INVESTMENT ANALYSIS AND APPRAISAL

Unit I

Introduction to Investment
An investment is the purchase of an asset with the expectation that it will generate income or
appreciate in value over time. There are many different types of investments, including stocks,
bonds, mutual funds, real estate, and businesses.

The goal of investing is to build wealth over the long term by allocating capital to assets that are
expected to generate returns. There are many factors that can impact the performance of an
investment, including market conditions, economic trends, and the financial health of the asset
being considered.

Investing involves taking on risk, as there is no guarantee that an investment will perform as
expected. However, by diversifying a portfolio and considering a range of investments, it is
possible to manage risk and increase the chances of achieving investment objectives.

It is important for investors to have a clear understanding of their financial goals and risk
tolerance before making any investment decisions. They should also be aware of the potential
risks and rewards of each investment, and be prepared to monitor and review their investments
on an ongoing basis.

Risk tolerance and Risk capacity

Risk tolerance is the amount of risk an investor is willing to take on in pursuit of their investment
objectives. It is a personal preference that varies from person to person and is influenced by
factors such as an investor's age, financial goals, and personal circumstances.

Risk capacity, on the other hand, is the amount of risk an investor is able to take on based on
their financial situation. It is determined by factors such as an investor's total net worth, income,
and expenses.
It is important for investors to understand both their risk tolerance and risk capacity when
making investment decisions. An investor's risk tolerance may be higher than their risk capacity,
in which case they may need to adjust their investment strategy in order to align with their
financial situation. On the other hand, an investor's risk capacity may be higher than their risk
tolerance, in which case they may need to reassess their risk tolerance in order to take advantage
of investment opportunities.

Introduction to Investment Analysis

Investment analysis is the process of evaluating an investment for profitability and risk. It
involves analyzing financial statements, looking at market trends, and assessing the management
team of the company or project being considered. It is a crucial aspect of the investment process,
as it helps investors make informed decisions about where to allocate their capital.

The goal of investment analysis is to determine whether an investment is worth making, and if
so, how it should be allocated in a portfolio. There are many different tools and techniques that
can be used in investment analysis, including fundamental analysis, technical analysis, and
statistical analysis. It is important to remember that no single tool or technique is perfect, and
that a combination of approaches is often needed to get a complete picture of an investment.

Investment Analysis Process

The investment analysis process involves evaluating the potential profitability and risk of an
investment. It is a crucial aspect of the investment process, as it helps investors make informed
decisions about where to allocate their capital.

The steps involved in the investment analysis process are:

1. Understanding the requirements: The first and the foremost step of the investing process
is to understand the client or the investor his/her needs, risk taking capacity and tax
status.

2. Define your investment objectives: . After getting an insight of the goals and restraints of
the client, it is important to set a benchmark for the portfolio management process which
 will help in evaluating the performance and check whether the client’s objectives are
achieved. It is important to clearly define the investment goals and risk tolerance before
beginning the analysis. This will help in determining the appropriate asset allocation for
the portfolio and will act as a guide for analysis of potential investments.

3. Gather information: Once the investment objectives are defined, the next step involves
gathering information about the investment options available. This may include
reviewing financial statements, market trends, and other data.

4. Analyze the data: Next, the data gathered should be analyzed to evaluate the potential
profitability and risk of each investment. This may involve using tools such as
fundamental analysis, technical analysis, and statistical analysis.

5. Portfolio Selection Strategy: A portfolio selection strategy is a plan for choosing

investments and allocating capital in a way that aligns with an investor's financial goals
and risk tolerance. There are many different portfolio selection strategies that investors
can use, and the appropriate strategy will depend on an investor's individual
circumstances and goals.
A. Passive investing: This involves selecting a diversified portfolio of assets and
holding it for a long period of time. It is based on the idea that markets are
efficient and that it is difficult to consistently outperform the market.
B. Active investing: This involves making more frequent trades in an attempt to
outperform the market. Active investors may use tools such as fundamental
analysis and technical analysis to identify buying and selling opportunities.

