Transcript SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

SECURITY ANALYSIS AND PORTFOLIO
MANAGEMENT
SECURITIES CONTRACT REGULATION ACT HAS DEFINED
SECURITY AS—
INCLUSIVE OF SHARES,SCRIPS,STOCKS,BONDS,DEBENTURE
STOCK OR ANY MARKETABLE SECURITIES OF A LIKE NATURE
IN OR OF ANY DEBENTURES OF A COMPANY OR BODY
CORPORATE, GOVERNMENT,SEMI GOVT.ETC.
WHAT IS A SECURITY
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SECURITY IS AN INSTRUMENT OF PROMISSORY NOTE OR A
METHOD OF BORROWING OR LENDING, OR A SOURCWE OF
CONTRIBUTING TO THE FUNDS NEEDED BY THE CORPORATE BODY
OR NON-CORPORATE BODY.
( SUPERIOR REETURNS ARE POSSIBLE BY PROPEER SECURITY
ANALYSIS, THROUGH BETTER FORECASTING ABILITIES AND
SUPERIOR EXPEERTISE IN SECURITY ANALYSIS.)
• WHAT IS A PORTFOLIO
COMBINATION OF SECURITIES WITH DIFFERENT
RISK-RETURN CHARACTERISTICS WILL
CONSTITUTE PORTFOLIO OF THE INVESTOR
INVESTMENT AND SPECULATION
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SPECULATION INVOLVES INVESTMENT AND VICE-VERSA.
IN INVESTMENT ,THE OBJECTIVES ARE LONG TERM OR MEDIUM
TERM. INVESTOR TAKES DELIVERY OF SECURITIES AND BOOKS
PROFIT WHEN THE RETURNS ARE HIGHER THAN HIS TARGET
EXPECTATION.
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IN SPECULATION THE PERSPECTIVE IS SHORT TERM, NO
INTENTION OF TAKING DELIVERY – BOOKS PROFIT FROM THE
MOVEMENT OF PRICES
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IN INDIAN STOCK MARKETS 80% OF TRADE IS SPECULATION
SECURITY ANALYSIS
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SECURITY ANALYSIS IN TRADITIONAL SENSE IS ANALYSIS OF THE
FUNDAMENTAL VALUE OF THE SHARE DAND ITS FORECAST FOR
THE FUTURE THROUGH THE CALCULATION OF ITS INTRINSIC
WORTH.
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MODERN SECURITY ANALYSIS RELIES ON FUNDAMENTAL
ANALYSIS, RISK-RETURN ANALYSIS DEPENDING ON VARIABILITY
OF RETURNS , SAFETY OF FUNDS AND PROJECTION OF FUTURE
RETURNS.
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FORECAST OF SHARE PRICE DEPENDS U[PON ANALYSIS OF
TRENDS OF THE ECONOMY,INDUSTRY AND SWOT ANALYSIS OF THE
COMPANY ITSELF
CHARACTERISTICS OF INVESTMENT
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1. Risk– depends on following factors—
a) Longer maturity period higher risk
b) Creditworthiness of borrower more– risks are lower (Govt.
securities)
c) Ownership securities as returns are based on net profit—rates are
variable.
2. Returns—
A major factor influencing pattern of investment is its return—i.e. yield
plus capital appreciation .(Yield is interest or dividend). Yield has to
be calculated on the purchase price.
Nature of tax liability also influences returns. In case of tax free
instruments net return would be higher
Characteristics of investment contd..
• 3. Safety– certainty of return of capital without loss of money or time
• 4. If the capital asset is easily realisable, marketable then the
liquidity is higher. If there is time gap for realising proceeds then it is
less liquid.
• 5. Marketability– Easy and quick means of transferability of an
asset.
CLASSES IF INSTRUMENTS
1. OWNERSHIP– EQUITY,PREFERENCE SHARES
DEBT– DEBENTURES, BONDS.
2. TERM PERIOD– EQUITY HAS NO FIXED PERIOD.
DEBENTURES MAY BE 5/7/12 YEAR.BANK DEPOSITS
FIXED PERIOD.
