Fundamental

Analysis:
Economic Analysis

ABHISHEK BANSAL - 01

I S H A N P R ATA P S I N G H – 1 6

S U R B H I T V YA S – 5 4

U J J AWA L R A J – 5 7

U T K A R S H S I N G H R A G H U VA N S H - 5 8
 Security Analysis
A systematic analysis of the risk return profiles of various securities which is to help a rational investor to
estimate a value for a company from all the price sensitive information/data so that he can make purchases
when the market underprices some of them and thereby earn a reasonable rate of return.

Objectives of Security Analysis

Capital Appreciation

Regular Income

Safety of Capital

Hedge against Inflation

 Security Analysis

Fundamental
Technical Analysis
Analysis
 Fundamental Analysis
Fundamental Analysis is a method of evaluating the intrinsic value of an asset and analyzing the
factors that could influence its price in the future.

This form of analysis is based on external events and influences, as well as on financial
statements and industry trends.

ASSUMPTION :
The 'market price' of security and the price as justified by its fundamental factors called 'intrinsic
value' are different and the marketplace provides an opportunity for a discerning investor to
detect such discrepancy. The moment such a description is identified, a decision to invest or
disinvest is made.
 General Rule

1. If IV > MP, buy the security

2. If IV < MP, sell the security
3. If IV > MP, no action

The price prevailing in market is called "market price' (MP) and the one justified by its
fundamentals is called 'intrinsic value' (IV).
The fundamental factors mentioned previously may relate to the economy or
industry or company or all some of this.

Fundamental
Analysis

Economic Industry Company

Analysis Analysis Analysis
Economy
Industry
Company
 Approaches for Fundamental Analysis
Before really starting fundamental analysis an investor must decide how he is going to approach the market,
what factors he is going to consider and what strategy he is going to employ in his study. There are two major
approaches through which an investor carries out Fundamental Analysis.
These are :

1. Top-Down Approach

2. Bottom –Up Approach

 Top-Down Approach

The Top-Down Approach starts the analysis with the

consideration of the health of the overall economy.
By analysing various macroeconomic factors such as
Government policies, inflation and GDP levels , an investor tries to
determine the overall direction of economy and sectors of economy
offering best investment opportunities.
Bottom-Up Approach

Inversely to Top-Bottom Approach, there is Bottom-Up Approach. Instead of

starting the analysis from the larger scale, the bottom-up approach
immediately dives into the analysis of the individual stocks.
The rationale of the investors who follow bottom-up approach is that the
individual stock may perform much better than overall industry.

The bottom-up approach is primarily concentrated on various

microeconomic factors such as a company earning and financial
metrics. Analysts who use such an approach develop a
thorough assessment of each company to gain a better
understanding of its operation.
Steps Involved in Fundamental Analysis

Economic Industry or
Sector Company
Analysis Analysis
Analysis
Economic Analysis or Forecast

The first step in Fundamental Analysis is always the evaluation of economy

in general.
The economy needs to be analyzed closely to begin fundamental
research. The growth in the economy directly affects the growth of
companies and their stocks in general with some exceptions

There is direct link of the interest rates prevailing in the economy with
the stock market and bond markets.
Industry or Sector Analysis

In a growing economy , certain industries will bring more profits

than others. To choose the specific industry for your specific industry for
your investment purpose, investor needs to check the
industry’s overall growth potential in the upcoming years.

An investor needs to check the prospects of the industry as well.

What innovations and technologies involved and getting
developed in the industry.
Company Analysis
After analysing economy and choosing industry, the investor
needs to choose a particular company and stocks to invest in.
For selecting a company out of industry ,investor needs to
shortlist on some criteria such as-

• Its prospects in terms of technology and innovations.

• Its marketing standards.
• Whether it has an edge over other companies or not?
• Market Share.
• Financials.
• Brand Value

Some qualitative factors such as Officials’ reputation and their

approach towards life and work are also taken in
consideration.
 Criteria for selecting a Particular Company

Analysis of Financials
Business Manageme- of the
Plan nt Decesion company
Why Fundamental Analysis ?
It is critical for an investor to separate the daily short-term noise in the stock market & concentrate on
the underlying business performance.

Over the long term, the stock prices of a fundamentally strong company tend to appreciate, thereby
creating wealth for its investors.

The trick has always been to separate the investment grade companies which create wealth from the
junk companies that destroy wealth.

