CLASS – BBA5

SUBJECT:- Investment Management

UNIT-04

Topic:- Fundamental Analysis

Analysis :- Analysis involves researching and evaluating a security or an industry to predict its
future performance and determine its suitability to a specific investor .

Meaning of 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 factor relating to the economy ,industry and company.
Hence the economy a fundamental , industry fundamental and company fundamental have to be
considered while analysing a security for investment purpose. fundamental analysis is in other
words, a detailed analysis of the fundamental factor affecting the performance of company.
Each share is assumed to have an economic worth based on its present and future earning
capacity.

EIC Analysis Framework :-

The analysis of economy , industry and company fundamentals constitute the main activities in
the fundamental approach to security analysis. The multitude of factors affecting the performance
of a company can be broadly classified as :-

1. Economy :- Factors such as growth rate of the economy, inflation rate , foreign exchange
rate, etc which affect all companies .
2. Industry :- Factors such as demand supply gap in the industry , the emergence of
substitute products , changes in government policy relating to the industry , etc .
3. Company :- Factors such as the age of its plant, the quality of management , brand image
of its product , its labour management relations etc.

Fundamental Analysis thus involves three steps :-

1) Economy Analysis
2) Industry Analysis
3) Company Analysis

Economic Analysis:-

The performance of a company depends on the performance of the economy ,if economy is
booming income rise ,demand for good increases ,hence the industry and companies in general
tend to be prosperous .on the other hand, if the economy is in recession the performance of the
company will be generally bad.

Characteristics of economic Analysis:-

 1. Growth rates of national income :-
The rate of growth of the national economy is an important variable to be considered by
an investor GNP( gross national product) NNP(net national product) and GDP (gross
domestic product) are the different measure of the total income of total economic output
of the country as a whole the growth rate of these measures indicate the growth rate of
the economy.

2. Depression :-
Depression is the worst of the four stages during a depression, demand is low and
declining inflation is often high and so are interest rate companies are forced to reduce
production shut down plant and lay of workers.

3. Inflation:-
inflation prevailing in the economy has considerable impact on the performance of
companies higher rate of inflation upset business plan ,lead to cost escalation and result
in a squeeze on profit margin. This will result in lower demand for products. High rate of
inflation in an economy are likely to affect the performance of companies adversely
industries and companies customer during time of low inflation.

4. Interest rates:-
Interest -rate determine the cost and availability of credit for companies operating in an
economy. The interest-rate in the organised financial sector of the economy are
determined by the monetary policy of the government and the trend in money supply.

5. Infrastructure :-
set development of an economy depends very much on the infrastructure available
industry need electricity for its manufacturing activity roads and railways to transport ,
raw material and finished good communication channels to keep in touch with suppliers
and customer.

Economic Forecasting :-
Economy analysis is the first stage of fundamental analysis and start with an analysis of historical
performance of the economy. But as investment is a future oriented activity .The investor is more
interested in the expected future performance of the overall of the economy and in the various
segments economic. forecasting does become a key activity in economy analysis
There are various forecasting techniques :-

1. Anticipatory survey:-
Anticipatory survey are the surveys of intention of people in government ,business, trade
and industry regarding their construction activity plant and machinery expenditures level
of inventory etc. such survey may also include the future plans of consumers with regard
to their spending on durable and non-durable ,based on the result of the survey the
analysis scan form is on forecast of the future state of the economy.

2. Barometric or indicator approach:-

In this approach to economic forecasting various types of indicator our study is to find out
how the economy is likely to perform in the future these indicator a time-series data of
certain economic variables the indicators are classified into leading and lagging indicator.

3. Econometric Model Building :-

 This is the most precise and scientific of the different forecasting techniques . This
technique makes use of econometrics , which is a discipline that applies mathematical and
statistical technique economic theory.
econometric models used for economic forecasting and generally complex the accuracy of
the forecast derived from this technique would depend on the validity of the assumption
made by the analysis regarding economic interrelationship of the quality office input data.

4. Opportunistic Model Building :-

This is the most widely forecasting technique it is also known as GNP model building a
sectorial analysis.
The two GNP forecast arrived by two different method will be compared and necessary
adjustment will be made to bring the two forecast into line with each other.

TOPIC:- Industry Analysis

Meaning of Industry Analysis:-

Industry analysis is an assessment tool that is used to understand the

different dynamics of a certain market or industry. In other words,
conducting an industry analysis enables companies to understand and get
a feel about what is happening in an industry. This could involve:

• Understanding the pace of technological advancement in the industry .

• Understanding the impact of major competitors on the industry.

