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Security Analysis &Portfolio
Management
Prepared By: S Prashanth
MBA-CMU 13031E0117JNTUH SMS.
Fundamental Analysis
Fundamental Analysis
Fundamental Analysis is to evaluate a lot information about the past performance and the expected future performance of companies, industries and the economy as a whole before taking the investment decision. Such evaluation or analysis is called fundamental analysis.
Fundamental Analysis (con’t)Fundamental analysis is really a logical and systematic
approach to estimating the future dividends and share price.
Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:
• To conduct a company stock valuation and predict its probable price evolution,
• to make a projection on its business performance,• to evaluate its management and make internal
business decisions,• to calculate its risk.
Fundamental analysis includes:• Economic analysis • Industry analysis • Company analysis
Fundamental Analysis
Economy Analysis
Industry analysis
Company Analysis The Analysis of economy, industry and company constitute the main activity in the fundamental approach to security analysis. And can be viewed as different stages in investment decision making process. Three tier analysis depict
that company performance dependent not only on its own effort but also on the general industry and economy factor.
Economy Analysis
Boom Economy:Income rise and demand for goods will increase the industries
and companies in general tend to be prosperous.
Recession Economy:Income decline and demand for goods will decrease the industries
and companies in general tend to be bad performance
Economy analysis (con’t)
Growth rates of national income(GRNI)GRNI is an important variable can be
calculated by GDP, NNP, and GDP to analysis the growth rate of economy.
Four stages of economy or economic cycle i.e depression, recovery, boom and recovery of economy of nation also impact on security performance.
• Depression: At this stage demand is low and declining inflation often high and so are interest rate, companies usually reduce activities and securities performance is poor.
• Recovery: Economy begin to revive after depression, demand pick up leading, production and activities increase.
• Boom: High demand with high investment and production, companies earn more profit
• Recession: Companies slowly begins downturn in demand, production and employment, profits are also decline.
Inflation:
Inflation prevailing significant impact on company performance. High inflation upset company plan. Demand goes down because purchasing power fall, high inflation impact company performance adversely. Inflation is measured both in
WPI (Wholesale price index)CPI (Consumer price index)
Interest RateInterest rates determine the cost and
availability of credit for companies operating in an economy.
Low interest rate=> easily and cheaply available credit.
=> lower cost of finance => high profitability
High interest rate => higher cost of production=>lower profitability =>Lower demand
Government revenue, expenditure and deficit
• Government is the largest investor in economy of any country thus revenue, expenditure and deficit have significance impact on the performance of industries and companies.
• Expenditure stimulate demand and creates job.• The excess of expenditure over revenue is
deficit, (budget deficit), most expenditure are spent on infrastructure, and deficit financing fuel inflation.
Exchange rate• The balance of trade in import and export
determine the rate of exchange rate.• Depreciation of local currency improve the
competitive position in foreign market the performance of exported product but it would also make the imported product more expensive.
• A foreign Exchange reserves is needed to meet several commitments such as payment for import and servicing of foreign depts.
Infrastructure.• Development of a economy depends very much
on the infrastructure available. Industry needs electricity for its manufacturing activities road and railways to transport raw material and finished good. Communication channels help supplier and customers.
• Good infrastructure is symptoms of development.• Bad infrastructure lead to inefficiencies, low
productivity wastages and delay. • Investors should analysis the infrastructure of any
economy.
Seasonal impact• INDIAN economy depends on agriculture
sectors, and services sector. The economy is also depend the performance of agriculture, optimistic forecasting of weather condition will prosper the economy condition.
• Weather forecasting becomes a matter of great concern for investor in the economy of agricultural country.
Macro Economic Indicator• GDP-annual rate of 4.70% 3rd & 4th quarter
of 2013• Inflation rate:-last reported 6.73 % in FEB-
2014• Interest Rate:-reverse repo rate is adjusted
to 7.0 %.• Trade deficit $138.0 Billions in April-2014• Tax rate India 30% ,less than Spain ,
France etc• Saving rate -35.7%
Infosys RatiosYEARRATIOS:
2011 2012 2013
Current Ratio 4.28 4.71 3.30Quick Ratio 4.20 4.67 3.28Gross Profit Ratio
31.04 30.66 28.23
Net Profit Ratio 26.31 27.52 27.37Asset Turnover Ratio
5.59 3.39 3.47
Dividend Per Share Ratio
25.00 23.50 33.25
Reported EPS 101.30 101.58 78.15
Indian IT Industry• The IT-BPO industry is estimated to
aggregate revenues of US$ 108.1 billion in FY2013, with the IT software and services industry accounting for US$ 89.7 billion of revenues.
• Accounts for a 5.19% of the country's GDP• Direct/indirect employment to 2.3 million
people • 2.3 million employment• India's outsourcing industry is expected to
increase to US$225 billion by 2020
Porter 5 forces
• Threat of Substitutes:(Medium)– Other offshore locations e.g Philippines– Price of projects is a major differentiator, the quality
of products being same.• RIVALRY AMONG FIRMS: High
– 'low-cost, little-differentiation‘ positioning.– high industry growth– Strong competitors– few numbers of large companies.
Bargaining Power of Supplier: (high)-Availability of vast talent pool- freshers and
experience.• Bargaining Power of Customers (very high) Large number of IT Companies vying for IT
Projects and Decline in IT Expenditure.Barriers To Entry: (low)Large Value Chain &Low Capital Requirements.
Recommendation
• Intrinsic value =EPS*(P/E Ratio)• EPS=101.30• P/E Ratio=32.42
– Intrinsic value=3284.14– Market Value=3254.10
-Market Value>Intrinsic value Buy shares of infosys