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FUNDAMENTAL ANALYSIS  Classification of Industries 1) Classification by reporting agencies 2) Classification by business cycle 3) Industry groups 4) Input based classification 1) Classification by reporting agencies: industries into 32 groups, stock exchange 10 group, business media have...

FUNDAMENTAL ANALYSIS  Classification of Industries 1) Classification by reporting agencies 2) Classification by business cycle 3) Industry groups 4) Input based classification 1) Classification by reporting agencies: industries into 32 groups, stock exchange 10 group, business media have their own classification. 2) Classification by business cycle/Industry classification: According to business cycle based upon up swing and down swings of economy. Growth industries: These industries grow consistently and its growth and its growth may exceed the average growth of the economy. High rate of earnings Wider expansion of business By considering technological changes By considering 20th industry: - 1) Automobile industry 2) Aero plane industry 1940’s Photography industry 1950’s Color television industry, Computers industry 1960’s Pharmaceutical industry, Communication 2000’s Soft ware industry Present cellular industry, Genetic engineering and Environmental Management. 3) Group of industries I) small scale units: are not listed and those which are listed should be of a minimum paid up capital. 2) Medium scale industries: the industries units which have a material figures in paid up capital can be listed on the regional stock exchanges 3) Large scale industries: the industries units with higher paid up capital Industry Groups 1. Food Industry 2. Beverages, Tobacco and tobacco products 3. Textiles 4. Wood and wood products 5. Leather and Leather products 6. Rubber and plastic products 7. Chemical and chemical products (pharmaceuticals) 8. Non metallic minerals products (mercury) 9. Basic metals, alloys and metal products 10. Machinery and machine tools 11. Transfer equipment and products 12. Other miscellaneous manufacturing Industries.  Industry Life Cycle 1. Pioneering stage 2. Rapid growth stage 3. Maturity/stagnation stage 4. Declining stage 1. Pioneering stage: o Product is attracted byproducers(competitors) o Product is having low demand. o Product tries to develop brand name, differentiation of the product and for a new image. o non price competition will be available. O it is difficult to select companies per investment because the survival rate is unknown. 2. Rapid growth stage: - known as expansion stage. It starts with surviving in the pioneering Stage. Companies grow strongly in market share and financial performance. Technology of the production would be improved and low cost of production under goes quality products; companies also declare dividends to the share holders. It is advisable to invest in the shares at these companies. Ex: Soft ware industry, pharmaceutical. 3. Maturity/stagnation stage: o The growth of the industry which had moderated in the expansion stage begins at stagnated. o In this stage the ability of the industry to grow appears have been losses. o Sales may be increasing at a slower rate than that experienced by other company in the industry or by the overall economy. o The investments opportunities within the industry may be diminished. o Symptoms of this stage include social habits high labor cost, changes in technology and stationary demand. 4. Declining stages: o the demand and earnings of the industry product will be declined. – Ex: black and white televisions. o Consumer prefers less to this stage. o the industry would be low and decline the higher rate during the recession. o It is better to avoid industry in the shares of the low growth even in the boom period. o Investments in the shares of company lead to erosion of capital. Key characteristics in an industry analysis: a. Past sales and earnings performance: o Historical record of industry sales o Average levels and stability of performance o Past variability o Knowledge and understanding of the past behavior  b. Permanence: – It is a phenomenon related to the products and technology of the industry. – c. Government attitude towards industry: For some industries the Govt will give more concessions, tax benefits, having positive attitude. d. Labor conditions: which type of labors are require for that particular industry, what labor actions and reactions in the industry etc., also has to know for analyzing security risk and return. e. Competitive conditions: – In the consideration analysis of competitive conditions. Three types of general barriers are – a) Product differentiation advantages – b) Absolute cost advantages and – c) Economies of scale  f. Product differentiation advantages: – buyer’s have a preference for the product of established firms or Industries such as patient rights. g. Absolute cost advantages: - – The fact is established firms or industries able to produce and distribute their products at any level of production or distribution at a lower cost than any new entrant can so established firms likely to have more profits. h. Economies of scale: – - To attain a high level of production in order to obtain economically feasible levels of cost have to obtain significant share of the market if it expects to a competitive cost structure relating to existing firms.  i. Research and development activities j. SWOT analysis: – The investor has to analyze the internal strengths and weaknesses, external opportunities and threats of the industry. Decision to purchase is made based not only current status and future prospects but also on the current prices of securities in the industry. Price is very high relatively to future earnings growth. Price is low relative to future prospects are din.  Fundamental Analysis: COMPANY ANALYSIS Why do you do company analysis? it is because the annual reports and the financial statements help you in evaluating the performance of the company so that you can select good stocks for your portfolio.  Steps in the company analysis process 1. Identify company and industry's economic characteristic This step will help us in getting an idea as to which part of the value chain does the company fits in and its closest competitors which might be operating in that area. 2. Identify and know about the products and/or services: we need to go through its products and services which it offers to its customers. Suppose we want to know about the products ‘Dabur’ manufactures and sells, we can just log on to the website and under ‘Products’ section we will see the verticals it is present in like, Healthcare, Home and Personal care and Foods category.  