FUNDAMENTAL ANALYSIS

(SUBJCET-SECURITY ANALYSIS & PORTFOLIO MANAGEMENT)

TARGET STUDENT-BBA/BCOM/MBA/MCOM

By
PARTHA SETH
11/05/2020
WHAT IS FUNDAMENTAL ANALYSIS?

 Fundamental analysis is a technique that

attempts to determine a security‘s value by
focusing on underlying factors that affect a
company's actual business and its future
prospects.
 WHY FUNDAMENTAL ANALYSIS
 Fundamental analysis answers the following
question
 Is the company’s revenue growing?
 Is it actually making a profit?
 Is it in a position strong-enough to outrun its
competitors in the future?
 Is it able to repay its debts?
 Is management trying to "cook the books"?
FUNDAMENTAL ANALYSIS
 The fundamental school of thought appraises
the intrinsic value of shares through
 ECONOMY ANALYSIS
 The first step to this type of analysis includes
looking at the macroeconomic situation.
 GDP/growth rate
 Inflation
 Interest rates
 Foreign Exchange rates
 Agricultural production/monsoon
 FDI/FII
 Govt’s Budget/fiscal policy
 ECONOMIC INDICATORS AND THEIR IMPACT ON THE
STOCK MARKET
INDICATOR FAVOURABLE UNFAVOURABLE
IMPACT IMAPACT
GDP/GROWTH RATE HIGH GROWTH RATE SLOW GROWTH RATE

DOMESTIC SAVINGS HIGH LOW

RATE
INTEREST RATES LOW HIGH

TAX RATES LOW HIGH

INFLATION LOW HIGH

IIP/INDUSTRIAL HIGH LOW

PRODUCTION
BALANCE OF TRADE POSITIVE NEGATIVE

BALANCE OF POSITIVE NEGATIVE

PAYMENTS
 ECONOMIC INDICATORS AND THEIR IMPACT ON THE
STOCK MARKET
INDICATOR FAVOURABLE UNFAVOURABLE
IMPACT IMAPACT
FOREIGN EXCHANGE HIGH LOW
POSITION
DEFICIT LOW HIGH
FINANCING/FISCAL
DEFICIT
AGRICULTURAL HIGH LOW
PRODUCTION
INFRASTRUCTURAL GOOD NOT GOOD
FACILITIES
 Industry analysis
 Industry analysis is a type of investment research that
begins by focusing on the status of an industry or an
industrial sector.

 Why is this important?

 Each industry is different, and using one cookie-cutter
approach to analysis is sure to create problems. Imagine,
for example, comparing the P/E ratio of a tech company
to that of a utility. Because you are, in effect, comparing
apples to oranges, the analysis is next to useless.
 2. Industry Analysis

• INDUSTRY ANALYSIS LOOKS AT

a) Business cycle and defensiveness to cycle
b) Industry structure, rules and regulation
c) competitive position of industry
d) Profit potential of industries
Michael Porter’s 5 Force Model
 Threat of New Entrants - The easier it is for new companies to enter
the industry, the more cutthroat competition there will be. Factors that can limit the
threat of new entrants are known as barriers to entry. Some examples include:
 Existing loyalty to major brands
 Incentives for using a particular buyer (such as frequent shopper programs)
 High fixed costs
 Scarcity of resources
 High costs of switching companies
 Government restrictions or legislation

 Power of Suppliers - This is how much pressure suppliers can place

on a business. If one supplier has a large enough impact to affect a company's
margins and volumes, then it holds substantial power. Here are a few reasons that
suppliers might have power:
 There are very few suppliers of a particular product
 There are no substitutes
 Switching to another (competitive) product is very costly
 The product is extremely important to buyers - can\'t do without it
 The supplying industry has a higher profitability than the buying industry
 Power of Buyers - This is how much pressure customers can place on a business. If one
customer has a large enough impact to affect a company's margins and volumes, then the
customer hold substantial power. Here are a few reasons that customers might have power:
 Small number of buyers
 Purchases large volumes
 Switching to another (competitive) product is simple
 The product is not extremely important to buyers; they can do without the product for a period
of time
 Customers are price sensitive

 Availability of Substitutes - What is the likelihood that someone will switch to a

competitive product or service? If the cost of switching is low, then this poses a serious threat.
Here are a few factors that can affect the threat of substitutes:
 The main issue is the similarity of substitutes. For example, if the price of coffee rises
substantially, a coffee drinker may switch over to a beverage like tea.
 If substitutes are similar, it can be viewed in the same light as a new entrant.

 Competitive Rivalry - This describes the intensity of competition between existing firms
in an industry. Highly competitive industries generally earn low returns because the cost of
competition is high. A highly competitive market might result from:
 Many players of about the same size; there is no dominant firm
 Little differentiation between competitors products and services
Company analysis: Financial analysis
 Financial statement Analysis:
 Common size statement analysis
 Comparative statement analysis
 Fund flow statement analysis
 Cash flow statement analysis
 Trend analysis
 Ratio analysis:
 Company Analysis-Non
Financial
Aspects :History, Promoters and Management
Review Questions
 How old is the company?
 Who are the promoters?
 Is it family managed or professionally managed?
 What is the public image and reputation of the company, its promoters and its products?
Aspects :Technology, Facilities and Production
Review Questions
 Does the company use relevant technology?
 Is there any foreign collaboration?
 Where is the unit located?
 Are the production facilities well balanced?
 Is the size the right economic size?
 What are the production trends?
 What is the raw material position?
 Is the process power- intense?
 Are there adequate arrangements for power?
 Non-financial Analysis
Aspect:Product range, Marketing, Selling and Distribution
Review Question:
 What is the company‘s product range?
 Are there any cash cows among the product portfolio?
 How distribution-effective is the marketing network?
 What is the brand image of the products?
 What is the market share enjoyed by the products in the relevant segments?
 What are the effects and costs of sales promotion and distribution?

Aspect:Industrial relations, Productivity and Personnel

Review Question:
 How important is the labour component?
 What is the labour situation in general?

Aspect:Environment
Review Question:
 Are there any statutory controls on production, price, distribution, raw material,
etc?
 Is there any major legal constraint?
 What are the government policies on the industry (domestic as well as related to
imports and exports of the final products and raw materials)?
 SWOT ANALYSIS

Internal Strengths Weaknesses

Latest Technology Loose controls
Lower delivered Cost Untrained labour force
Established products Strained cash flows
Committed manpower Poor product quality
Advantageous location Family funds
Strong finances Poor public image
Well- known brand names

External Opportunities Threats

Growing domestic demand Price War
Expanding export markets Intensive competition
Cheap labour Undependable component
Booming capital markets Suppliers
Low interest rates Infrastructure bottlenecks
Power cuts
FUNDAMENTAL ANALYSIS OF A COMPANY
Any question?

H A N K
T
YO U !