WEALTH MANAGEMENT PROJECT

“FUNDAMENTAL ANALYSIS OF HOSPITALITY

SECTOR”

Submitted To: Submitted By:

Prof. (DR.) B Brahmaiah Ankit Anand
Enroll No: 20BSPHH01C0168
 Concept of fundamental analysis

Fundamental Analysis: Fundamental analysis is about understanding the quantitative

and qualitative factors that impact earnings of a company and make an estimate of future
earnings based on this analysis. Analysts follow two broad approaches to fundamental
analysis – top down and bottom up. If the factors to consider are economic (E), industry (I)
and company (C) factors, beginning at company-specific factors and moving up to the macro
factors that impact the performance of the company is called the bottom-up approach.
Scanning the macroeconomic scenario and then identifying industries to choose from and
zeroing in on companies, is the top-down approach. EIC framework is the commonly used
approach to understanding fundamental factors impacting the earnings of a company,
scanning both micro and macro data and information.
Economic Factors: The economic cycle has an impact on the performance of companies. A
slowdown in Gross Domestic Product (GDP) growth rates can impact investment and
consumption-oriented businesses. Revival in economic indicators is tracked by looking at
Index of industrial Production (IIP), lead indicators such as auto sales, movement in
consumer
durables, capital goods imports, purchasing managers’ index and consumer confidence index.
As the momentum returns, concurrent and lag indicators such as changes in GDP, interest
rates and wages are monitored.
Fundamental analysis models base value on current and future profitability. It identifies
mispriced stocks relative to some measure of “true” value derived from financial data. The
intrinsic value (IV) is the “true” value, according to a model. The market value (MV) is the
consensus value of all market participants Trading Signal: IV > MV Buy, IV < MV Sell or
Short Sell, and IV = MV Hold or Fairly Priced
Fundamental analysis uses earnings and dividend prospects of the firm, expectations of future
interest rates, and risk evaluation of the firm to determine proper stock prices. The EMH
predicts that most fundamental analysis is doomed to failure. According to semi-strong form
efficiency, no investor can earn excess returns from trading rules based on any publicly
available information. Only analysts with unique insight receive superior returns.
Fundamental
analysis is no better than technical analysis in enabling investors to capture above-average
returns. However, the presence of many analysts contributes to market efficiency
The top-down approach thus assumes that the first two steps (economy-market and industry)
have a significant influence on the individual firm and its stock (the third step). In contrast,
the
bottom-up approach assumes that it is possible to select investments (i.e., firms) without
considering the aggregate market and industry influences. The top-down valuation process
begins by examining the influence of the general economy on all firms and the security
markets.
The next step is to analyze the various industries in light of the economic environment. The
final step is to select and analyze the individual firms within the superior industries and the
common stocks of these firms.
Value-oriented investors (1) focus on the current price per share, specifically, the price of
the stock is valued as “inexpensive”; (2) not be concerned about current earnings or the
fundamentals that drive earnings growth; and/or (3) implicitly assume that the P/E ratio is
below its natural level and that the (an efficient) market will soon recognize the low P/E ratio
and therefore, drive the stock price upward (with little or no change in earnings).
Growth-oriented investors (1) focus on earnings per share (EPS) and what drives that value;
(2) look for companies that expect to exhibit rapid EPS growth in the future; and/or (3)
implicitly assume that the P/E ratio will remain constant over the near term, that is, stock
price (in an efficient market) will rise as forecasted earnings growth is realized.
A price momentum strategy is based on the assumption that a stock’s recent price behavior
will continue to hold. Thus an investor would buy a stock whose price has recently been
rising, and sell (or short) a stock whose price has been falling. An earnings momentum
strategy rests.
on the idea that a firm’s stock price will ultimately follow its earnings. The measurement of
earnings momentum is usually based on a comparison to expected earnings. Thus an investor
would buy a stock that has accelerating earnings relative to expectations and sell (or short)
stock whose earnings fall below expectations
 EIC Analysis