6. Make a decision: Based on the analysis, a decision can be made whether to invest in a
particular asset, and if so, how much to allocate to it. It is important to carefully consider
the potential risks and rewards of each investment before making a decision.
 7. Monitor and review: Once the investment is made, it is important to regularly review and
monitor its performance to ensure that it is meeting the investment objectives. This may
involve making adjustments to the portfolio as needed.

Types of Investment Analysis

There are several types of investment analysis that investors can use to evaluate an investment:

1. 1. Top-down vs. bottom-up - Top-down and bottom-up are two approaches that can be
used in investment analysis and portfolio management.
A. Top-down approach: This approach involves starting with a broad view of the
economy and financial markets, and then looking for specific investment
opportunities that fit within that view. For example, an investor might start by
analyzing macroeconomic trends and making a decision about the overall
direction of the market, and then select individual investments based on that
analysis.
B. Bottom-up approach: This approach involves starting with individual investments
and building a portfolio from the ground up. The focus is on analyzing individual
companies and selecting those that are expected to perform well based on their
own fundamental strengths. This approach is more focused on the specific
characteristics of individual investments, rather than the overall market
environment.

Both top-down and bottom-up approaches have their own strengths and weaknesses, and
many investors use a combination of the two in their analysis and portfolio management.

2. Fundamental analysis: Fundamental analysis is a method of evaluating the intrinsic

value of an asset by examining its financial statements and other financial metrics. It is
commonly used to analyze stocks, but can also be applied to other investments such as
bonds, real estate, and businesses. The goal of fundamental analysis is to determine the
true value of an asset, as opposed to its market price. This is based on the idea that the
market price of an asset may not always reflect its true value, and that by analyzing the
 underlying factors that drive value, it is possible to identify mispriced assets and make
informed investment decisions.

3. Technical analysis: Technical analysis is a method of evaluating securities by analyzing

statistics generated by market activity, such as past prices and volume. Technical analysts
do not attempt to measure a security's intrinsic value, but instead use charts and other
tools to identify patterns that can suggest future activity. Technical analysis is based on
the idea that market trends, as shown by charts and other technical indicators, can predict
future activity. Technical analysts use charts and other tools to identify patterns and
trends that can suggest buy or sell opportunities.

4. Environmental, social, and governance (ESG) analysis: This type of analysis evaluates
a company's impact on the environment, its social responsibility practices, and its
governance structure. It is increasingly being used by investors to assess the long-term
sustainability of an investment.
 Unit 1.1 Fundamental Analysis – EIC Framework

Introduction to Fundamental Analysis

Fundamental analysis is a method of evaluating the intrinsic value of an asset by examining its
financial statements and other financial metrics. It is commonly used to analyze stocks, but can
also be applied to other investments such as bonds, real estate, and businesses. The goal of
fundamental analysis is to determine the true value of an asset, as opposed to its market price.
This is based on the idea that the market price of an asset may not always reflect its true value,
and that by analyzing the underlying factors that drive value, it is possible to identify mispriced
assets and make informed investment decisions.

To perform fundamental analysis, investors typically review a company's financial statements,

such as its income statement, balance sheet, and cash flow statement. They also look at
non-financial factors such as the company's management team, competitive advantage, and
growth prospects. By analyzing these factors, investors can get a sense of the company's
financial health and its potential for future growth. Fundamental analysis can be a complex and
time-consuming process, and it is important to have a solid understanding of financial statements
and accounting principles to perform it effectively. It is also important to keep in mind that no
single tool or technique is perfect, and that a combination of approaches is often needed to get a
complete picture of an investment.

EIC – Economic, Industry and Company Analysis

Economic industry company (EIC) analysis is a method of evaluating a company's financial
health and potential for future growth by analyzing economic trends, industry dynamics, and the
company's own financial and operational performance. To perform EIC analysis, investors
typically consider the following factors:
1. Economic trends: This involves analyzing macroeconomic indicators such as GDP,
employment, and inflation to get a sense of the overall health of the economy and how it
may impact a company's performance.
 2. Industry dynamics: This involves analyzing the competitive landscape of the industry in
which a company operates, including factors such as market size, growth prospects, and
the competitive position of the company within the industry.
3. Company-specific factors: This involves analyzing the company's own financial and
operational performance, including factors such as its revenue, earnings, and cash flow. It
may also involve reviewing the company's management team, strategic vision, and
corporate governance structure.

