Fundamental Analysis

Fundamental analysis

Fundamental analysis is a method of evaluating a company's financial health by analyzing its financial and economic factors such as revenue, expenses, assets, liabilities, management quality, and market conditions. The goal of fundamental analysis is to determine the intrinsic value of a company's stock, which can be compared to the stock's market price to determine whether it is overvalued or undervalued.

Here are some of the key concepts of fundamental analysis:

1.   Financial statements: Fundamental analysis starts with analyzing a company's financial statements, which includes the balance sheet, income statement, and cash flow statement. These documents provide a detailed view of a company's financial health, including its assets, liabilities, revenue, expenses, and cash flows.

2.   Valuation: After analyzing the financial statements, fundamental analysts use various valuation models to estimate the intrinsic value of a company's stock. Some of the commonly used valuation models include discounted cash flow (DCF), price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and enterprise value-to-EBITDA (EV/EBITDA) ratio.

3.   Management quality: Fundamental analysts also evaluate the quality of a company's management team, including their track record, leadership style, and ability to execute a business strategy. A strong management team can help to ensure that a company is well-positioned for long-term success.

4.   Industry analysis: Fundamental analysts also evaluate the industry in which a company operates, including its competitive landscape, regulatory environment, and market trends. Understanding the broader industry trends can help analysts to assess the long-term prospects of a company.

5.   Macroeconomic factors: Finally, fundamental analysts consider macroeconomic factors such as interest rates, inflation, and economic growth when evaluating a company's financial health. These factors can have a significant impact on a company's revenue, expenses, and profitability.

Overall, fundamental analysis provides a comprehensive view of a company's financial health and can help investors to make informed decisions about whether to buy, hold, or sell a stock.

Approaches fundamental analysis

Bottom-up and top-down are two different approaches used in fundamental analysis to evaluate a company or an industry.

The bottom-up approach involves analyzing individual companies first and then making investment decisions based on their fundamental characteristics. This approach involves evaluating a company's financial statements, management quality, industry trends, and other specific factors that may affect the company's future earnings growth. Bottom-up investors believe that individual companies can perform well regardless of the broader economic environment, and they focus on identifying undervalued stocks that have the potential for future growth.

On the other hand, the top-down approach involves starting with the broader economic and market conditions and then identifying industries or sectors that are expected to perform well. This approach involves analyzing macroeconomic factors such as interest rates, inflation, and GDP growth rates to determine which sectors of the economy are likely to benefit from favorable conditions. Top-down investors then look for individual companies within those sectors that are expected to outperform the broader market.

Both approaches have their advantages and disadvantages, and many investors use a combination of both to make informed investment decisions. Ultimately, the choice between bottom-up and top-down approaches depends on the investor's investment goals, risk tolerance, and investment style.

 

EIC analysis in fundamental analysis


EIC analysis, also known as economy-industry-company analysis, is a framework used in fundamental analysis to evaluate a company's potential investment opportunities. It involves analyzing the macroeconomic environment, the industry in which the company operates, and the company itself.

The EIC analysis consists of three components:

1.   Economy Analysis: This involves analyzing the macroeconomic factors such as GDP growth rate, inflation, interest rates, and other economic indicators to determine the current and future economic environment in which the company operates. This helps to identify opportunities and challenges that may impact the company's revenue, expenses, and profitability.

2.   Industry Analysis: This involves evaluating the industry in which the company operates, including the competitive landscape, regulatory environment, and market trends. The analysis helps to identify the potential risks and opportunities in the industry, including threats from new entrants, competition, and technological advancements.

3.   Company Analysis: This involves evaluating the company's financial health, management quality, and growth potential. It helps to determine the company's strengths, weaknesses, opportunities, and threats, and provides insights into the company's potential for long-term growth.

EIC analysis is a comprehensive approach to fundamental analysis, which provides investors with a holistic view of a company's investment potential. By analyzing the economy, industry, and company, investors can identify investment opportunities that have the potential for long-term growth and profitability.

