Fundamental Analysis

Made By-: Abhishek Goyal

Aniket Kumar
Himanshu Manchanda Megha Dhariwal Nishtha Srivastava Tarunpreet Singh

 Fundamental Analysis is a stock valuation method that

uses financial and economic analysis to predict the movement of stock price.
It is an examination of underlying forces that affect the

well being of the economy, industrial groups and companies

The objective is to appraise the intrinsic value of a

security and predict future price movements

 The

price on the stock market does not fully reflect a stocks real value. the long run, the stock market will reflect the fundamentals.

In

The approach to fundamental analysis is often referred to as E-I-C Approach. The E-I-C denotes the three parts of the fundamental analysis :
Economy Approach Industrial Approach Company Approach

Investors Approach
Top-down

approach
approach

Bottom-up

 Countries

go through the business or economic cycle, and the stage of the cycle at which a country is in, has a direct impact both on industry and individual companies. four stages of an economic cycle are:

The

Boom Recession Depression Recovery

Foreign Exchange Reserves Foreign Exchange Risk Foreign Debt and the Balance of Trade Inflation Interest Rates Taxation Government Policy

Industry Analysis
The industries that contribute to the output of the major segments of the economy vary in their growth rate and in their overall contribution to economic activity. Some grow more rapidly than the GDP and offer the expectation of continued growth. Others maintain a growth comparable to that of the GDP. A few are unable to expand and decline in economic significance

The first step in industry is to determine the cycle it is in, or the stage of maturity of the industry. All industries evolve through the following stages: 1. Introduction
2. Growth

3. Maturity
4. Decline

Points taken into account while conducting industry analysis

Raw Material And Inputs

Under this industries are looked depending upon the scarce of raw materials, competition from other companies and industry. Import export restrictions, labours also have a great influence on growth

Capacity Installed And Utilisation

Demand for industrial products are estimated by government and units are given licensed capacity on the basis of estimation

Industry Characteristics
Whether the industry is cyclical, fluctuating or stable as the prospects for growth will depend on these factors to an extent

Government Policy With Regard To Industry

The government has the power to control the inputs and outputs, price and distribution of products and a number of aspects. Policies related to installed capacity, granting of clearance and reservation of small industry is also important.

After a study of past the future prospects of the industry are to be assessed. The purpose, project demanded, input availabilities economies of scale and the position of competitors in the market are to be probed in.

India represents worlds largest and fastest growing automobile market. Large middle class population , improving income levels and improved technology have boosted automobile demand Even in wake of economic slowdown , the industry sustained its positive growth momentum mainly because of strong domestic demand for passenger car The passenger car market, which constitutes around 78.5% of passenger vehicle sales (in FY 2010), has immense growth potential as passenger car stock stood at around 11.6 per 1,000 people in 2009.

Company analysis is the last leg in the economy-industry-company sequence.

The analysis can be organized into two parts.

Quantitative Analysis Qualitative Analysis

Company analysis serves to answer questions, such as:

Is the companys revenue growing? Is it actually making a profit? Is it in a strong-enough position to beat out its competitors

in the future?
Is it able to repay its debts?
Is management trying to "cook the books"?

 The procedure commonly followed by the investment analysts to estimate the intrinsic value of a share:
Estimate the expected earnings per share Establish a future PE ratio Develop a value anchor & a value range

EPS forecast is based on a number of assumptions about the behavior of revenues and cost. Marutis Expected EPS

How EPS is Calculated

The price earnings (PE) ratio reflects the price currently being paid by the market for each rupee of currently reported EPS.

