fundamental research 1

8/13/2019 Fundamental Research 1

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Fundamental

Long term (more than a year)

Business perspective

Financial perspective

Sectoral view & competition

Valuation

Delivery based call

Technical - Short term (as short as a daily call)

Trend is friend

Charts and line indicators

Trading based calls


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Fundamental Analysis

Top down approach

Economic indicators & regulations

Sectoral cues

Peer group analysis

Company Analysis


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Economic indicators

GDP growth

IIP growth

Government regulations and policy changes

RBI Credit policy & Inflation

Crude pricing & currency movement

Demand cyclicality

Political uncertainty

Employment data


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Sectoral cues

Demand

Demographics

New entrants

Technology

Geography

Government initiatives


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Company Analysis

Collate data in excel sheets for the company for the last five yearson annual as well as quarterly basis and calculate (Year-on yearand quarter-on-quarter growth rates for all the P&L items) Alsocalculate P&L items as % of sales except tax (as a % of PBT) andinterest costs (% of debt)

Project topline by estimating volume for each possible segment

and pricing trend depending upon the sector, companyscompetitive position within the segment, pricing power etc Project operating level by estimating cost elements Project bottomline by estimating expenses below operating level

depreciation, interest costs and tax Project balance sheet drivers

Analyse various P&L and Balance sheet ratios Peer group analysisValuation Target price and rating

*Company management discussion/possible plant visit is a must


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P&L drivers

Topline/Revenue drivers-(for eg Auto sector) Product mix and demand New launches & market share trend expectations Pricing

Capacity expansion/utilization rate increase Competition

2 wheeler Higher rural consumption, monsoons

Passenger vehicles Purchasing power, growing middle class, interest rates, fuel price

changes Commercial vehicles

Industrial growth, Infrastructure devt, interest rates, economicactivity


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P&L drivers (continued.)

Operating level drivers Pricing actions

Product mix

RM cost (as a % of sales) steel, rubber, aluminium etc by

analysing trend in commodity prices depending uponconsumption and production trend.

Employee costs (as a % of sales) pension payouts, newrecruitment, pay hikes given

Operating expenses (as a % of sales) higher/lower mktg and

advertising expenses, royalty, network opex and license fees(telecom), R&D expenses, product development expenses

Check out for any one-offs, adjust them to get the actualfigures.


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P&Ldrivers (continued.)Bottomline drivers

In addition to operating level drivers, bottomline is impactedby the following factors -

Gearing ratio (D/E) impacting interest costs check whether

there are any FCCBs, repayment of loans etc, capex plansrequiring debt to be raised etc.

Depreciation and amortization New plant commissioning,amortization of goodwill etc

Tax rate Average corporate tax rate of ~33% can come down if

the company has any manufacturing facilities in tax havenareas.


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Balance sheet drivers

Equity level FPO, buyback, bonus, share split

Asset and liability tradeoff impacting cash balance impacted by

Debt levels

Working capital management

Investments plans

Capex plans

* Within cash flows, check for whether the company is free cash flow

positive


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Key financial parameters and ratios

Growth rates (%) Margins EBITDA, Net margins (%)

EPS (Rs)

CEPS(Rs)

DPS(Rs)

BVPS(Rs)

Dividend payout ratio(%)

Dividend yield(%) ROE(%)

ROCE(%)

Working capital days (days)


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Valuation Relative Widely used to compare the company with its

own historical multiples and also with that of its peers

P/E

P/CEPS

P/BVPS

EV/Sales

EV/EBITDA

DCF Used when there is a visibility of steady state growthin cash flows

Dividend discount model Used when the company has atrend of giving steady dividends. Rarely used


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Risks and concerns to the assumptions

Macro risks

Sectoral risks

Company specific risks

Demand slowdown

Margin risk

Competition

Policy decisions etc.


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Thank You

fundamental research 1

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