Economic analysis in the context of Security analysis

Economic analysis is a critical component of security analysis that involves analysing the broader macroeconomic factors that can influence the performance of a security. In the context of security analysis, economic analysis aims to identify the economic trends and indicators that could affect the investment performance of a security.

Key economic indicators that security analysts often consider in their analysis 

1.   Gross Domestic Product (GDP): GDP is a key indicator of the health of the economy, and it measures the total value of all goods and services produced within a country's borders. Security analysts use GDP to assess the current and future growth prospects of a security.

2.   Interest rates: Interest rates have a significant impact on the economy, and they can affect the cost of borrowing and the availability of credit. Changes in interest rates can also impact the value of securities, as higher interest rates can lead to lower prices for fixed-income securities such as bonds.

3.   Inflation: Inflation measures the rate at which the prices of goods and services increase over time. High inflation can erode the purchasing power of a security's returns, which can impact the security's value.

4.   Employment: The level of employment is another important economic indicator that can affect the performance of a security. High levels of employment are generally viewed as positive for the economy and can contribute to higher levels of consumer spending, which can benefit some securities.

5.   Consumer spending: Consumer spending is a critical component of economic growth, and it can impact the performance of securities in industries such as retail and consumer goods.

6.   IIP stands for Index of Industrial Production and is a key economic indicator used in the Indian context of financial markets. The IIP measures the changes in the volume of production of a basket of industrial products over a specific period, typically a month, and it provides insights into the overall industrial activity in the Indian economy.

The IIP is calculated by the Central Statistical Organisation (CSO) and covers a wide range of industries, including mining, manufacturing, and electricity generation. The IIP is based on the physical production of industrial goods, and it reflects changes in the quantity of goods produced, rather than changes in their prices.

In the Indian context, the IIP is an important indicator of economic growth and is closely monitored by policymakers, investors, and analysts. The IIP is used to gauge the health of the industrial sector in the Indian economy and to identify trends in industrial production. The IIP is also used as a leading indicator of economic growth, as increased industrial production can lead to increased economic activity and job creation.

Investors and analysts often use the IIP as a tool for investment analysis, as changes in the IIP can impact the stock prices of companies in the industrial sector. For example, if the IIP shows a strong increase in industrial production, it may indicate that companies in the industrial sector are likely to perform well in the short term, which can lead to higher stock prices.

In summary, the IIP is a key economic indicator used in the Indian context of financial markets to gauge the health of the industrial sector and to identify trends in industrial production. The IIP is closely monitored by policymakers, investors, and analysts, and it can have a significant impact on the stock prices of companies in the industrial sector.

Measuring GDP 

Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced within a country's borders in a given period. GDP is used as a key economic indicator to measure the health of a country's economy and to compare the economic performance of different countries. The following are the three main methods used to measure GDP:

1.   Output Method: The output method, also known as the production approach, measures the value of all goods and services produced within a country's borders in a given period. This method involves calculating the total value of goods and services produced in each industry or sector of the economy and then adding them up to arrive at the total GDP. This method is suitable for countries where production data is readily available.

2.   Income Method: The income method measures the total income generated by all factors of production within a country's borders in a given period. This includes wages and salaries earned by workers, profits earned by businesses, and rents earned by property owners. This method is suitable for countries where income data is readily available.

3.   Expenditure Method: The expenditure method measures the total amount of money spent on goods and services within a country's borders in a given period. This includes consumer spending, government spending, investment spending, and net exports (exports minus imports). This method is suitable for countries where expenditure data is readily available.

In practice, all three methods are used to measure GDP, and the results are usually very similar. However, there may be some differences due to data availability and measurement errors. To ensure accuracy, national statistical agencies in each country typically use a combination of the three methods to calculate GDP.

In summary, GDP is a measure of the total value of all goods and services produced within a country's borders in a given period. GDP can be measured using the output, income, or expenditure method, and national statistical agencies in each country typically use a combination of the three methods to calculate GDP.

