understanding fundamental analysis

7/30/2019 Understanding Fundamental Analysis

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Understanding Fundamental

Analysis


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Points of Discussion

What is Valuation?

Issues in Valuation

Factors determining Valuation Criticality of factors

Impact of macro economic factors on

Valuation

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A method of evaluating a security that

entails attempting to measure its intrinsic

value by examining certain qualitative and

quantitative factors

What is Fundamental Analysis?


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Fundamental analysts attempt to study everything that can

affect the security's value, including macroeconomic factors (like

the overall economy) ,industry related factors (key drivers of the

industry) and company-specific factors (like financial condition

and management).

What is Fundamental Analysis?


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What is Value?

Depends on who is asking and why

Generally an economic concept where what a buyer is willing to pay and

what a seller is willing to take overlap

Implies transferability

Implies agreeable to both parties

In the real world it is normally a range, not a point

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What Decides Value?


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Assets of various kinds which can be broadly

classified as:

Operating Assets

Non Operating Assets

Cash Flow

Value is decided by


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Financial Data of the Company

Trends in Growth

Broad Macro Economic Factors Growth in Industries

International Economy

Demographics

Quantitative Factors


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Business Environment

Capability of Management

Human Resource Quality

Qualitative Factors


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Misconceptions about Valuation

Myth 1: A valuation is an objective search for true value Truth 1.1: All valuations are biased. The only questions are how much and in which

direction.

Truth 1.2: The direction and magnitude of the bias in your valuation is directly

proportional to who pays you and how much you are paid.

Myth 2.: A good valuation provides a precise estimate of value Truth 2.1: There are no precise valuations

Truth 2.2: The payoff to valuation is greatest when valuation is least precise.

Myth 3: . The more quantitative a model, the better the valuation

Truth 3.1: Ones understanding of a valuation model is inversely proportional to the

number of inputs required for the model.

Truth 3.2: Simpler valuation models do much better than complex ones.


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Know What We Are Valuing

Current

Assets

IntangibleAssets

Financial Debtless Cash

ShareholdersEquity

CurrentLiabilities

EquityValue

EnterpriseValue

TangibleAssets

Current

Assets

IntangibleAssets

Financial Debtless Cash

ShareholdersEquity

CurrentLiabilities

EquityValue

EnterpriseValue

TangibleAssets


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Know What We Are Valuing

The accounting identity holds true at market value.

Assets = Liabilities

Current Assets + Tangible & Intangible Assets = Financial Debt (less cash) + Current

Liabilities + Shareholders Equity

Tangible & Intangible Assets + Working Capital = Net Financial Debt + Shareholders

EquityEconomic Assets Capital Employed


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What is Being Valued Levels of Value

Equit

y

Asse

ts

Common

Preferred

Tangible

Intangible

Other

Options,

Warrants,

etc.

ControllingInterest

Marketable

Minority

Interest

Nonmarketable

Minority Interest

Control Premium

Minority Interest Discount

Marketability Discount


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Qualitative Quantitative

Analysis Analysis

Early

Stage

Mid-

Stage

Late

Stage

Initial

Public

Offering

Stage:

Understand Companys Stage of Development


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Riddles in Fundamental Analysis

Sentiments Liquidity

Irrational

Exuberance


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Sentiments


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Volumes in IPO

How much flow is in mutual funds

Trading Volumes First day return on IPOs

Participation of Retail Investors

Sentiments- How to measure?


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Liquidity

How Much Cash is

Available in the market?

Also how the money

moves across the globe.


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Irrational Exuberance


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Some Factors are Temporary..


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Iran threatening to close Strait of

Hormuz


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Election Results


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Volcanic Eruption shuts Heathrow


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Others are Long Lasting


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Greece Crisis


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Sub-Prime Crisis


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International Crude Oil Prices


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Factors that need to be considered:

Economic Factors

Industry Factors

Company Factors

Others

Fundamental Analysis


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Approaches to Fundamental Analysis


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Bottom Up Approach


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Top Down Approach


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Growth Rate

Global Economy

International Trade

Monetary Policy

Fiscal Policy

Government Policies

Economy Related Factors


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GDP numbers

IIP

Key interest rates

Inflation data

GovernmentMonetary and Fiscal

Other Government Policies

Indian Economy- What should you

keep watch on?


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Do Economy related factors matter for

a company?


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Market keeps a watch on critical indicator of

economic development

It analyses the impact of an economic

indicator on different industries

Hence the impact on an economic factor is not

the same

Economy Related Factors


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Date Repo Rate Market (Sensex)

16-Jun-2011 7.50% -150 points

03-May-2011 7.25% -460 points

17-Mar-2011 6.75% -200 points

25-Jan-2011 6.50% -180 points

02-Nov-2010 6.25% -10 points

16-Sep-2010 6.00% -85 points

27-Jul-2010 5.75% +50 points

Repo Rate Hike and Sensex


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Name of the Company Stock Price Change

Shoppers Stop 395.65 6.99

Raymond 385.95 2.55

Pantaloon 234.05 16.67

Trent 1058.45 8.40

Vishal Retail 22.60 19.89

What happened when Government

announced FDI in Retail?


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Macro Economic Factors

It is not easy to quantify macro economic

factors

However, there is an obvious impact of macro

economic factors on a companys business

prospect.

An analyst needs to watch out for only those

factors which have long lasting impact on

valuation of a company

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understanding fundamental analysis

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