3. TYPE OF ISSUER– PRIVATE/PUBLIC/GOVERNMENT
NON CORPORATE INVESTMENTS
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BESIDES SECURITIES IN CORPORATE SECTOR IN WHICH HOUSEHOLD
SAVINGS ARE TO MINOR EXTENT—THERE ARE OTHER AVENUES
DEPOSITS WITH COMMERCIAL BANKS/CO-OP.BANKS
POST OFFICE SAVINGS BANK
NATIONAL SAVINGS CERTIFICATES
INSURANCE
PURCHASE OF REAL ESTATE,GOLD,SILVER
• CLASSIFICATION OF THE ABOVE INVESTMENTS
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MARKETABLE- REAL ESTATE,GOLD..NON MARKETABLE(BANK DEPOSITS)
INTEREST PAYABLE REGULARLY OR CUMULATIVE
PAYMENT LINKED TO EVENT (LIC POLICY/PROVIDENT FUND)
REGULAR SAVINGS MEDIA OF INVESTMENT OR LUMP/SUM
INVESTMENT
SECONDARY MARKET STRUCTURE
• REGULAR STOCK EXCHANGE—
FOR BIG COMPANIES WITH PAID UP CAPITAL 5 CRORES OR
10 CRORES –BOMBAY,CALCUTTA DELHI PRINCIPAL
EXCHANGES AND REGIOANL EXCHANGES LIKE
COCHIN,INDORE,
OVER THE COUNTER EXCHANGE OF INDIA—
OCT.1992
COMPUTERISED TRADING FOR SMALLER COMOPANIES
WITH PAID UP CAPITAL OF 30 LAKHS TO 25 CRORES ..NO
TRADING RING…UPPER LIMIT REMOVED IN 1997
• NATIONAL STOCK EXCHANGE
RECOGNISED IN APRIL 93 – STARTED OPERATIONS IN
GOVT.SECURITIES AND MONEY MARKETS INITIALLY..EQUITY
TRADING STARTED IN NOVEMBER 1994. COMPUTERISED
TRADING WITH COUNTRY WIDE NETWORK
INTERCONNECTED STOCK EXCHANGE
RECOGNISED BY SEBI IN NOV.1998..ELECTRONIC TRADING
OF 15 REGIONAL EXCHANGES..
PLAYERS IN THE MARKET– MERCHANT BANKERS,
REGISTRARS, UNDERWRITERS,BROKERS,
STOCK MARKET INTERMEDIARIES
• 1.CLIENT BROKERS
• 2. JOBBERS AND MARKET MAKERS
• 3. ARBITRAGUERS – DOING INTER MARKET DEALS – WHERE
THERE IS PRICE DIFFERENCE AT ANY POINT OF TIME
• 4. BADLA FINANCIERS – WHO FINANCE CARRY FORWARD
DEALS IN SPECIFIED GROUP FOR INTEREST,, THEY LEND
MONEY OR SHARES TO THE BROKERS WHO ARE IN
OVERBOUGHT OR OVERSOLD POSITION AT THE TIME OF
SETTLEMENT
RISKS AND RETURNS
• INVESTORS HAVE DIFFERENT MOTIVES FOR INVESTING—
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REGULAR INCOME—DIVIDEND/INTEREST
CAPITAL GAINS OR CAPITAL APPRECIATION
HEDGE AGAINST INFLATION I.E. POSITIVE REAL REETURNS.
SAFETY OF FUNDS– REGTULAR RETURNS AND REFIND ON
MATURITY
LIQUIDITY AND MATURITY
SECURITY ANALYSIS INVOLVES AN EXAMINATION OF EXPECTED
RETURNS AND ACCOMPANYING RISKS. THE FIRST THREE
MOTIVES REFER TO THE RETURNS, LAST TWO ARE RELATED TO
RISKS..
RETURNS DEPEND ON RISKS– INVESTORS WANT MORE RETURNS
AND LOWER RISKS.
COMPONENTS OF RETURNS
• RETURN IS MEASURED BY TAKING THE INCOME PLUS THE
PRICE CHANGE.
• THE TERRM YIELD IS ALSO USED IN RESPECT OF FIXED
INCOME SECURITIES.
• THE RETURN IS TO BE CALCULATED ON THE PURCHASE
PRICE.
• THE EXPECTED RETURN MAY DIFFER FROM REALISED
RETURNS AND THIS VARIATION IS A RISK FACTOR.
• TOTAL RETURN IS CALCULATED
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INCOME RECEIVED + PRICE CHANGE
DIVIDED BY PURCHASE PRICE OF ASSET
MEASUREMENT OF RETURN
• ARITHMATIC AVERAGE—
• IT IS A SUMMATION OF RETURNS OVER A GIVEN NUMBER OF
YEARS.
• GEOMETRIC RETURN MEASURES THE COMPOUND
CUMULATIVE RETURNS OVER TIME.