1. Economic Analysis
The main objective of economic analysis is to find out whether or not the economic entity is
allocating its resources most cost-effectively or not. You can refer to the following given
sample of an economic analysis of a company for more information on the same.
o The economic analysis involves comparing at least two alternatives in achieving, for
example, a certain goal under specific constraints and assumptions.
o Economic analyses factor in the opportunity costs that people or companies employ.
They measure, in monetary terms, what the benefits of a project are to the economy or
community.
o Opportunity cost is all about evaluating the option you gave up when you made a
choice.
o Study of economic systems or a study of a production process or an industry to see if
it is operating effectively and how much profit it is making.
o Economic analysis is all about analyzing the economic aspects of something. Apart
from economists, statisticians and mathematicians may also carry out economic
analysis.
2. Industry Analysis
In 1980, Michael Porter proposed a standard approach to industry analysis which is referred
to the as competitive analysis framework. Threats of new entrants evaluate the expected
reaction of current competitors to new competitors and obstacles to entry into the industry. In
certain industries, it is quite difficult for new companies to compete successfully.
The bargaining power of suppliers has also a substantial influence on the profitability of the
company. The supplies for manufacturing products are required by the company and it does
not have sufficient control over the costs. The company can’t increase the price of its finished
products to cover the increased costs due to the presence of powerful buyer groups in the
market of substitute products. So while conducting industry analysis, the presence of
powerful suppliers should be considered as negative for the company.
The above considerations of industry structure should be analyzed by the investor to estimate
the future trends of the industry in light of the economic conditions. When a potential
industry is identified then comes the final step of EIC analysis which is narrower relating to
companies only.
3. Company Analysis
In company analysis, different companies are considered and evaluated from the selected
industry so that the most attractive company can be identified. Company analysis is also
referred to as security analysis in which stock picking activity is done. Different analysts
have different approaches to conducting company analysis like
1. Value Approach to Investing
2. Growth Approach to Investing
Additionally in company analysis, the financial ratios of the companies are analyzed to
ascertain the category of stock as value stock or growth stock. These ratios include price to
book ratio and price-earnings ratio. Other ratios like return on equity etc. can also be
analyzed to ascertain the potential company for investing.

Financial Ratios
A financial ratio is a relative magnitude of two selected numerical values taken from an
enterprise's financial statements. Often used in accounting, there are many
standard ratios used to try to evaluate the overall financial condition of a corporation or other
organization. Financial ratios may be used by managers within a firm, by current and
potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use
financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in
a company are traded in a financial market, the market price of the shares is used in certain
financial ratios.

Profitability ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings relative to its revenue, operating costs, balance sheet assets,
or shareholders' equity over time, using data from a specific point in time.
Profitability ratios can be compared with efficiency ratios, which consider how well a
company uses its assets internally to generate income (as opposed to after-cost profits).
Some common examples of profitability ratios are the various measures of profit margin,
return on assets (ROA), and return on equity (ROE). Others include return on invested
capital (ROIC) and return on capital employed (ROCE).

 Profit Margin

Different profit margins are used to measure a company's profitability at various cost levels
of inquiry, including gross margin, operating margin, pretax margin, and net profit margin.
The margins shrink as layers of additional costs are taken into consideration—such as the
COGS, operating expenses, and taxes.
 Return on Assets (ROA)
Profitability is assessed relative to costs and expenses and analyzed in comparison to assets to
see how effective a company is deploying assets to generate sales and profits. The use of the
term "return" in the ROA measure customarily refers to net profit or net income—the value
of earnings from sales after all costs, expenses, and taxes. ROA is net income divided by total
assets.

 Return on Equity (ROE)

ROE is a key ratio for shareholders as it measures a company's ability to earn a return on its
equity investments. ROE, calculated as net income divided by shareholders' equity, may
increase without additional equity investments. The ratio can rise due to higher net income
being generated from a larger asset base funded with debt.

Operating Ratios
The operating ratio shows the efficiency of a company's management by comparing the
total operating expense (OPEX) of a company to net sales. The operating ratio shows how
efficient a company's management is at keeping costs low while generating revenue or sales.
The smaller the ratio, the more efficient the company is at generating revenue vs. total
expenses.
Some of the Operating ratios are as mentioned below:

 Working Capital Ratio

Working capital represents a company's ability to pay its current liabilities with its current
assets. Working capital is an important measure of financial health since creditors can
measure a company's ability to pay off its debts within a year.
Working capital represents the difference between a firm’s current assets and current
liabilities. The challenge can be determining the proper category for the vast array of assets
and liabilities on a corporate balance sheet and deciphering the overall health of a firm in
meeting its short-term commitments.