By considering these factors, investors can get a comprehensive view of a company's financial
health and its potential for future growth. It is important to keep in mind that no single tool or
technique is perfect, and that a combination of approaches is often needed to get a complete
picture of an investment.

Unit 1.2 Economic Analysis

Meaning
Economic analysis is a method of evaluating the economic performance or potential of a
business, industry, or economy. It involves examining factors such as the supply and demand for
goods and services, the level of competition, the cost and availability of resources, and the
impact of government policies and regulations.

Economic analysis can be used to make predictions about the future performance of a business or
industry, to identify opportunities and risks, and to inform decision-making. It is often conducted
using a variety of tools and techniques, including statistical analysis, modeling, and forecasting.
Economic analysis can be conducted at various levels, including the microeconomic level (which
looks at individual businesses or industries) and the macroeconomic level (which looks at the
economy as a whole).

Leading, Lagging and Coincident Indicators

Leading, lagging, and coincident indicators are economic indicators that can be used to predict
future economic activity.
 1. Leading indicators: Leading indicators are economic indicators that tend to change
before the economy as a whole. They are often used to predict future economic activity
and can be used to identify turning points in the business cycle. Examples of leading
indicators include building permits, stock prices, and the Purchasing Managers' Index
(PMI).
2. Lagging indicators: Lagging indicators are economic indicators that tend to change after
the economy as a whole. They are often used to confirm trends that have already been
identified using leading indicators. Examples of lagging indicators include the
unemployment rate and the consumer price index (CPI).
3. Coincident indicators: Coincident indicators are economic indicators that tend to change
at the same time as the economy as a whole. They are often used to confirm the direction
of the economy, but are not as useful for predicting future economic activity. Examples of
coincident indicators include GDP and industrial production.

It is important to keep in mind that no single indicator is perfect, and that a combination of
indicators is often needed to get a complete picture of the economy.

Macroeconomic variables influencing Indian Stock Prices

In the Indian context, there are several macroeconomic variables that can impact stock prices:
1. Indian Market Indices: When analyzing the Indian Stock Markets, one should look at all
the indices be it Nifty Midcap, Nifty Smallcap, Nifty Pharma, Nifty Metals, Sensex etc.
According to one of the Dow Theories, the averages should confirm each other and if
they do not confirm then reversal might come.

2. GDP growth: Generally, stock prices tend to rise when the economy is growing, as this
typically indicates that companies are performing well and generating profits. However,
if GDP growth is too high, it may also lead to inflation, which could be negative for stock
prices.

3. Interest rates: Changes in interest rates can impact the cost of borrowing for companies,
which can affect their profitability. Higher interest rates may lead to lower stock prices,
 as companies may face higher costs and reduced profitability. On the other hand, lower
interest rates may lead to higher stock prices, as companies may have access to cheaper
financing and be able to invest in growth opportunities.

4. Inflation: Inflation can erode the purchasing power of consumers and reduce their ability
to spend, which can negatively impact the profits of companies. As a result, stock prices
may decline when inflation is high.

5. Political stability: Political stability can affect investor confidence and impact the
performance of the stock market. Market uncertainty and instability may lead to lower
stock prices, while a stable and predictable political environment may lead to higher
stock prices.

6. Exchange rates: Changes in the exchange rate can impact the competitiveness of Indian
companies in the global market, which can affect their profitability. A depreciation of the
Indian rupee may lead to higher stock prices, as it can make Indian exports more
competitive and boost the profits of export-oriented companies.

7. Dollar Index: There is an inverse relationship between the dollar index and the Indian
stock market. The reason behind this is that when the dollar index falls, FIIs (Foreign
Institutional Investors) invest more in Indian stocks as they give higher returns as
compared to returns from dollars. The technical analyst can easily analyze the dollar
index with NIFTY 50 for finding out the ongoing scenario of the market. As a result of
rising dollar value, the Indian stock markets suffer. Few sectors in the Indian stock
market suffer a lot in comparison to others.