We have to also look at the nature of the product being offered by the firm, uniqueness of the product, demand and supply dynamics, brand awareness in the geographical area it is present in. The market shares and to which market by geography it caters too. 3. Understanding the risks and concerns about the company: Every business and industry carries its own set of risks and concerns which might impact the performance and profitability of the company. as an investor it is very important to get an idea as to the risks the company is exposed to in case of any eventualities. need to check and analyze, that to which extent will that particular risk affect the business and can the company overcome it. – For example: Currency volatility is an important risk for the IT industry as it generates majority of the revenues from other countries. Here we need to check that how and to what extent will currency appreciation or depreciation impact the company’s performance.  The Company’s Annual Report also contains the risks and concerns that the company is exposed to. We can get it under ‘Management Discussion and Analysis’, where it will list the risks which the company might face in its operations along with the steps it is taking to overcome those situations.  4. Analyzing the Financial Statements: This is one of the most important steps in the process to analyze a company. gives us the actual quantitative picture of any company which is an important part. evaluating the Income Statements, we check on the margins, the topline and the bottom- line.  From the Balance Sheet we get an idea as to how strong the company financially is. Cash Flow Statements gives us a thorough picture of the Cash balance which is generated from the company’s operating, investing and financing activities. It helps in understanding the firm’s liquidity position.  Fundamental Analysis Factors affecting company analysis: 1. Qualitative Factors : These factors take into consideration the business model, competitive advantage, Management and Corporate governance. Under business model, need to see what the company does, what does it sell along with the prices at which it sells. If the company is doing something differently then it will affect its profitability to a large extent in the long term.  It is important to get an idea of the company’s quality of management as to how experienced are they and whether they are guilty of any kind of frauds in the past. A proper and ethical management will always think about the well being of the company and its stakeholders. Sound management will also abide by the rules and regulations set up by the government or the regulators. 2. Quantitative Factors: In the quantitative factors, we deal with the Industry growth and the company’s growth along with its peers. There will be few times, when the company will outperform the industry but also some times when it will underperform the industry. The smaller the company, the higher growth is expected out of it and vice versa.  Companies having large number of competitors in its segment will have more pricing pressure and thus lower margins. FMCG companies cannot just hike or lower the prices as there are too many competitors which might get affected whereas, in the airlines industry, only few players operate which enables them to hike or reduce their prices whenever they want. Hence we need to take into account both qualitative as well as the quantitative factors in order to get an in depth understanding about the company.  Methods of Company Analysis: Primarily company analysis can be segregated into two methods: 1. Top Down Approach : In the top down approach, the investors start analyzing by looking at the macroeconomic factors like monetary policy, inflation, economic growth, broader events before digging deep into the individual stock. The investor looks for the factors, events prevailing in the market and tries to understand the opportunity that could be derived from it. 2. Bottom Up Approach : In this approach, we start by analyzing the individual companies and then building portfolio based on the specific attributes. The investors tend to focus on the micro-economic factors in this method of investing.  How do we evaluate the company fundamentals? First we need to have a brief overview about the company’s business model. From the point of getting the raw materials to selling the products; series of steps needs to be taken. – For example, lets say in the case of Dabur, first we need to get an idea about the company from the About >> Corporate Profile section. Then, we can get further details about the company’s business model from the Annual Report which is published annually.  The business model analysis includes getting the information of the raw material as to how it is supplied to the retailers. This step will help us to get an idea of how are the different products manufactured and are supplied to the various suppliers. Post getting to know about the business model, we need to check the financials of the company. We will get these from the Profit & Loss Statements. Analyzing the financials and the balance sheet will help us to get an idea of the financial position of the company. We will get the Financials and Balance Sheet in the Annual Report from where we can analyze the performance of the company compared to the previous fiscal year.  Now, financial analysis should also be done on a comparable approach, like how is the revenue growth. Only then it is possible for us to conclude whether the company fared well or was average. Balance Sheets can be analyzed on a year on year change basis. Cash Flow Statements should also be analyzed on the basis of three activities : Operating, Investing and Financing activities.  Remember that: Company Analysis is the process of evaluating a company’s profitability, profile, product and services It’s important for any investor to perform a thorough analysis in order to get a fair view of the company he/she is interested in. It is important to go through the ratios in a comparative manner, in relation to the past periods or relative to the other players in the industry. It is important to get an idea of the company’s quality of management as to how experienced are they and whether they are guilty of any kind of frauds in the past. Cash Flow Statements gives us a thorough picture of the Cash balance which is generated from the company’s operating, investing and financing activities. We need to take into account both qualitative as well as the quantitative factors in order to get an in depth understanding about the company.