 Quick Ratio
Also called the acid test, this ratio subtracts inventories from current assets, before dividing
that figure into liabilities. The idea is to show how well current liabilities are covered by cash
and by items with a ready cash value. Inventory, on the other hand, takes time to sell and
convert into liquid assets.
 Price-Earnings (P/E) Ratio
Called P/E for short, this ratio reflects investors' assessments of those future earnings.
You determine the share price of the company's stock and divide it by EPS to obtain the P/E
ratio.
If, for example, a company closed trading at $46.51 a share and EPS for the past 12 months
averaged $4.90, then the P/E ratio would be 9.49. Investors would have to spend $9.49 for
every generated dollar of annual earnings.

 Debt-Equity Ratio
What if your prospective investment target is borrowing too much? This can reduce the safety
margins behind what it owes, jack up its fixed charges, reduce earnings available for
dividends for folks like you and even cause a financial crisis.
The debt-to-equity (D/E) is calculated by adding outstanding long and short-term debt, and
dividing it by the book value of shareholders' equity.

Valuation Ratios
Valuation is the financial process of determining what a company is worth. Valuation ratios
put that insight into the context of a company’s share price, where they serve as useful tools
for evaluating investment potential. Here is a list of principle valuation ratios.

 Price-to-earnings
Price-to-earnings ratio (P/E) looks at the relationship between a company's stock price and its
earnings. The P/E ratio gives investors an idea of what the market is willing to pay for the
company's earnings. The ratio is determined by dividing a company's current share price by
its earnings per share. For example, if a company is currently trading at $25 a share and its
earnings over the last 12 months are $1.35 per share, the P/E ratio for the stock would be 18.5
($25/$1.35). As the P/E goes up, it shows that current investor sentiment is favourable. A
dropping P/E is an indication that the company is out of favor with investors.

 Price-to-sales
The price-to-sales ratio (P/S) shows how much the market values every dollar of the
company's sales. To calculate it, take the company's market capitalization and divide it by the
company's total sales over the past 12 months. A company's market cap is the number of
shares issued multiplied by the share price. The P/S ratio can be used in place of the P/E ratio
in situations where the company has a net loss. One of the advantages of using the P/S ratio is
that sales are much harder to manipulate than earnings. Since a company's sales are generally
more stable than its earnings level, any large changes in the P/S ratio are often more likely to
indicate a departure from the intrinsic value of the company (either up or down).
 Price/earnings-to-growth (PEG)
Price/earnings-to-growth ratio is the relationship between the P/E ratio and the projected
earnings growth of a company. It is calculated by dividing the P/E ratio by the earnings-per-
share growth. For example, if a company’s P/E ratio is 16.5 and its earnings-per-share growth
over the next 3 years is expected to be 10.8%, its PEG ratio would be 1.5. A PEG of 1 or less
is typically taken to indicate that the company is undervalued. A PEG of more than 1 is
typically taken to indicate that the company is overvalued. To get a clearer picture of value,
the PEG of the company should also be compared with the PEG of the market and with the
industry that the company competes in.

Hospitality Sector: An Introduction

Introduction
The Indian tourism and hospitality industry has emerged as one of the key drivers of growth
among the services sector in India. Tourism in India has significant potential considering the
rich cultural and historical heritage, variety in ecology, terrains and places of natural beauty
spread across the country. Tourism is also a potentially large employment generator besides
being a significant source of foreign exchange for the country. In FY20, 39 million jobs were
created in the tourism sector in India; this accounted for 8.0% of the total employment in the
country. The number is expected to rise by two% annum to 52.3 million jobs by 2028.
According to WTTC, India ranked 10th among 185 countries in terms of travel & tourism’s
total contribution to GDP in 2019. During 2019, contribution of travel & tourism to GDP was
6.8% of the total economy, ~ Rs. 13,68,100 crores (US$ 194.30 billion). Another way to
better understand hospitality is by looking at The Big Four: Food and beverage, travel and
tourism, lodging, and recreation. The food and beverage category includes restaurants, bars,
and lounges. Travel and tourism cover airlines and travel agencies. Lodging can be anything
from hotels to Airbnb. And recreation usually means activities such as golfing, fishing, and
tennis.