8. Crude Oil: There is an inverse relationship between the crude oil price and the Indian
equity market. The reason behind this is that India is a major importer of oil. Thus,
industries like tyre, logistics, refinery, airlines, lubricants, paints, etc are affected by a
change in oil prices directly. The energy stocks have around 12.5% weightage in Nifty 50
and nearly 15% weightage in Sensex. Thus, increase in crude oil prices adversely affects
 these sectors that are oil-dependent and fall in oil prices results in the rise in these
companies’ stock prices.

9. US 10-year Yield: The US bond yields are very influential globally as they attract funds
from investors all across the world. Also investing in the US treasuries is one of the safest
investment tools and when these bond yields rise then they become more attractive.
When the yields increase then it also indicates that the Fed might raise interest rates for
controlling inflation. Due to this reason, many FIIs and global investors may pull out
their money from Indian Stock Markets and invest in these bonds. As a result, the prices
of the stocks in the Indian stock markets may fall.

10. US Market Indices: Due to globalization, the whole world has become a single economy
and the financial markets of all over the world work in sync. Since the whole world is
connected through various businesses, every company is connected directly or indirectly
to another for fulfilling the business purpose. The US economy is the largest in the world
and whenever there is any negative news in the US markets, it largely affects the global
markets, especially Indian Stock Markets. For example, the 2008 crash in the US stock
market affected almost every country’s economy. The Indian stock markets went down
sharply and also the overall world’s housing price started to drop creating huge tension
around the world.

It is important to keep in mind that these are general trends and that the direction of stock prices
can also be influenced by company-specific factors, such as earnings and financial performance.
It is always important to carefully consider a wide range of factors before making investment
decisions.
 Unit 1.3 Industry Analysis

Meaning
Industry analysis is a method of evaluating the characteristics of a particular industry or market
in which a business operates. It involves examining factors such as the market size and growth
rate, the major players in the industry, the competitive landscape, and the target customers for the
products or services offered.

The purpose of industry analysis is to assess the opportunities and risks that a business may face
in a particular industry, and to identify the factors that will be key to success in that industry.
Industry analysis can be used to inform strategic planning, business development, and marketing
efforts. It is often conducted using a variety of tools and techniques, including market research,
financial analysis, and competitive analysis.

Stages of Industry Life Cycle

The stages of the industry life cycle refer to the different phases that an industry goes through
from its inception to its decline or maturity. The specific stages can vary depending on the
context, but a common set of stages includes:
1. Emergence: This is the stage in which a new industry is emerging, characterized by a
high level of uncertainty and innovation. Information on the products and industry
participants are often limited, so demand tends to be unclear. The industry tends to be
highly fragmented in this stage. Participants tend to be unprofitable because expenses are
incurred to develop and market the offering while revenues are still low. At this point, the
industry is not yet well-defined and there may be multiple firms competing to establish
themselves as leaders.

2. Growth: This is the stage in which the industry starts to grow and mature, characterized
by an increase in the number of firms and a proliferation of products and services.
Consumers in the new industry have come to understand the value of the new offering,
and demand grows rapidly. A handful of important players usually become apparent, and
they compete to establish a share of the new market. Immediate profits usually are not a
 top priority as companies spend on research and development or marketing. Business
processes are improved, and geographical expansion is common. Once the new product
has demonstrated viability, larger companies in adjacent industries tend to enter the
market through acquisitions or internal development. At this point, the focus is on
expanding market share and building customer bases.

3. Maturity: This is the stage in which the industry has reached a level of stability and the
focus shifts to maximizing profitability. Some firms achieve economies of scale,
hampering the sustainability of smaller competitors. As maturity is achieved, barriers to
entry become higher, and the competitive landscape becomes more clear. Market share,
cash flow, and profitability become the primary goals of the remaining companies now
that growth is relatively less important. Price competition becomes much more relevant
as product differentiation declines with consolidation. At this point, the number of firms
in the industry may start to consolidate, and there may be increased competition for
market share.