GVA and GDP

GVA stands for Gross Value Added. It is a measure of the contribution of each sector of the economy to the overall GDP. GVA is calculated by subtracting the cost of inputs (such as raw materials, energy, and other intermediate goods) from the value of the goods and services produced by a particular sector.

GVA provides a more accurate picture of the economic activity in each sector of the economy, as it takes into account the intermediate inputs used in production. This is different from GDP, which measures the value of all final goods and services produced in the economy. For example, if a manufacturing company produces goods worth Rs. 10,000 and uses raw materials worth Rs. 2,000, the GVA of the manufacturing sector would be Rs. 8,000.

GVA is calculated for each sector of the economy, such as agriculture, manufacturing, construction, and services. The sum of GVA for each sector gives the overall GVA of the economy. GVA is used by policymakers, analysts, and investors to understand the contribution of each sector to the overall economy and to identify trends in economic activity.

GVA is often used in conjunction with GDP to understand the performance of the economy. For example, if GDP is growing but GVA is not, it may indicate that the growth is driven by factors such as inflation or increased imports, rather than actual growth in production. In contrast, if GVA is growing faster than GDP, it may indicate that the economy is becoming more efficient, as fewer inputs are needed to produce the same level of output.

In summary, GVA is a measure of the value added by each sector of the economy to the overall GDP. GVA takes into account the intermediate inputs used in production, providing a more accurate picture of economic activity in each sector. GVA is used by policymakers, analysts, and investors to understand the contribution of each sector to the overall economy and to identify trends in economic activity.

Inflation

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. It is a complex economic phenomenon with various types, causes, and remedial actions. Here's a detailed explanation of each:

Types of Inflation:

1.   Demand-Pull Inflation: This type of inflation occurs when there is an increase in demand for goods and services in the economy, which exceeds the supply of those goods and services. As a result, the prices of goods and services rise to meet the excess demand.

2.   Cost-Push Inflation: This type of inflation occurs when the cost of production of goods and services increases due to factors such as a rise in the cost of raw materials, wages, or taxes. As a result, producers increase the prices of goods and services to maintain their profit margins.

3.   Structural Inflation: This type of inflation occurs due to structural deficiencies in an economy. For instance, poor infrastructure, labor market inefficiencies, or supply-side bottlenecks can cause structural inflation.

4.   Built-In Inflation: This type of inflation occurs when inflation expectations become ingrained in the economy. Workers, for instance, demand higher wages to offset the expected inflation, which in turn leads to higher costs for producers, and ultimately higher prices for consumers.

Causes of Inflation:

1.   Increase in the Money Supply: An increase in the money supply can lead to inflation. When there is too much money chasing too few goods, prices will rise.

2.   Cost Push Factors: An increase in the cost of production of goods and services due to factors such as raw material prices, taxes, or wages can lead to inflation.

3.   Increase in Demand: An increase in demand for goods and services beyond the capacity of the economy to supply can cause demand-pull inflation.

4.   Exchange Rate Changes: Changes in exchange rates can also cause inflation. A depreciation of the domestic currency can lead to an increase in the cost of imported goods, thereby causing inflation.

Remedial Actions:

1.   Monetary Policy: Central banks can use monetary policy tools such as increasing interest rates, reducing the money supply, or tightening credit to reduce inflation.

2.   Fiscal Policy: Governments can use fiscal policy tools such as reducing government spending or increasing taxes to reduce inflation.

3.   Supply-side Policies: Supply-side policies such as improving infrastructure, reducing bottlenecks, or improving labor market efficiency can help to reduce cost-push inflation.

4.   Wage and Price Controls: Governments can impose wage and price controls to prevent excessive inflation. However, these policies can have negative consequences such as shortages and reduced incentives for investment.

In conclusion, inflation is a complex economic phenomenon that can have various types and causes. Governments and central banks can use a combination of monetary, fiscal, and supply-side policies to reduce inflation and stabilize prices.

GDP Deflator

The GDP deflator is a measure of inflation and is used to adjust nominal GDP for changes in the price level. It measures the ratio of the value of goods and services produced in a country in a given period at current prices to the value of the same goods and services produced at a base year's prices.