All investment grade companies have a few common attributes that sets them apart likewise all wealth
destructors have a few common traits which are clearly visible to an astute investor.
 Pros & Cons of Fundamental Analysis
PROs CONs
Helps in development of a thorough Time Consuming & Tedious
understanding of Business of a Company.
Too many assumptions & Interpretations
Helps detect red flags, If any.
Doesn’t take into account the ‘Herd Mentality’
Helps in finding Undervalued / Under-rated
Company, may be next Multi-bagger stock.
 Mindset of a Market Participant
TRADER
Trading is a skill of timing the market.
It involves holding stocks for a short period of time.
Technical Analysis is used for decision making.
Involves higher risk & higher potential rewards
Traders are skilled, technical who time the market & learn
market trends to hit higher profits in the stipulated time.
It is related to the ‘Psychology of the Market’.
INVESTOR
Investing is an art of creating wealth by compounding interest
& dividend over the years.
It works on buy and hold principle.
Fundamental Analysis forms the base for decision making.
Comparatively lower risk & lower returns in a short run but
might deliver higher returns by compounding dividends &
interests.
Investors analyze the stocks they want to invest in. It also
includes learning business fundamentals & commitment to stay
invested for a longer term.
It is related to the ‘Philosophy that runs the Business’.
Benchmark Index As on 17-Aug-2011 As on 17-Aug-2021 10 Year CAGR 5 Year CAGR
(2011-21) (Nov 16-Nov 21)
SENSEX 16,840.80 55,792.27 12.7% 17%
NIFTY-50 5,056.60 16,614.60 12.6% 16.1%
 Company Name Share Price as on 17- Share Price as on 17- 10 Year CAGR 5 Year CAGR
Aug-2011 Aug-2021 (2011-21) (2016-21)
Bajaj Finance Ltd. 67.3 6,410.1 57.7% 48.6%
Bajaj Finserv Ltd. 488.4 14,737.3 40.6% 39.3%
Berger Paints India 37.3 815.0 36.1% 23.7%
Ltd.
Eicher Motors Ltd. 136.0 2,515.7 33.9% 0.1%
Havells India Ltd. 68.1 1,224.4 33.5% 26.6%
Shree Cement Ltd. 1,651.3 26,200.3 31.8% 12.6%
Britannia Industries 236.6 3,696.5 31.6% 17.4%
Ltd.
Info Edge India Ltd. 351.2 5,455.3 31.6% 46.1%

Pidilite Industries 168.2 2,216.1 29.4% 28.0%

Ltd.
Abott India Ltd. 1,470.1 19,045.3 29.2% 33.6%
 Company Name Share Price as on Share Price as on 10 Year CAGR 5 Year CAGR
17-Aug-2011 17-Aug-2021 (2011-21) (2016-21)

HCL Technologies Ltd. 105.8 1,143.0 26.9% 25.5%

Aurobindo Pharma Ltd. 71.4 731.5 26.2% -1.9%
Torrent Pharmaceuticals 308.5 3,008.1 25.6% 16.9%
Ltd.
Asian Paints Ltd. 324.5 3,015.3 25.0% 24.7%
Titan Company Ltd. 210.4 1,874.5 24.4% 44.9%
Kotak Mahindra Bank 222.8 1,788.4 23.2% 20.8%
Ltd.
Tech Mahindra Ltd. 179.0 1,413.7 23.0% 28.9%
Hindustan Unilever Ltd. 316.4 2,483.8 22.9% 23.5%
HDFC Bank 233.8 1,514.7 20.5% 20.7%
Marico Ltd. 79.7 520.6 20.7% 16.7%
 Industry Analysis

Structure of the Industry & Nature of Competition

Stage of the Industry Life Cycle

Nature & Prospects of Demand

Cost Structure, Efficiency & Profitability

Research & Technological Innovations

Government Attitude

Sensitivity to the Business Cycle

 Company Analysis

Qualitative / Non-Financial Quantitative / Financial

History & Business of the

Ratio Analysis
Company

Industrial Relations
Income Statement Analysis
Scenario

Corporate Image Balance Sheet Analysis

Cash Flow & Fund Flow

Quality of Management
Analysis
 Economic Analysis
Economic Indicators & their Suggestive Impact on the Share Market

Impact on the Share

Economic Indicator Situation
Market
Boom Positive (Bullish Market)
Business Cycle Stage
Recession Negative (Bearish Market)
Growth Positive
Gross Domestic Product
Decline Negative
Constant Prices Positive
Inflation
Inflationary / Deflationary Prices Negative
Rise Positive
Aggregate Demand
Fall Negative
 Economic Indicators & their Suggestive Impact on the Share Market

Impact on the Share

Economic Indicator Situation
Market
Increase Negative (Bearish Market)
Unemployment
Decline Positive (Bullish Market)
Increase Positive
Individual Savings
Decline Negative
High Negative
Interest Rate
Low Positive
Increase Positive
Personal Disposable Income
Decrease Negative
 Economic Indicators & their Suggestive Impact on the Share Market

Impact on the Share

Economic Indicator Situation
Market
Favorable (Strong Domestic
Positive (Bullish Market)
Currency)
Exchange Rate
Unfavorable (Weak Domestic
Negative (Bearish Market)
Currency)
High Negative
Corporate Tax Rate
Low Positive
Positive (Exports > Imports) Positive
Balance Of Trade
Negative (Imports > Exports) Negative
 Economic Indicators & their Suggestive Impact on the Share Market

Impact on the Share

Economic Indicator Situation
Market
Poor Negative (Bearish Market)
Monsoon & Agriculture
Good Positive (Bullish Market)

NOTE:
This table is relevant assuming all other economic indicators do not change for a given situation.
A combination or set of these economic conditions defines an economy at any point of time. Hence, any economic indicator need not necessarily
support the share market behaviour as suggested, though theoretically it might be possible.
In addition, a change in one economic variable has a multiple impact on other economic indicators either positively or negatively. This compel us to
look for an economic scenario rather than the particular directional movement of a single economic indicator.