4. Decline: This is the stage in which the industry starts to decline, characterized by a
decrease in the number of firms and a decrease in overall industry performance. This can
be due to a variety of factors, such as changing customer preferences, technological
disruption, or increased competition. Obsolescence and evolving end markets negatively
impact demand, leading to declining revenues. This creates margin pressure, forcing
weaker competitors out of the industry. The decline phase can be delayed with
large-scale product improvements or repurposing, but these tend to prolong the same
process.

5. Consolidation or restructuring: This is the stage in which the industry undergoes

significant changes, such as mergers and acquisitions or the introduction of new
technologies, in an effort to remain competitive.
Porter’s Five Forces Model
Porter's Five Forces is a framework developed by economist and business strategist Michael
Porter that outlines the competitive forces that shape every industry, and helps determine an
industry's attractiveness. The five forces are illustrated as follows:

1. Threat of new entrants: How easy is it for new companies to enter the market? A
company's power is also affected by the force of new entrants into its market. The less
time and money it costs for a competitor to enter a company's market and be an effective
competitor, the more an established company's position could be significantly weakened.
An industry with strong barriers to entry is ideal for existing companies within that
industry since the company would be able to charge higher prices and negotiate better
terms.

2. Threat of substitutes: What is the availability of substitutes for the industry's products or
services? Companies that produce goods or services for which there are no close
substitutes will have more power to increase prices and lock in favorable terms. When
close substitutes are available, customers will have the option to forgo buying a
company's product, and a company's power can be weakened.

3. Bargaining power of buyers: How much bargaining power do customers have when it
comes to setting prices? The ability that customers have to drive prices lower or their
level of power is one of the Five Forces. It is affected by how many buyers or customers
a company has, how significant each customer is, and how much it would cost a company
to find new customers or markets for its output. A smaller and more powerful client base
means that each customer has more power to negotiate for lower prices and better deals.
A company that has many, smaller, independent customers will have an easier time
charging higher prices to increase profitability.

4. Bargaining power of suppliers: How much bargaining power do suppliers have when it
comes to setting prices? The fewer suppliers to an industry, the more a company would
depend on a supplier. As a result, the supplier has more power and can drive up input
 costs and push for other advantages in trade. On the other hand, when there are many
suppliers or low switching costs between rival suppliers, a company can keep its input
costs lower and enhance its profits.

5. Competitive rivalry: How intense is the competition within the industry? The larger the
number of competitors, along with the number of equivalent products and services they
offer, the lesser the power of a company. Suppliers and buyers seek out a company's
competition if they are able to offer a better deal or lower prices.

By analyzing these five forces, businesses can better understand the structure of their industry
and identify opportunities for improvement. Understanding Porter's Five Forces and how they
apply to an industry, can enable a company to adjust its business strategy to better use its
resources to generate higher earnings for its investors.

SWOT Analysis
SWOT analysis is a strategic planning tool that helps organizations identify their strengths,
weaknesses, opportunities, and threats. It is often used to assess an organization's internal and
external environment, and can be applied to a variety of situations, including businesses,
non-profit organizations, and individuals. The acronym SWOT stands for:

● Strengths: Characteristics of the organization that give it an advantage over others: a

strong brand, loyal customer base, a strong balance sheet, unique technology, and so on.
● Weaknesses: Characteristics that place the organization at a disadvantage relative to
others: a weak brand, higher-than-average turnover, high levels of debt, an inadequate
supply chain, or lack of capital.
● Opportunities: External chances to improve performance (e.g., market growth, new
technologies). For example, if a country cuts tariffs, a car manufacturer can export its cars
into a new market, increasing sales and market share.
● Threats: External elements that could cause problems for the organization (e.g.,
competitors, economic downturns). Threats include things like rising costs for materials,
increasing competition, tight labor supply and so on.
SWOT analysis is typically conducted as a group exercise, with people from various parts of the
organization contributing to the analysis. The results of the analysis can be used to inform
strategic planning and decision-making processes.