Market Size
India is the most digitally advanced traveller nation in terms of digital tools being used for
planning, booking, and experiencing a journey. India’s rising middle class and increasing
disposable income has supported the growth of domestic and outbound tourism.
During 2019, foreign tourist arrivals (FTAs) in India stood at 10.93 million, achieving a
growth rate of 3.5% y-o-y. During 2019, FEEs from tourism increased 8.6% y-o-y to Rs.
2,11,661 crores (US$ 30.06 billion). In 2019, arrivals through e-Tourist Visa increased by
23.6% y-o-y to 2.9 million.
International hotel chains are increasing their presence in the country, and it will account for
around 47% share in the tourism and hospitality sector of India by 2020 and 50% by 2022.

Objectives of the Industry:

Customer Service
Excellent service is one of the hospitality industry's primary objectives. Hotel visitors rely on
hospitality staff for many of their travel needs. Hotel staff comes through in a pinch when a
traveller forgets to pack his toothbrush or seeks a recommendation for a local hotel.
Similarly, diners often ask restaurant wait staff to recommend a particular meal or to
accommodate a dietary restriction. Hospitality providers often measure performance rates of
their customer objectives by surveying their customers. They encourage customers to visit a
survey website, and often provide incentives, such as discount coupons, for customers who
complete online surveys.

Product Quality
Customers love good service, but the hospitality industry must also provide quality products
to satisfy customers. Goals based on this important objective vary from restaurant to
restaurant and from hotel to hotel. Patrons of a restaurant demand fresh, delicious food.
Customers also desire consistency. They want a cheeseburger from a fast-food chain to taste
the same in San Francisco as it does in their hometown. Hotel guests look for quiet, clean and
comfortable rooms where they can get a good night's sleep and spotless, spa-like bathrooms.

Volume
Another primary objective of the hospitality industry is customer volume. A restaurant owner
wants to see 100 percent of her tables filled during any given service period. Empty tables
mean fewer orders, and without sufficient table traffic, restaurant staff may have to throw
away perishable food items at the end of a shift. In the hotel business, 100 percent room
occupancy is a primary objective. If you see a "no vacancy" sign at a hotel, motel or resort,
management has achieved its volume goal for that day.
Ratings
Publicly available ratings can reflect the success of a hospitality-based company in meeting
its performance objectives. There are well-known trade-specific rating guides in both the
restaurant and hotel industries, and managers strive for recognition in them. Establishments
seek coveted mentions on the "best of" lists local newspapers and weekly magazines publish.
A positive reputation on Internet travel and restaurant review sites is as important as it is on
the high-profile rating systems, because Internet reviews are accessible to the entire world,
and reviews can remain online for years.

Achievements
Following are the achievements of the Government during 2019-20:
 During 2019-20, an additional fund Rs. 1,854.67 crore (US$ 269.22 million) was
sanctioned for new projects under the Swadesh Darshan scheme.
 Ministry of Tourism sanctioned 18 projects covering all the North Eastern States for
Rs. 1,456 crore (US$ 211.35 million) to develop and promote of tourism in the region
under Swadesh Darshan and PRASHAD schemes.
 Statue of Sardar Vallabhbhai Patel, also known as ‘State of Unity’, was inaugurated in
October 2018 and the total revenue generated till November 2019 stood at Rs. 82.51
crore (US$ 11.81 million).

Road Ahead
Staycation is seen as an emerging trend were people stay at luxurious hotels to revive
themselves of stress in a peaceful getaway. To cater to such needs, major hotel chains such as
Marriott International, IHG Hotels & Resorts and Oberoi hotels are introducing staycation
offers were guests can choose from a host of curated experiences, within the hotel.
India’s travel and tourism industry has huge growth potential. The industry is also looking
forward to the expansion of e-Visa scheme, which is expected to double the tourist inflow in
India. India's travel and tourism industry has the potential to expand by 2.5% on the back of
higher budgetary allocation and low-cost healthcare facility according to a joint study
conducted by Assocham and Yes Bank.
 SWOT ANALYSIS

Strengths

 A very wide variety of hotels is present in the country that can fulfill the demand of
the tourists.
 There are international players in the market such as Taj and Oberoi & International
Chains. Thus, the needs of the international tourists’ travellers are met while they are
on a visit to India.
 Manpower costs in the Indian hotel industry is one of the lowest in the world. This
provides better margins for Indian hotel industry.
 India offers a readymade tourist destination with the resources it has. Thus the magnet
to pull customers already exists and has potential grow.

