This project is being done to construct portfolio of clients with the help of fundamental and technical analysis. Also analyse their portfolio by valuating those companies where they have already invested using specific valuation model. Then find out whether it is right time to invest in those companies using technical analysis. Also calculating the returns they are getting and suggest for higher return.
Fundamental Analysis gives us the idea what to buy or what to sell, while Technical Analysis tells us the timing when to buy or when to sell.
In this project I am mainly focusing on how to provide a holistic view to the clients, specifically HNIs (High Net-worth Individuals), on investing in equity market i.e. stock market.
The main motive of this research is to check whether fundamental analysis and technical analysis together is useful to provide better suggestion for investments.
INTRODUCTION
About the Company:-
phiNNACLE Wealth Managers Pvt. Ltd. is an independent financial services firm that offers personalized advice to individuals in understanding, pursuing and achieving their financial goals. The products and services include designing comprehensive financial planning and wealth management solutions tailored for current and future requirements of clients.
phiNNACLE Wealth Managers Pvt. Ltd. was founded by Mr. Siddhartha Nair with the vision of creating the BEST Private Wealth Firm. The Management team constitutes Siddhartha Nair (Founder and CEO), Ashwini Bhat (CoFounder and Operations Head) and Saurabh Dafria (CoFounder and President - Emerging Markets)
phiLOSOphi of phiNNACLE:-
The various products and services that has been offered at phiNNACLE are guided by a set of commandments that constitute six main principles, that is the philosophy (phiLOSOphi) of this company.
These are,
Financial life target is imperative
Allocation of assets should be carefully considered
Risk coverage is crucial
Markets will be volatile
Time value of money is vital
Success of a plan depends on the execution
Products & Services:-
The products and services offered by phiNNACLE are,
Investment Planning
phiNNACLE follows a top-down approach of investing from Economy to Sector to Securities. Once the clients have been assisted to zero-in on the desired security, phiNNACLE helps to manage the same using in-house Dynamic Change Management Tool and Fund Flow Indicator.
NRI Services ( Portfolio Investment Scheme for NRIs)
Portfolio Investment Scheme (PIS) allows NRIs to invest in shares of Indian companies in the secondary market on a repatriation or non-repatriation basis. Using the PIS route, NRIs can allocate a portion of their investment basket to India which presents a great investment opportunity in the coming decade.
Lifecycle Planner
The Lifecycle Planner (LP) services are tailored to meet clients' needs as determined through personal consultations. It helps to create a roadmap to reach life goals based on an analysis of clients' needs and cash flows.
Risk Profiling
By combining investments with different characteristics, the risks inherent in any one investment can be balanced by assets that move in different cycles or respond to different market factors. Based on the risk profile of the clients, the right asset allocation can be designed to suit clients' investment needs.
Insurance Advisory
Education Financing
Retirement Planning
Account Aggregation
About the Project:-
Portfolio is a combination of securities such as stocks, bonds, and money market instruments. The process of blending together the broad asset classes so as to obtain optimum return with minimum risk is called Portfolio Construction.
There are several approaches for constructing Portfolio. At phiNNACLE the traditional approach is followed. The traditional approach of Portfolio Construction includes six main steps. These are,
Formulating the objectives.
Analyze the constraints of the clients.
Selection of securities.
Study of risk and return of the securities.
Minimizing the risk factor.
Finally relative portfolio weights are assigned to securities and then diversification is carried out.
Objective of the Project:
To identify what are main factors that underlined the performance of the portfolio.
To valuate various companies using fundamental analysis.
To measure the feasibility of investing in those companies using technical analysis.
Methodology: The methodology includes the following,
Secondary Data: - Collecting information from different websites, books, journals and magazines.
Fundamental Analysis: - Analysing the performance of the company through different parameters like enterprise value, market capitalization, and different ratios from their annual reports.
Technical Analysis: - Identifying the buying point and selling point by tracking them in Meta-stock software with the help of exponential moving average method.
Limitations of the Study:
This project is being done with the help of historical data like annual reports of the company. So, the availability of data is the limitation of this project. Also this project needs a lot of time to analysing data. As the project is based on secondary data, possibility of unauthorized information cannot be avoided.
MAIN TEXT
What is Fundamental Analysis?
Fundamental analysis is a technique what determines the intrinsic value of a security by focusing on the underlying factors that affect a company's performance of business and its future prospects.
Fundamental analysis of companies involves analysing its financial statements, its management and competitive advantages and its competitors and markets. The fundamental analysis is performed on the basis of historical and present data.
It is mainly done to conduct a company's stock valuation and predict its probable price evaluation. It is very important to make a projection on its business performance. Then it will also help to understand that how much the company is able to sustain itself.
