Fundamental Analysis

Fundamental Analysis
Intrinsic value depends on the performance of the Economy,Industry and the company Intrinsic Value: What should be the price given the fundamentals

Technical Analysis
Every stock price moves in a particular patterns and the pattern repeats itself Fundamentals of the company have no bearing on the stock prices Head and Shoulders Pattern

Efficient market hypothesis

Market is efficient The stock prices incorporate all publicly available information Strong form of efficiency Weak form of efficiency Semi-strong form of efficiency

Economy Analysis
Analysis of macro economic variables Inter related parameters Also dependent on demographic factors like population,urbanization

Macro economic Analysis:Economy wide factors

GDP GNP NNP Growth rate Interest rates Monsoon Infrastructure facilities Foreign trade,BOP and Exchange rates Government revenue,expenses and deficit Savings and investment Demographic data

Growth rate
Change in GDP Sectoral growth rates: 1)Agriculture 2)Industrial 3)Services

Interest rates
Bank rate PLR(Prime Lending rate) Call market rate High Interest rates depresses companys profitability

Foreign trade,BOP &exchange rates

BOP is a measure of strength of rupee on external account. In other words, BOP=Export-Import Visible and invisible imports In deficit increases, rupee depreciates thereby affecting cost of imports

Forex reserves
Foreign exchange reserves indicate how rapidly the government will have to correct the deficit Forex Reserves: a)FDI b)FII c)Exports

Govt. revenue, Expenses and deficit

Annual Budget Revenue = Expense =>Deficit in budget Total - Total = Current account revenue expense deficit Revenue+ borrowings -expenses=Fiscal deficit Fiscal deficit is always expressed as a % of GDP

Savings and Investment

Growth Investment Savings Saving Patterns Pension funds Indian Economy is highly saving sensitive

Other Indicators
Demographic data Monsoon Infrastructure facilities-Communication, transportation, power etc

Economic Forecasting
Economic Indicators: 1)Leading-Fiscal policy, rainfall, monetary policy, indices, capital investment 2)Coincidental-GNP,Interest rates 3)Lagging-unemployment rate Econometric model building

Industry Analysis
A group of firms that have similar technological structure of production and produce similar products Classification based on: i) Business Cycle ii) Industry Life Cycle

Business Cycle
Classified based on the over all growth of the specific industry 1. Growth industries 2. Cyclical industries 3. Defensive industries 4. Cyclical-Growth industries

Growth Industry
Abnormal high rate of earnings and growth but consistent Independent of Business Cycle Are born as a result of some technological revolution Examples: Telecom , Biotech, IT

Cyclical Industries
Move along with the business cycle Gain more profit in the boom period and most likely to suffer at times of recession Examples: FMCG, consumer durables, steel, cement

Defensive Industries
Defy the Business Cycle These industries do extremely well irrespective of the economy Examples: Utilities, Housing and food items

Cyclical-Growth Industries
At good times, they perform better than the normal business cycle but at bad times, suffer more than normal Examples: Airlines, Automobiles

Industry Life Cycle

Extension of the product life cycle

Stage 1:Pioneering
The product is launched for the first time Very high growth rate Competition based on differentiation High mortality rate No permanent positioning STRATEGY: common investor normally avoids these industries

Stage 2:Expansion
Very few survivors Sales grow at a very fast rate Moderate growth rates Price based competition Many strategic alliances STRATEGY: An ideal investment

Stage 3:Stabilization and Maturity

Stagnation of growth rate Slow increase in sales Large dividends are paid Fear of technology obsolescence and shift in social norms DIFFERENTIATION STRATEGY: best option is to move out

Stage 4:Decline
Low or negative growth of sales Obsolete technology Change in consumer preferences Shift in social norms

Industry Factors
Past sales and earnings performance Cost structure and profitability Permanence Government policy Labor conditions Competitive conditions R&D and pollution standards