Security Analysis &Portfolio Management

Fundamental Analysis

Prepared By:

S Prashanth
MBA-CMU 13031E0117 JNTUH SMS.

Fundamental Analysis
Fundamental Analysis is to evaluate a lot information about the past performance and the expected future performance of companies, industries and the economy as a whole before taking the investment decision. Such evaluation or analysis is called fundamental analysis.

Fundamental Analysis (cont)

Fundamental analysis is really a logical and systematic approach to estimating the future dividends and share price. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives: To conduct a company stock valuation and predict its probable price evolution, to make a projection on its business performance, to evaluate its management and make internal business decisions, to calculate its risk.

Fundamental analysis includes: Economic analysis Industry analysis Company analysis

Fundamental Analysis
The Analysis of economy, industry and company constitute the main activity in the fundamental approach to security analysis. And can be viewed as different stages in investment decision making process.
Company Analysis Industry analysis

Economy Analysis

Three tier analysis depict that company performance dependent not only on its own effort but also on the general industry and economy factor.

Economy Analysis
Boom Economy:
Income rise and demand for goods will increase the industries and companies in general tend to be prosperous.

Recession Economy:
Income decline and demand for goods will decrease the industries and companies in general tend to be bad performance

Economy analysis (cont)

Growth rates of national income(GRNI) GRNI is an important variable can be calculated by GDP, NNP, and GDP to analysis the growth rate of economy. Four stages of economy or economic cycle i.e depression, recovery, boom and recovery of economy of nation also impact on security performance.

 Depression: At this stage demand is low and

declining inflation often high and so are interest rate, companies usually reduce activities and securities performance is poor.

Recovery: Economy begin to revive after depression,

demand pick up leading, production and activities increase.

Boom: High demand with high investment and

production, companies earn more profit

Recession: Companies slowly begins

downturn in demand, production and employment, profits are also decline.

Inflation:
Inflation prevailing significant impact on company performance. High inflation upset company plan. Demand goes down because purchasing power fall, high inflation impact company performance adversely. Inflation is measured both in WPI (Wholesale price index) CPI (Consumer price index)

Interest Rate
Interest rates determine the cost and availability of credit for companies operating in an economy.
Low interest rate=> easily and cheaply available credit. => lower cost of finance => high profitability High interest rate => higher cost of production =>lower profitability =>Lower demand

Government revenue, expenditure and deficit

Government is the largest investor in economy of any country thus revenue, expenditure and deficit have significance impact on the performance of industries and companies. Expenditure stimulate demand and creates job. The excess of expenditure over revenue is deficit, (budget deficit), most expenditure are spent on infrastructure, and deficit financing fuel inflation.

Exchange rate
The balance of trade in import and export determine the rate of exchange rate. Depreciation of local currency improve the competitive position in foreign market the performance of exported product but it would also make the imported product more expensive. A foreign Exchange reserves is needed to meet several commitments such as payment for import and servicing of foreign depts.

 Development of a economy depends very much on the infrastructure available. Industry needs electricity for its manufacturing activities road and railways to transport raw material and finished good. Communication channels help supplier and customers.
Good infrastructure is symptoms of development. Bad infrastructure lead to inefficiencies, low productivity wastages and delay. Investors should analysis the infrastructure of any economy.

Infrastructure.

Seasonal impact
INDIAN economy depends on agriculture sectors, and services sector. The economy is also depend the performance of agriculture, optimistic forecasting of weather condition will prosper the economy condition. Weather forecasting becomes a matter of great concern for investor in the economy of agricultural country.

Macro Economic Indicator

GDP-annual rate of 4.70% 3rd & 4th quarter of 2013 Inflation rate:-last reported 6.73 % in FEB2014 Interest Rate:-reverse repo rate is adjusted to 7.0 %. Trade deficit $138.0 Billions in April-2014 Tax rate India 30% ,less than Spain , France etc Saving rate -35.7%

Infosys Ratios
YEAR RATIOS: Current Ratio 2011 4.28 2012 4.71 2013 3.30

Quick Ratio
Gross Profit Ratio Net Profit Ratio

4.20
31.04 26.31

4.67
30.66 27.52

3.28
28.23 27.37

Asset Turnover Ratio

Dividend Per Share Ratio Reported EPS

5.59
25.00 101.30

3.39
23.50 101.58

3.47
33.25 78.15

Indian IT Industry
The IT-BPO industry is estimated to aggregate revenues of US$ 108.1 billion in FY2013, with the IT software and services industry accounting for US$ 89.7 billion of revenues. Accounts for a 5.19% of the country's GDP Direct/indirect employment to 2.3 million people 2.3 million employment India's outsourcing industry is expected to increase to US$225 billion by 2020

Porter 5 forces
Threat of Substitutes:(Medium)
Other offshore locations e.g Philippines Price of projects is a major differentiator, the quality of products being same.

RIVALRY AMONG FIRMS: High

'low-cost, little-differentiation positioning. high industry growth Strong competitors few numbers of large companies.

Bargaining Power of Supplier: (high) -Availability of vast talent pool- freshers and experience. Bargaining Power of Customers (very high) Large number of IT Companies vying for IT Projects and Decline in IT Expenditure. Barriers To Entry: (low) Large Value Chain & Low Capital Requirements.

Recommendation
Intrinsic value =EPS*(P/E Ratio) EPS=101.30 P/E Ratio=32.42
Intrinsic value=3284.14 Market Value=3254.10

-Market Value>Intrinsic value Buy shares of infosys