Weaknesses

 The cost of land in India is high at 50% of total project cost as against 15% abroad.
This acts as a major deterrent to the Indian hotel industry.
 The hotel industry in India is heavily staffed. This can be gauged from the facts that
while Indian hotel companies have a staff to room ratio of 3:1, this ratio is 1:1 for
international hotel companies.
 High tax structure in the industry makes the industry worse off than its international
equivalent. In India the expenditure tax, luxury tax and sales tax inflate the hotel bill
by over 30%. Effective tax in the South East Asian countries works out to only 4-5%.
 Only 97,000 hotel rooms are available in India today, which is less than the Bangkok
hotel capacity.
 The services currently offered by the hotels in India are only limited value-added
services. It is not comparable to the existing world standards.
Opportunities

 Demand between the national and the inbound tourists can be easily managed due to
difference in the period of holidays. For international tourists the peak season for
arrival is between September to March when the climatic conditions are suitable
whereas the national tourist waits for school holidays, generally the summer months.
 In the long-term the hotel industry in India has latent potential for growth. This is
because
India is an ideal destination for tourists as it is the only country with the most
diverse topography. For India, the inbound tourists are a mere 0.49% of the global
figures. This number is expected to increase at a phenomenal rate thus pushing up the
demand for the hotel
industry.
 Unique experience in heritage hotels.

Threats

 Guest houses replace the hotels. This is a growing trend in the west and is now
catching up in India also, thus diverting the hotel traffic.
 Political turbulence in the area reduces tourist traffic and thus the business of the
hotels. In India examples of the same are Insurgency in Jammu Kashmir and the
Kargil war.
 Changing trends in the west demand similar changes in India, which here are difficult
to implement due to high project costs.
 The economic conditions of a country have a direct impact on the earnings in hotel
industry.
Lack of training man power in the hotel industry.

 STEPS INVOLVED IN FUNDAMENTAL ANALYSIS

 Creating of our own index to keep the track of the companies in our sector and to analyse
the performance of the individual company or the sector as a whole.

 Dividing the shares in our index into undervalued and overvalued stocks by comparing
their P/E ratio to the sector PE.

 Selection of value-pick from undervalued and growth-pick from overvalued stocks.

 Determining five major ratios important for the analysis of the Oil and Gas sector.

 Ranking of the value-pick and growth-pick on the basis of these ratios.

 Allocation of Fund on the basis of their ranking.

Finally making of the fund sheet for our sector

CREATING OUR OWN INDEX

This step is already discussed above in the section stock exchange. We created our own
index with taking all the large cap companies in it with starting Sensex base of 1000 and
keep recording changes in Sensex base on daily basis as the last price of the stocks
changes.
All the companies(stocks) in our index are as follows:-

 Indian Hotels Ltd.

 EIH Ltd.
 Chalet Hotels
 Lemon Tree Hotels
 India Tourism Development Corp,
 Taj GVK Hotels
 EIH Assoc Hotel

DIVIDING OVERVALUED AND UNDERVALUED STOCKS

In this step we have to divide our 13 socks into over-valued and under-valued stocks for
differentiating them into under-valued and over-valued first we have to find out the P/E
ratio of all the stocks and compare it to the sector PE (or sector P/E ratio) if the stock’s
ratio is higher than the sector PE than it is over-valued stock or if it is lower than the
sector PE than it is under-valued stock.
To find out the P/E ratio of each stock we have apply the formula:

P/E ratio = market price of share / EPS

Where, Sector PE = Average of P/E ratio of all the stocks

IF, P/E ratio > Sector P = Over-valued

P/E ratio < Sector P = Under-valued

Now, we can distinguish the Overvalued and Undervalued stocks of the company we
have measured from the above. The following are mentioned below:
  SELECTION OF VALUE-PICK AND GROWTH-PICK

Now we have to do the selection of value-pick from the Under-valued stocks and Growth-
pick from the Over-valued stocks. By doing so we can choose best stock from the under-
valued and over-valued stocks.

 Value-pick from the Under-valued stocks by comparing their revenue and profit of
last year to the current year.

 Similarly, Growth-pick from the Over-valued stock with the help of PEG ratio.

 FINDING OF VALUE – PICK

For finding of Value – pick from the Undervalued stocks we have to find out whether the
stocks are really undervalued or they have capacity to do better in future, for that we have
to analyse the company performance from past year to current year by comparing their
revenue and profit. If any one of them will increase than it will be selected for the Value –
pick from the undervalued stocks.