How to conduct a SWOT Analysis?

● Determine the objectives
● Gather Resources
● Compile Ideas
● Refine Findings
● Develop Strategy

Financial Analysis of an Industry

Financial analysis of an industry involves analyzing the financial statements and performance of
companies within that industry to understand the industry's overall financial health and to
identify trends and potential opportunities or threats. This can be done through various methods,
including:
1. Ratio analysis: This involves calculating and comparing financial ratios (such as
profitability ratios, liquidity ratios, and debt ratios) to understand a company's financial
performance and to compare it to industry averages or other benchmarks.
2. Benchmarking: This involves comparing a company's financial performance to that of its
peers or industry averages to identify areas of strength or weakness.
3. Trend analysis: This involves analyzing financial data over time to identify trends and
changes in financial performance.
4. Industry analysis: This involves examining the overall economic and market conditions
that affect the industry, as well as the competitive landscape and key industry trends.

By conducting financial analysis of an industry, businesses can gain insights into the financial
health of the industry and make informed decisions about their own operations and strategies.
 Unit 1.4 Company Analysis

Meaning
Company analysis is the process of evaluating the financial performance and operations of a
business. This can include analyzing the company's financial statements, evaluating its
management and business model, and considering external factors that may impact the
company's performance.

Some specific areas that may be included in a company analysis include:

● Revenue and profitability: Examining the company's revenue and profitability over time
can help to understand its financial health and growth potential.
● Debt and liquidity: Analyzing the company's debt levels and access to liquidity can help
to understand its financial risk and ability to meet its financial obligations.
● Management and leadership: Evaluating the quality and experience of the company's
management team can provide insight into its decision-making and strategic planning.
● Market and industry: Examining the company's position in its market and industry can
help to understand its competitive landscape and potential for growth.
● SWOT analysis: A SWOT analysis involves examining the company's strengths,
weaknesses, opportunities, and threats to identify its internal and external factors that
may impact its performance.

There are many different tools and techniques that can be used in company analysis, and the
specific approach will depend on the goals and needs of the person or organization conducting
the analysis.

Company Analysis to Financial Strategies

Company analysis can be used to inform financial strategies for a business. By evaluating the
financial performance and operations of a company, it is possible to identify areas for
improvement and develop strategies to optimize financial performance. Some examples of
financial strategies that may be developed based on a company analysis include:
 ● Reducing costs: By identifying areas of the business where costs can be reduced, a
company can improve its profitability and increase its bottom line.
● Improving efficiency: Analyzing the company's operations can help to identify
opportunities to streamline processes and improve efficiency, which can have a positive
impact on the company's financial performance.
● Increasing revenue: A company analysis can help to identify opportunities to increase
revenue, such as by expanding into new markets or introducing new products or services.
● Managing debt: If a company analysis reveals that the business has high levels of debt,
financial strategies may be developed to reduce debt or improve the company's ability to
manage it.
● Diversifying revenue streams: If a company is reliant on a single source of revenue,
diversifying its revenue streams can help to mitigate risk and improve financial stability.

It is important to note that financial strategies should be developed with the company's overall
business goals and objectives in mind, and should be carefully considered and implemented to
ensure their success.

Finance Function
The Finance function is the process of acquiring and utilizing funds of a business. Financing
consists of raising, providing and managing all the money, capital or funds of any kind to be used
in connection with the business. The following are the objectives of finance function:

1. Investment Decisions: This is where the finance manager decides where to put the
company funds. Investment decisions relating to the management of working capital,
capital budgeting decisions, management of mergers, buying or leasing of assets.
Investment decisions should create revenue, profits and save costs.

2. Financing Decisions: Here a company decides where to raise funds from. There are two
main sources to consider, mainly equity and borrowed. From the two a decision on the
appropriate mix of short and long-term financing should be made. The sources of
financing best at a given time should also be agreed upon.
3. Dividend Decisions: These are decisions as to how much, how frequent and in what form
to return cash to owners. A balance between profits retained and the amount paid out as
dividends should be decided here.