• THE MEASUREMENT OF RETURN ON ANY SECURITY IS
GENERALLY DONE ON THE BASIS OF THE MARKET RETURN,
WHICH IS BASED ON AN APPROVED INDEX –SUCH AS B.S.E.
SENSETIVE INDEX (30 SCRIPS). BASE 1978-79=100
RISK ELEMENTS
• THE COMPONENTS OF RISKS ARE BROADLY TWO—
• 1. SYSTEMATIC RISKS– THAT PORTION OF VARIABILITY OF
RETURN CAUSED BY COMMON FACTORS AFFECTING THE
PRICES OF ALL SECURITIES IN THE MARKET ALIKE
THROUGH ECONOMIC,POLITICAL AND SOCIAL FACTORS.
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EXAMPLES OF SYSTEMATIC RISKS—
1) MARKET RISKS– CHANGES IN MARKET CONDITION
2) INTEREST RATE RISKS– CHANGES IN INTEREST RATES.
3) INFLATION RISKS
4) TRADE CYCLES/BUSINESS CONDITION OR MONSOON FOR
AGRICULTURE BASED ECONOMIES.
RISK ELEMENTS CONTD
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• UNSYSTEMATIC RISKS—
• THAT PORTION AFFECTING THE VARIABILITY OF RETURNS
CAUSED DUE TO UNIQUE FACTORS—RELATING TO THE
PARTICULAR INDUSTRY/FIRM THROUGH SUCH FACTORS
SUCH AS MANAGEMENT FAILURES,LABOUR STRIKE,RAW
MATERIAL SCARCITY,SUBSTITUTE PRODUCTS.
• EXAPMLES OF UNSYSTEMATIC RISKS—
• 1) FINANCIAL RISKS – HEAVY INTEREST/INEFFICIENT CAPITAL
MANAGEMENT.
• 2) MANAGEMENT RISKS– INEFFICIENCY/POOR PLANNING
• 3) LABOUR AND OTHER INPUT RISKS
RISKS AND UNCERTAINTY
• RISKS AND UNCERTAINTY GO TOGETHER .INVESTOR KNOWS
THAT THERE ARE SOME POSSIBLE CONSEQUENCES BUT IN
UNCERTAINTY OUTCOME IS NOT KNOWN.
• SOME RISKS CAN BE PREDICTED AND CONTROLLED BY THE
INVESTORS AND SOME BY ISSUERS BUT THERE ARE SOME
RISKS WHICH CANNOT BE CONTROLLED.
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WHAT CAUSES THE RISKS–
WRONG DECISION ABOUT THE INVESTMENT ALTERNATIVE
WRONG TIMING OF INVESTMENT
NATURE OF INSTRUMENTS
CREDITWORTHINESS OF THE ISSUER
MATURITY PERIOD /LENGTH OF INVESTMENT
AMOUNT OF INVESTMENT
WHAT CAUSES RISKS—
CONTD..
• METHOD OF INVESTMENT –SECURED OR UNSECURED
• TERMS AND CONDITIONS OF INVESTMENT–
SERVICING,REDEMPTION
• NATURE OF INDUSTRY/BUSINESS
• NATIONAL AND INTERNATIONAL FACTORS.
• In addition to the above risks there are other risks such as political
risks, changes in govt. policies, budgetary provisions; marketability
risks involving loss of liquidity or loss of value in conversion from
one asset to other asset.
• Sometimes the risks are because of natural calamities, accidents
etc. where there may be heavy loss.
ECONOMIC ANALYSIS
• INVESTMENT DECISION IS BASED ON AVAILABILITY OF
MONEY AND INFORMATION ON THE ECONOMY, INDUSTRY
AND COMPANY— CURRENT SHARE PRICE AND EXPECTED
PRICE.
• CRITERIA FOR INVESTMENT DECISIONS—
• 1. MOOD OF THE MARKET– FUTURE MOVEMENT OF SHARE.
• 2. PAST,PRESENT AND EXPECTED PERFORMANCE OF THE
COMPANY.
• 3. INVESTORS PERCEPTION ABOUT THE SHARE PRICE–
RIGHT, OVERVALUED,UNDERVALUED.
• 4. INVESTORS PREFERENCES/FANCIES/MOOD.
ECONOMIC AND INDUSTRY FACTORS--
• COMPANY SPECIFIC(UNSYSTEMATIC
RISKS ) CAN BE REDUCED BY
DIVERSIFYING. BUT SYSTEMATIC
RISKS NEED TO BE STUDIED AND
TIMING OF INVESTMENT DECIDED
CAREFULLY.