Reason for this analysis:

 To know the revenue of the company
  To know is company making profit
 Is company able to beat its competitor
 Will company stock a good investment?

So, by the above analysis, we can say that either the stocks revenue or profit is growing or
either is increasing.

So, out of the 4 undervalued stocks, we select only 2 stock as they satisfy the conditions.

By this, we can interpret that although the above stocks are undervalued but they can
fetch good returns in the future as these are hidden gems and this is the time when we
should buy it and we can say that these stocks are a good investment for an investor.

 FINDING OF THE GROWTH – PICK

We will find Growth pick by PEG Ratio. (Price to earnings growth)

I have taken PEG ratio because I can determine whether the company will be expecting
earnings growth while the stock value is being determined and this would give me more
glance at the stocks that have been shortlisted using P/E ratio.

PEG ratio of 1 gives a perfect correlation between the company's market value and its
unfavourable, telling a stock is overvalued. If it is in between 0-1 the stock is having a
scope to perform well though it is overvalued.
 Formula: PEG ratio = P/E ratio / EPS growth rate

EPS growth rate can be calculated by comparing current year EPS to the last year EPS, if the
EPS decreases from last year than the growth rate comes to be negative than the stock
directly rejected for the growth pick.

1. PEG ratio = (P/E ratio)/EPS Growth Rate

2. EPS Growth rate = (Current year EPS – Previous year EPS)/Previous year EPS*100
3. If EPS growth rate is negative, then the PEG ratio is N/A

The stock having PEG ratio between 0-1, is selected for Growth pick.

Therefore, ‘CHALET HOTELS LTD’ is selected for Growth pick.

Therefore, we have 2 value picks and 1 growth pick in our FUND.

ASSET ALLOCATION

Asset allocation is the rigorous implementation of an investment strategy that attempts to

balance risk versus reward by adjusting the percentage of each asset in an investment
portfolio according to the investor's risk tolerance, goals and investment time frame. The
focus is on the characteristics of the overall portfolio. Such a strategy contrasts with an
approach that focuses on individual assets.
Before allocating of the fund, we have to rank all the selected stocks through value pick
and growth pick on the basis of the ratios that were important for the sector by which we
rank all the stocks in order of the allocation.
So, according to my industry, there are main 5 ratios which will have an impact on asset
allocation decision:

1. Current Ratio
The current ratio is a liquidity measure that shows how a company is able to meet all its
short-term liabilities with the short-term assets on hand. Assets considered short-term are
anything such as inventory and do not include long-term assets such as property, plant,
and equipment.

For the hospitality industry, companies have a lot of current liabilities in the form of
salaries and wages, short-term equipment leasing, and other short-term liabilities.
Additionally, it is a cyclical industry, making it imperative that companies have enough
current assets to cover current liabilities, even in an economic downturn. Stakeholders
want to see a high current ratio above one to determine a company within the hospitality
industry is strong.

Current Ratio = [ Current Assets/ Current Liabilities]

2. Debt-Equity Ratio
Companies within the hospitality industry have a lot of long-term liabilities in the form of
debt, along with current liabilities. This debt is used to finance large properties such as
hotels or large bus fleets for transportation companies. A lot of long-term assets are
needed to successfully run a hospitality company, and therefore long-term debt
financing is also normally needed.

Debt-Equity Ratio = [Total Debt/ Total Equity]

3. Gross Profit Ratio

Gross profit margin measures a company's gross profit earned on the revenue it generates.
For companies in the hospitality industry, most of the costs come from operations and not
the cost of goods sold, and the gross profit margin should be high for those businesses
that operate within the hospitality industry.
Gross profit margin = ((Sales - Cost of goods sold) / Sales)

4. Net Profit Ratio

The net profit margin is similar to the gross profit margin except that it measures the
amount of net profit earned on the revenue a company generates. For the companies in the
hospitality industry, profits are actually not very high, as there are high associated
operating costs to run a company in this industry. However, a stakeholder should always
look at a company's net profit margin and compare it to industry averages to ensure it
meets or exceeds the benchmark.

