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