Types of Industry Analysis:-

There are various models that are used to conduct an industry analysis.
The most common tools and techniques used to analyse markets are :-

• Porter's 5 competitive forces model

• PEST model
• SWOT analysis

Porter's 5 Competitive Forces Model:-

Porter's 5 forces model is a widely used technique that analyses five major
components that shape all industries. This model can be used to identify
the threats and strengths of a specific industry and analyse the structure
of the industry. The five forces are:

• Competition in the industry: It is important to analyse the impact competitors

can have on the company. For instance, a large number of small competitors
might indicate that the market is subject to a fair competition. However, when
the industry is characterised by a monopoly (only one big firm in the industry),
 the impact can be very aggressive as the company can lower the price to
undercut a new competitor.
• Potential of new entrants into the industry: An industry is also shaped by the
potential of new entrants. For instance, if it only requires a small period and
low cost to enter the industry, it might lead existing companies to have lower
profitability and decreased market shares. But if the industry requires large
investments, large know-how, or other complicated measures to be
undertaken before entering the industry, this industry is considered safe.
• Power of suppliers: The industry is also shaped by the power of suppliers. If
suppliers have a low power (e.g., when there is a big number of suppliers and
when the cost of switching to a new supplier is cheap), companies in the
industry usually have a better control for their costs. But if the power of
suppliers is high (e.g., airline companies that require specific products), it can
have a negative influence in the long run.
• Power of customers: Customers can also be an important factor that drives the
prices of the company. For instance, customers have a high impact on the
restaurant industry as it is easy for them to switch to another competitor. But
in some industries, such as the health care industry, customers have less
power over companies.
• Threat of substitute products: Finally, substitute products that can be used in
the place of the product or service of interest can have a high impact on the
industry. For instance, the soda industry has lots of substitutes, such as milk,
juice, and flavoured water. Therefore, the soda industry needs to carefully
price its products and provide high quality products in order to keep its
customers.

PEST Model:-
The PEST model helps business organisations identify major external
factors that shape their operations. This model analyses:

• Political factors: This involves understanding the political stability of

economies. It is important to identify if a specific country is politically stable
before operating in it.
• Economic factors: This involves checking the economic determinants that
might impact the company. An example can be understanding the average
income per capita to see if customers can afford the product/service or not.
• Social factors: This involves the study of the population. This includes
identifying the current level of the population, its potential growth, the age
pyramid, and many other aspects.
• Technological factor: This involves the impact of technology on the industry. It
is important for business organisations to see their dependency on technology,
the impact of technological advancement on the industry, the ease and cost of
technology, etc.
SWOT Analysis:-
• SWOT analysis is a technique for assessing the strengths,
weaknesses, opportunities, and threats of a business organization.
Analysing strengths enable companies to focus on their core
competencies to undertake the identified opportunities and to avoid
the identified threats. In addition to that, the weaknesses are
identified to be improved or eliminated if possible.

INDUSTRY LIFECYCLE:-

1. Pioneering stage :- In the pioneering stage, the product is new and

customers are not familiar with it. The goal of advertising at this stage is
to show consumers what the product is and how it works. Advertisers
also need to show that the product fulfils a need in the consumer's life.
2. Expansion stage:- once an industry has established itself it enters the
second stage of a expansion or growth the industry now include only those
companies that have survived the pain pioneering stage these companies
continue to become stronger each company find a market for itself and
develop its own strategies to sell and maintain its position in the market
the competition among the surviving companies bring about improved
products at lower price.
3. Stagnation stage:- This is the third stage in the industry life-cycle .In
this stage the growth of the industry stabilise the ability of the industry to
grow appears to have lost. sales maybe increasing but at a slower rate
than that experienced by competitive industry or by the overall economy.
For example :-The black-and-white television industry in India provides
a good example of an industry which passed from the expansion stage to
the stagnation stage during the 18th century.
4. Decay stage:- From the stagnation stage the industry passes to the decay
stage this occurs when the product of the industry are no longer in
demand. New product and new technologies have come to the market
customer have changed your habit style and liking as a result the industry
become obsolete and gradually to exist.

Characteristic of Industry Analysis:-

Technology:-Trends in technology can affect numerous industry

factors including the product or services and how it is produced and
delivered.
There are literally dozens of examples of changes that have taken or are
taking place due to technological innovations.
 Polities and Regulation:- Because political change reflects
social values, today’s trend maybe tomorrow’s law, regulations, or
tax.The industry analyst needs to project and assess political changes
relevant to the industry under study.
LifeStyles:-Lifestyles deal with how people live, work, form
households, consume, enjoy leisure, and educate themselves.
Performance:-By permanence, we understand the products and
the technology of a particular industry not becoming obsolete in a short
span of time.

TOPIC:- COMPANY ANALYSIS:-

Company analysis is the process by which investors evaluate securities, the company's
profile, profitability, and its products and services for the investment process.

Four types of financial analysis:-

1. Balance sheet
2. Income statement
3. Cash flow statement
4. Ratio Analysis