The GDP deflator is calculated using the following formula:

GDP deflator = (Nominal GDP / Real GDP) x 100

Where Nominal GDP is the value of goods and services produced in a country in a given period at current prices, and Real GDP is the value of the same goods and services produced at base year's prices.

The GDP deflator is different from other inflation measures such as the Consumer Price Index (CPI) and the Producer Price Index (PPI). The CPI measures changes in the prices of goods and services purchased by consumers, while the PPI measures changes in the prices of goods and services purchased by producers. In contrast, the GDP deflator measures changes in the overall price level of goods and services produced in the economy.

The GDP deflator is useful for tracking inflation over time and for comparing the performance of different countries. It provides a more comprehensive measure of inflation than other measures, as it includes all goods and services produced in the economy. However, the GDP deflator is less widely used than other inflation measures, as it is more complex to calculate and may be subject to measurement errors.

In summary, the GDP deflator is a measure of inflation that adjusts nominal GDP for changes in the price level. It measures the ratio of the value of goods and services produced in a country in a given period at current prices to the value of the same goods and services produced at base year's prices. The GDP deflator is useful for tracking inflation over time and for comparing the performance of different countries.


WPI and CPI 

WPI and CPI are two commonly used measures of inflation in India.

WPI:The Wholesale Price Index (WPI) is a measure of the average change in the prices of goods sold in bulk by manufacturers and wholesalers. It measures the price changes at the wholesale level of the economy, which includes inputs, intermediate goods, and finished products.

WPI is calculated by taking a weighted average of the prices of a basket of goods, which includes primary articles, fuel and power, and manufactured goods. The weightage assigned to each item in the basket is based on its share in the total value of production.

CPI:The Consumer Price Index (CPI) is a measure of the average change in the prices of goods and services consumed by households. It measures the price changes at the retail level of the economy.

CPI is calculated by taking a weighted average of the prices of a basket of goods and services consumed by households, which includes food, beverages, fuel, housing, clothing, and transportation. The weightage assigned to each item in the basket is based on its share in the total consumption expenditure of households.

Uses of WPI and CPI:Both WPI and CPI are used to track inflation in the economy and are important tools for policymakers, analysts, and investors to monitor price changes in the economy. The Reserve Bank of India (RBI) uses these measures to make monetary policy decisions and to control inflation. If inflation is rising, the RBI may increase interest rates to reduce demand and cool off the economy. If inflation is low, the RBI may lower interest rates to stimulate demand and boost economic growth.

WPI and CPI are also used by businesses to adjust their pricing strategies and to make investment decisions. If the cost of raw materials or other inputs is rising, businesses may need to increase their prices to maintain profitability. Conversely, if inflation is low, businesses may have more room to lower prices and gain a competitive advantage.

In summary, WPI and CPI are two commonly used measures of inflation in India. WPI measures the price changes at the wholesale level of the economy, while CPI measures the price changes at the retail level of the economy. Both measures are important for policymakers, analysts, and investors to monitor price changes in the economy and make informed decisions about monetary policy, investment, and pricing strategies.

 

Interest rates

Interest rates can have a significant impact on the economy, and central banks around the world often use them as a policy tool to manage the economy. Here's how interest rates affect the economy and why they have become a policy tool:

1.   Impact on Consumer Spending: Interest rates can impact consumer spending. When interest rates are low, borrowing costs decrease, making it cheaper for consumers to borrow money to purchase homes, cars, and other goods. This can lead to an increase in consumer spending, which can stimulate economic growth. On the other hand, high-interest rates can make it more expensive for consumers to borrow money, reducing their spending and slowing down economic growth.

2.   Impact on Business Investment: Interest rates can also impact business investment. When interest rates are low, businesses can borrow money at a lower cost to invest in new projects, expand their operations, or purchase new equipment. This can lead to an increase in business investment, which can stimulate economic growth. Conversely, high-interest rates can make it more expensive for businesses to borrow money, reducing their investment and slowing down economic growth.