Current market price = 1215 (as on 2/8/2011)

It is calculated as follows: = average of last five years dividend payout ratio =11+8.09+9.7+9.78+9.72 5 =9.658

By applying the Gordons model, we get the following:

YEAR 1st 1st

PRICE ROR 12% 1364 12%

EPS 85.9 -

DIVIDEND

NPV 7.40 1218

8.29 -

Value anchor
Value Range = 1193.29 to 1247.67

1225.4

 Present value of future returns = 1225.4 New PE ratio

future market value of the share

future EPS 1225.4/85.9 14.26

Recommendation: BUY

last five yr results

100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07

Net Profit

EPS
Debt Equity Ratios ROE dividend

Ratios
Net profit margin

Current ratio EPS

Gross profit margin

Debt/equity
F.Asset turnover Return on assets

Earning power ROE ROCE

Maruti 10.29 1.5 79.2 7.1 0.02 3.09 9.26% 12.75% 16.6 9.39%

Tata motors 3.75 0.77 28.55 5.26 0.79 2.19 2.89% 5.74% 9.04 3.91

Ratios

Maruti 2011 Net profit margin 10.29 Current ratio 1.5 EPS 79.2 Gross profit margin 7.1 Debt/equity 0.02 F.Asset turnover 3.09 Return on assets 9.26% Earning power 12.75% ROCE 9.39%

Maruti 2010 8.34 1.02 86.4 9.93 0.06 2.82 11.44 16.17 11.60

 Marketing Dividend

policies

Operating

efficiency
policies

Accounting

Capital

structure

Management

 The

first variable that influences future earnings in terms of both quality and quantity is the marketing results of the firm in comparison to the industry.

This

in turn is determined by:

Share of the company in the industry Growth of its sales

Stability of sales.

Marketing contd.
Share of the company in the industry: The rupee amount of annual sales and its share of the market helps to determine a companys relative competitive position within the industry and how successful it has been in meeting competition.
Estimated sales of Maruti

year
2012 2013

Sales(Rs. mn)
393,196 435,858

growth percentage
45 40 35 30 25 20 15 10 5 0 2007 2008 2009 2010

 Stability of sales will provide stable earning for a firm. A stability in sales will allow for better financial

planning and plant utilization of plant.

It can be seen from the trend of past 5 years that the

sales of Maruti are stable in nature

 Management

tries to have a stable dividend policy and increase the dividends only when they expect they will be able to able to maintain the higher rate of dividends in future. of Maruti for the last 5 years
Year 2007 2008 2009 2010 2011 Dividend 9.72 9.78 9.7 8.09 11

Dividend

Operating rate

Operating rate = (Actual activity / Plan activity) X 100

Capital expenditure

 Before

the analysis of a company its accounting policies must be seen.

Inventory pricing
Depreciation

Depreciation is the process by which a company allocates an assets cost over the duration of its useful life. The purpose of recording depreciation as an expense is to spread the initial price of the asset over its useful life. As an investor, you need to now how the choice of depreciation method affects an income statement and balance sheet in the short term A closer look at depreciation should remind the investors that the improvements in earnings per share and book value can, in some cases, result from little more than strokes of pen.

It is quite possible that earnings and net asset value are sometimes boosted and hence have nothing to do with improved business performance, and in turn, dont signal strong long-term fundamentals.

 Companies

can finance their operations through either debt or equity.

debt-to-capital ratio gives users an idea of a company's financial structure, along with some insight into its financial strength.

The

Chart Title
TOTAL DEBT 0% EQUITY

100%

 Management

is ultimately responsible for applying company resources effectively and efficiently to accomplish the companys goals. experts believe that the quality of a companys management may be the single most important influence on its future profitability and overall success.

Some

1.

How effective is the companys strategic planning? Has the company been Financed on adequately and appropriately? Does the company have good relations with its unions and employees? How effective is the board of directors?

2.

3.

4.

SWOT ANALYSIS
STRENGHTS WEAKNESS

OPPORTUNUTIES

THREATS

STRENGHTS
I.

Brand loyalty
Service and distribution network Low maintenance cost

II.

III.

IV.

High market share (46.07%)

WEAKNESS
I. Changing customers preferences
II. Labor conflicts III. No product in luxury segment

IV.Comparatively takes more time to launch new product or to modify the existing one

OPPORTUNITIES
I. Attraction of youth
II. Increasing middle class income III. Export of small cars

IV.Rise in income in rural areas

THREATS
I. Foreign brands
II. Fuel prices III. Rise in interest rates