Researchers have found that stock price changes can be attributed to some factors. These are,
Economical Factors
30-35%
Industrial Factors
15-20%
Company-wide Factors
30-35%
Other Factors
15-25%
Steps of Fundamental Analysis:
Considering the above evidence fundamental analysis involves 3basic steps. These are,
Economic Analysis- Understanding of macroeconomic environment and developments. The key variables commonly used to describe the state of the macro economy are,
Growth Rate of GDP (Gross Domestic product)
Industrial Growth Rate
Savings & Investments
Agriculture and Monsoons
Government Budget and Deficit
Price Level and Inflation
Interest Rate
Balance of Payments, Forex Reserves, and Exchange Rates
Infrastructural Facilities and Arrangements
Sentiments of People
Industry Analysis- Analysing the prospects of the industry to which the company belongs. It includes 3parts which are,
Industry Life-cycle Analysis
Study of Structure and Characteristics of the Industry
Profit Potential of the Industry
Company Analysis- Assessing the projected performance of the company. It may organised in 2parts,
Study of Financial Statements & Financial Ratios
Study of Other factors
ANALYSIS
Progress Till Now:-
To start fundamental analysis first I have taken clients' portfolio. I have taken 10 portfolios of 10 different clients. Then I have chosen 3companies which have maximum weight-age according to the percentage of holdings of those portfolios. These are,
Company Name
Number of Clients
% of Holdings (max)
State Bank of India
7
68%
ICICI Bank
4
55%
HDFC Bank
6
32%
As these three companies belong to Banking Industry, so till now I am concentrating on only Banking Industry. I will be analysing many more companies further on the basis of collection of clients' portfolio.
First I analysed the financial statements (Balance Sheet, Income Statement and Cash Flow Statements) of these companies. After that I did the ratio analysis part. Also I have valuated those companies on the basis of price as on April 13th, 2011. Then I have suggested my views about the company also considering the facts of the company's performance.
Future Work:-
After doing the fundamental analysis I am also preparing the technical analysis part for my future progress of this project, so that I can give better suggestion about these companies.
FUNDAMENTAL ANALYSIS
Step1: Economic Analysis:-
The level of economy has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of economic activity is low, stock price are low, and when the level of economic activity is high the stock price are high.
Growth Rate of GDP (Gross Domestic product):-
The Gross Domestic Product (GDP) of India expanded 8.20% in the fourth quarter of 2010, previous year. The average GDP of India was 8.40% from the year 2004 to 2010. In September of 2006 it reached in 10.10% and in December of 2004 GDP was as low as 5.50%. The main growth drivers of Indian economy are traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, modern technology and service sectors The average growth rate is more than 7% in the decade since 1997, reducing poverty by about 10% points.
Interest Rate: - The benchmark interest rate (reverse repo) in India was last reported at 5.75 percent. In India, interest rate decisions are taken by the Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark repurchase rate. From 2000 until 2010, India's average interest rate was 5.82 percent reaching an historical high of 14.50 percent in August of 2000 and a record low of 3.25 percent in April of 2009.
Step 2: Industry Analysis:-
The Indian Banking industry is governed by the Banking Regulation Act of India, 1949. From 1949 to till now it is in growing stage. There is huge prospect in this industry with the help of modern technologies like e-banking, ATMs etc.
Besides these positive sides the banking industry has several threats to its growth. These are,
Continuous Deregulation and changes of economic conditions are responsible for transformation of banking industry.
As a result of it market place has been redefined with new rules.
Efficiency and customer's loyalty is another barrier of this industry.
Step 3: Company Analysis:-
Company 1: State Bank of India
Company Introduction:-
The State Bank of India is the oldest Bank in this country and a premier in terms of the number of branches, market capitalization and net profit. The Bank is actively involved since 1973 in non-profit activity called Community Services Banking.
SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. It also has around 130 branches overseas. With an asset base of $352 billion and $285 billion in deposits, it is a regional banking and is one of the largest financial institutions in the world. It has a market share among Indian commercial banks of about 20% in deposits and loans.
Financial Statement Analysis:-
Net Profit has been consistently increased without any extra Expenditure (as expenditure also increased in the same ratio).
Book Value has been increased almost 2times in the last 5years which means the value of intangible assets also increased.
Total Debt has been increased by more than 2times in the last 5years that means the company has been funded by debt.
Total Cash is increased in the last 5years but balance in banks has been decreased in the last year which means liquidity of the company is increased but current assets is not increased in the same proportion.
Earnings Per Share has been increased consistently in the last 5years by almost 72%
Company 2: ICICI Bank
Company Introduction:-
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. It is the India's second largest bank and the largest private sector bank in India by market capitalization. The bank also has a network of 2,529 branches (as on 31 March 2010) and about 6,102 ATMs in India and presence in 19 countries, as well as some 24 million customers (at the end of July 2007). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and specialization subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank is also the largest issuer of credit cards in India.
Financial Statement Analysis:-
Total Debt is not increased by a big number in the last 5years, but it has been decreased from the year 2008 to 2009 which indicates the company is not totally depend on debt.
Share Capital has been decreased in the last year by 24% which is a good sign as it reduces Debt to equity ratio.