3.   Impact on Exchange Rates: Interest rates can also impact exchange rates. When a country's interest rates are higher than those of other countries, its currency tends to appreciate relative to other currencies. This can make exports more expensive and reduce demand for them, slowing down economic growth. Conversely, when a country's interest rates are lower than those of other countries, its currency tends to depreciate, making exports cheaper and boosting demand for them.

4.   Impact on Inflation: Interest rates can impact inflation. When interest rates are low, borrowing costs decrease, which can lead to an increase in consumer spending and business investment. This increased demand can lead to higher prices and inflation. Conversely, when interest rates are high, borrowing costs increase, which can reduce consumer spending and business investment, reducing demand and keeping prices and inflation in check.

Given the significant impact that interest rates can have on the economy, central banks around the world have increasingly used them as a policy tool. By adjusting interest rates, central banks can influence the level of economic activity, manage inflation, and stabilize the economy. In this way, interest rates have become a key policy tool for managing the economy.

 The five forces are:

1.   Threat of new entrants: The degree to which new competitors can enter the market.

2.   Bargaining power of suppliers: The degree of influence suppliers has on the prices and quality of inputs.

3.   Bargaining power of buyers: The degree of influence buyers has on the prices and quality of outputs.

4.   Threat of substitute products or services: The degree to which alternative products or services can be used as substitutes.

5.   Rivalry among existing competitors: The degree of competition among existing firms in the market.

Porter's Five Forces is used in fundamental analysis to assess the competitive environment of a company or an industry. By understanding the strength of each of the five forces, analysts can evaluate the attractiveness and profitability of an industry, as well as the competitive position of a company within that industry. This analysis can inform investment decisions, strategic planning, and marketing strategies.

For example, if an industry has high barriers to entry and few substitutes, then the threat of new entrants and substitutes is low. In this case, existing firms in the market may have more pricing power and higher profit margins. Conversely, if an industry has low barriers to entry and many substitutes, then the threat of new entrants and substitutes is high. In this case, existing firms in the market may face more competition and lower profit margins.

In summary, Porter's Five Forces is a framework used in fundamental analysis to understand the competitive dynamics of an industry. It helps analysts assess the attractiveness and profitability of an industry, as well as the competitive position of a company within that industry. By evaluating each of the five forces, analysts can make informed investment and strategic decisions.


unemployment

Unemployment refers to a situation where people who are willing and able to work are unable to find employment. In India, unemployment is a major social and economic issue, with various types of unemployment affecting different sections of society.

The main types of unemployment are:

1.   Structural Unemployment: This occurs when the structure of the economy changes, and the skills of workers no longer match the requirements of the available jobs. For example, when industries shift from traditional manufacturing to high-tech industries, it leads to structural unemployment.

2.   Frictional Unemployment: This type of unemployment is due to the time lag between leaving one job and finding another. For instance, fresh graduates looking for jobs or employees leaving one company to look for a better job in another company.

3.   Cyclical Unemployment: This occurs when the economy experiences a downturn and businesses lay off workers or reduce hiring, leading to increased unemployment. This type of unemployment is dependent on the overall economic cycle.

4.   Disguised Unemployment: This type of unemployment is not evident because people who are employed are working in unproductive or low-productivity jobs.

To measure unemployment in India, the government uses two main methods:

1.   The Census method: This is conducted by the National Sample Survey Organization (NSSO) every five years. The NSSO collects data from households to estimate the number of unemployed people in the country.

2.   The Current Daily Status (CDS) method: This is used to estimate the number of people who are unemployed on a daily basis. The CDS method is based on the number of people who are willing to work and are actively seeking employment.

In addition to these two methods, the government also uses data from the Labor Bureau, which collects data from registered companies and industries to estimate the number of people employed in the formal sector. However, this data does not cover the informal sector, which employs a significant proportion of the workforce in India.

which private data agencies maintain unemployment statistics in India

In India, the government is responsible for maintaining and publishing official unemployment statistics through various agencies. However, there are also private data agencies that conduct surveys and provide estimates on unemployment in India. Some of the private data agencies that maintain unemployment statistics in India are:

1.   Center for Monitoring Indian Economy (CMIE): CMIE is a private research organization that provides economic and business data in India. They conduct regular surveys on employment and unemployment in India and provide estimates on the unemployment rate.

