV/MW)
^ (P/E)/ Expected 1 year forward growth rate
@ Order Book/ Sales
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32. Innovation
75 (%) SBI ICICI
60
45
30
15
0
Mar-07 Dec-07 Sep-08 Jun-09
Cap/Credit 63 17
32 12
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33. Sensex/Gold Ratio
0.80 Sensex/Gold Sensex (RHS) 20,000
0.60 15,000
0.40 10,000
0.20 5,000
0.00 0
Apr-92 Aug-96 Dec-00 Apr-05 Aug-09
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34. What Works On Dalal Street
• Big Numbers Miss Real Figures
• GDP, IIP, corporate sales, and EBIDA margin have very low
correlation with Sensex gyrations
• It’s the liquidity – real juice and the interest rate differential - that
determine the market pulse
• Honesty: Transparency, Unbiased, Responsibility for Actions
• Consistency: Job knowledge and consistency of performance
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35. Thank You
Important Disclosure: All data, information, examples discussed here for academic purpose only. Nothing
contained in this document should be construed as an offer to buy or sell any securities.
Khandwala Securities Limited 34
September 2009