Net income has been decreased by 10% where as Expenditure decreased by 20%, so its performance is quite good.
Book Value of the company is well maintained though the profit is decreased.
Earnings Per Share has been increased by 26% in the last 5years, where as it has been decreased after 2007
Company 3: HDFC Bank
Company Introduction:-
HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.
Financial Statement Analysis:-
Net Profit of the company has been consistently increased. In the last year 2010 it increased by 4times from the year 2006
Total Debt has been increased 3times in the last 5years which means the company is funded by mostly debt.
Equity Capital also increased in such a way that the company is able to decrease its Debt to equity ratio.
Cash has been increased by 5times which means liquidity position of the company is quite good.
Book Value also increased more than 3times in the last 5years that means the value of intangible assets of the company is increased.
Earnings per share has been increased by 80%
COMPARATIVE STUDY OF THREE COMPANIES
VALUATION (SBI)
VALUATION (ICICI)
VALUATION (HDFC)
Price as on April 13, 2011
2,819.40
1,128.05
2,372.05
No of shares (In Cr)
63.50
115.14
46.52
Market Cap
1,79,031.62
1,29,886.18
1,10,353.86
Debt
9,07,127.83
2,96,280.17
1,80,320.13
Preferred Stock
0
0
0
Cash
61,290.87
27,514.29
15,483.28
Enterprise Value
10,24,868.58
3,98,652.06
2,75,190.71
Sales
85,962.07
32,999.36
19,983.52
EBITDA
70,077.15
24,064.16
13,319.88
EBIT
69,144.49
23,444.66
12,925.49
Key Ratios:-
EPS
159.22
40.86
78.42
Debt/Equity
13.75
5.74
8.38
Current Ratio
0.04
0.14
0.04
Quick Ratio
9.07
14.70
5.23
Dividend Per Share
30.00
12.00
10.00
Net Profit Margin
10.54
12.17
11.35
EV/Sales
11.92
12.08
13.77
EV/EBITDA
14.62
16.57
20.66
EV/EBIT
14.82
17.00
21.29
PE
17.71
27.61
30.25
PB
2.71
2.52
5.13
PS
2.08
3.94
5.52
*highlighted text carries highest value among 3companies
Findings:-
The market price of SBI is the highest comparing to the other two companies. Market Capitalization of SBI is also high which results less numbers of outstanding shares.
But for the case of ICICI Bank market capitalization is not very less and market price is the least resulting more number of outstanding shares.
EPS of SBI is the highest 159.22 but Debt to equity ratio is also very high 13.75 that mean the company is funded by debt mainly.
Current ratio and Quick ratio is high for the case of ICICI that means the liquidity is high in this company.
PE ratio and PB ratio is less for SBI, so good returns can be expected from SBI.
Enterprise Value: - It is an measure of company's value where as it includes all the security-holders like debt holders, preferred shareholders, minority shareholders, common equity holders, and others. It is more comprehensive than market capitalization as it includes only common equity. This is calculated as:
EV = Market Capitalization + Debt + Preferred Stock - Excess Cash
EV/Sales ratio gives investors an idea of how much it costs to buy the company's sales. Generally the lower the EV/sales the more attractive or undervalued the company is believed to be.
So we can say SBI and ICICI are undervalued than HDFC because PE ratio is also very high for HDFC.
HDFC is overvalued than the SBI and ICICI.
Conclusion:-
We can recommend to buy and hold SBI and ICICI for long term.
SBI is better for Dividend options.
HDFC is better to hold.
TECHNICAL ANALYSIS
Technical analysis is basically a security analysis discipline to forecast the direction of prices on the basis of historical data. Technical analysis also helps to identify whether the market is bearish or bullish.
Two main important tools exist in technical analysis. One is indicators and second one is charts. Charts are used to identify price patterns and market trends. While indicators help in valuating the stocks.
In this project I will mainly follow the Moving Averages as a market indicator to find out the buying and selling point. In this project Candlestick Charting will be used for better understanding of price move in trends.
I will identify the buying point and selling point by tracking the historical data in Meta-stock software with the help of exponential moving average method.
REFFERENCES
Websites:-
www.phinnacle.com
www.wikipedia.com
www.moneycontrol.com
www.scribd.com
www.investopedia.com
http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR
Books:-
Edwin J. Elton, Martin J. Gruber, 1996. Modern Portfolio Theory and Investment Analysis. 5th Edition. New York: John Wiley & Sons
Gordon J. Alexander, William F. Sharpe, Jeffery V. Bailey, 2007. Fundamentals of Investments. 3rd Edition. New Delhi: Asoke K. Ghosh, Prentice-Hall of India Pvt. Ltd.
Punithavathy Pandian, 2005. Security Analysis and Portfolio Management, Delhi: Vikas Publishing House Pvt. Ltd.
Prashanna Chandra, 2002. Investment Analysis and Portfolio Management, New Delhi: Tata McGraw-Hill Publishing Company Limited