2.   Azim Premji University: Azim Premji University is a non-profit organization that conducts research on social issues in India. They also conduct surveys on employment and unemployment in India and provide estimates on the unemployment rate.

3.   Indian Society of Labour Economics (ISLE): ISLE is a professional organization that focuses on the study of labor and employment issues in India. They conduct research and surveys on employment and unemployment in India and publish reports and papers on their findings.

4.   National Council of Applied Economic Research (NCAER): NCAER is a research organization that conducts surveys and provides research on economic issues in India. They also provide estimates on the unemployment rate in India.

It is important to note that the government's official statistics are considered the most reliable source of information on employment and unemployment in India. However, private data agencies can provide additional insights and perspectives on these issues.


Unemployment has a significant impact on the economy and financial markets in India. Here are some of the ways in which unemployment affects them:

1.   Decreased Consumer Spending: When people are unemployed, they have less disposable income to spend on goods and services. This can lead to decreased consumer spending, which can negatively impact the economy and financial markets. Reduced consumer spending can result in lower sales, profits, and revenues for companies, which can lead to a decrease in stock prices and a slowdown in economic growth.

2.   Decreased Tax Revenues: Unemployment also reduces tax revenues for the government. When fewer people are employed, they pay fewer taxes, which can lead to a decrease in government revenues. This can negatively impact the financial markets and the economy by reducing government spending on infrastructure and social programs.

3.   Increased Government Spending: Unemployment can also result in increased government spending on social programs like unemployment benefits, which can put a strain on the government's finances. Increased government spending can lead to a rise in inflation and higher interest rates, which can negatively impact the financial markets.

4.   Social Unrest: High levels of unemployment can lead to social unrest, protests, and even violence. This can negatively impact the economy and financial markets by creating instability and uncertainty.

5.   Decreased Investment: Unemployment can also lead to a decrease in investment in the economy. When investors see high levels of unemployment, they may be less likely to invest in companies or industries in the country, which can lead to a decrease in foreign investment, and negatively impact the financial markets.

In summary, high levels of unemployment can have a wide-ranging impact on the economy and financial markets in India, and addressing unemployment is essential for sustainable economic growth.


Consumer Spending and how their behaviour effect the economy


Consumer spending refers to the amount of money that individuals spend on goods and services in an economy. This spending behavior has a significant impact on the economy as a whole. When consumers increase their spending, it leads to economic growth, while a decrease in consumer spending can lead to an economic slowdown or recession.

There are several factors that influence consumer spending behavior, including income, employment levels, interest rates, and consumer confidence. Let's explore each of these factors in more detail:

In addition to these factors, there are also other psychological and social factors that can influence consumer spending behavior. These may include:

Overall, consumer spending is a critical driver of economic growth. When consumers spend money, it creates demand for goods and services, which can lead to job creation, increased production, and higher levels of economic activity. As a result, policymakers often look to encourage consumer spending during times of economic slowdown or recession by implementing measures such as tax cuts or stimulus spending programs.


What are Consumer confidence surveys, how they are done, who does it in India. Where the data is available

Consumer confidence surveys are surveys conducted to measure the level of confidence that consumers have in the economy. These surveys provide valuable insights into consumer behavior and can help businesses and policymakers understand how consumers are likely to behave in the future.

In India, there are several organizations that conduct consumer confidence surveys. Some of the most prominent ones include:

These surveys are typically conducted through face-to-face interviews, telephone interviews, or online surveys. The data collected is then analyzed to understand consumer behavior and sentiment towards the economy.

The data from these surveys is typically made available to the public through reports published by the organizations conducting the surveys. For example, the RBI publishes its consumer confidence survey results on its website, while the CII publishes its reports on its website as well. The CMIE also makes its consumer sentiment data available through its website and subscription-based services.