Net profit margin = (net profit) / (total sales)

5. Inventory Turnover Ratio

Inventory turnover is a financial ratio showing how many times a company has sold and
replaced inventory during a given period. A company can then divide the days in the
period by the inventory turnover formula to calculate the days it takes to sell the
inventory on hand.
Calculating inventory turnover can help businesses make better decisions on pricing,
manufacturing, marketing, and purchasing new inventory. In Hospitality Industry, it’s an
important ratio as it tells about how the inventory of the hotels is being used up or
utilised. If a hotel or hospitality business has a high inventory turnover ratio, it indicates a
positive sign and tells that the business is in a profitable position.

Inventory Turnover Ratio = [Cost of Goods Sold/ Average Inventory]

(Ranks are given according to the nature of the Ratio)
After ranking all the stocks for all the five ratios on the basis of the ratio requirement in a
company (higher or lower). We assign the ranking in such a way that the lower ranking is
best for that ratio, therefore when we add all the rankings of all the stocks individually
than the stock having lowest sum would be the best on the basis of these five ratios. And
we can see there is a tie between two companies, so choosing one over another in these
won’t affect any changes in the fund.

As we earlier picks value-pick and growth-pick from undervalued and overvalued stocks,
these stocks have tendency to better in future, and now we filtered them on the basis of
the 5 major ratio in the sector and rank them accordingly. Now we are ready for the asset
allocation for our fund.

For the allocation of FUND initially we have total of 10cr of AUM (asset under
management). Initially we just allocate this fund to the stocks we found out after the
analysis.

For allocating this fund, we need to keep in mind these two rules.
1. More fund will be allocated to the stock having better rating(lower).
2. Total AUM is 10 crores
Now, we have to calculate NAV of our fund

 CALCULATION OF Net Asset Value [NAV]

To find out the NAV:

NAV = AUM / No. of Units

Here, 1 Unit = Rs. 10

Therefore, for Rs.10 Cr. No. of Units = 10000000

Now, for the first day (on 19/05/2021):

NAV = AUM / No. of Units

= 100000000 / 10000000

NAV = 10
 Now for the next day onwards:

No. of shares remains constant, but the last price keeps fluctuate so the actual allocation
keeps changing. So, the total AUM keeps changing daily but the No. of Units keeps
always constant, therefore NAV keeps updating on the daily basis as the closing price of
the shares changes.

For example,

For the next day

20/04/2021 NAV = 10.74

21/04/2021 NAV = 10.91

Similarly, we keep updating the NAV for our Fund on the daily basis and keep the record
of changing in NAV for our FUND.

 Updating the NAV

 BEATING THE BENCHMARK:

Now, the 3 stocks to which we allocate the AUM is our Fund that we create after the
filtration of the Index that we have initially including all the large cap companies from
our sector.

Now our Fund includes the best stocks from our index because these all these stocks in
the Fund we found them after the fundamental analysis of the whole index and we
allocate fund to them through the rating that was given to them on the basis of the major
ratios that affect the company’s performance in the sector.

So now our own index that we created earlier that includes all the large cap companies
now act as a benchmark for our fund. If our fund beats the benchmark, it implies that we
did the proper analysis and our fund which includes the best stocks from the sector and
the rating on which the allocation depends is also efficient.

Beating the benchmark here signifies that if the Sensex goes down in our Index that the
NAV also goes down but less than the Sensex, similarly if the Sensex goes up that NAV
also goes up but with more impact or higher. For instance, if the Index rises by 10%, then
our fund must rise above 10% (say 11%) and vice-versa. This state our Fund gives more
return in favourable conditions and less risk in unfavourable conditions.

CONCLUSION:
We begin our project with creating our own sector index fund as to compare it with with our
Asset fund which was created later. We got to know making the sector index fund as our
benchmark we can beat it with our top grinded companies The making of fund starts with the
distinguish between undervalued and overvalued stocks with the help of P/E ratio and after
that finding of the value-pick and growth-pick from undervalues and overvalued stocks
respectively. After the final selection of the stocks that are capable to be in our fund we rank
all these stocks on the basis of five major ratio those are important for our sector and
according to the rating given to them we assign the allocation of AUM to them. Main aim of
the fund was to create a portfolio with a higher profitability and lower risk. After allocating
them to our fund, we assigned some investments out of the total investment of 10 crores we
had (virtual) to each company. Thereby, we divided the current price from the asset value
allocated to get number of equity shares. Then we calculated NAV of our fund and compared
it with the sector index we made. If our AUM beats the Index then, it’s a profitable situation
as we are able to beat the market and our fund can be recommended to the company. This
was the part of fundamental analysis.