ECONOMIC AND INDUSTRY FACTORS
• WHATEVER IS HAPPENING IN THE ECONOMY /IS LIKELY TO
HAPPEN IN NEAR FUTURE NEEDS TO BE
ANTICIPATED.(ECONOMY FORECASTS)
• SURVEY RESULTS OF THE ECONOMY– GDP GROWTH RATE,
INFLATION RATE, INTEREST RATES, MONEY SUPPLY,
GOVERNMENT DEFICIT , FOOD STOCKS, EXPECTATION
ABOUT MONSOON, INTERNATIONAL TRADE, CURRENCY
RATE FLUCTUATIONS, INDEX OF INDUSTRIAL PRODUCTION.
• IN INDIA CMIE, FICCI, GOVERNMENT DEPARTMENT,
INDUSTRY ASSOCIATIONS , C.S.O PUBLISH ECONOMY DATE
FROM TIME TO TIME.
INDUSTRY INFORMATION
• INSTALLED CAPACITY, TREND OF
DEMAND, COMPETING UNITS,
CAPACITY UTILISATION,EXPORTS,
COST OF INPUTS, SUBSTITUTE
PRODUCTS, IMPORTS OF INPUTS,
GOVERNMENT POLICY, LABOUT
SCENARIO, TECHNOLOGY
CHANGES.,TAX STRUCTURE, INFLOW
OF NEW INVESTMENTS
COMPANY INFORMATION
• INFORMATION IS AVAILABLE IN DAILY FINANCIAL
NEWSPAPERS/FORTNIGHTLY JOURNALS, BOMBAY STOCK
EXCHANGE ALSO PUBLISHES DIRECTORY OF COMPANIES
• ANNUAL REPORTS OF THE COPMPANIES/HALF YEARLY
UNAUDITED RESULTS ALSO USEFUL.
• BIG BROKER FIRMS ALSO SEND NEWSLETTERS TO THEIR
CLIENTS AND OTHER INVESTORS. INFORMATION ON THE
BASIS OF THEIR RESEARCH,
• SECURITY PRICE INFORMATION IS PUBLISHED EVERYDAY IN
FINANCIAL NEWSPAPERS/INTERNET SITES OF SELECTED
FINANCE ORGANISATION
• DATA ON MUTUAL FUNDS IS PUBLISHED IN FINANCIAL
NEWSPAPERS AND JOPURNALS—CURRENT SCHEME/NAVS
OF DIFFERENT SCHEMES/MARKET PRICE-REDEMPTION
PRICE/REPURCHASE PRICE
BASIS FOR COMPANY ANALYSIS
• STOCK PRICE IS GENERALLY DEPENDENT ON INTRINSIC
VALUE TO THE EXTENT OF 50 %
• INTRINSIC VALUE IS THAT VALUE WHICH IS JUSTIFIED BY
THE FACTS OF ASSETS, EARNINGS AND DIVIDENDS
• THE ANALYST HAS TO PROJECT THE FUTURE
(EXPECTED)EARNINGS PER SHARE, DISCOUNT THEM TO THE
PRESENT TIME AND COME TO INTRINSTIC VALUE.
• ANOTHER METHOD IS TAKE EXPECTED EARNINGS AND
MULTIPLY IT BY INDUSTRY AVERAGE P/E MULTIPLE.
• INVESTMENT DECISION IS TO BUY UNDER VALUED STOCK
AND SELL OVER VALUED STOCK.
VALUATION OF SHARES
• SHARE IS UNDERVALUED IF ITS RISKS ARE LOWER THAN
THE MARKEET RISK, AND RETURN IS HIGHER THAN MARKET
RETURN.MARKET PRICE CAN BE COMPARED TO BOOK
VALUE, OR P/E RATIO CAN BE COMPARED TO SIMILAR
COMPANIES IN THE SAME INDUSTRY.
• PRICE DEPENDS ON – SPECULATIVE ACTIVITY–
TECHNICAL, MANIPULATIVE, PSYCHOLOGICAL
• FUTURE VALUE FACTORS– MANAGEMENT,
COMPETITION, PROSPECTS, CHANGES IN COSTS AND
PRICES.
• INTRINSTIC VALUE FACTORS – SALES, EARNINGS &
DIVIDENDS, ASSETS, CAPITAL STRUCTURE..
FINANCIAL ANALYSIS
• FINANCIAL MANAGEMENT INVOLVES PROCUREMENT AND
UTILISATION OF FUNDS– COST INVOLVED FOR RAISING
FUNDS AND REVENUES GENERATED BY USING SUCH
FUNDS.
• OVERALL CAPITAL STRUCTURE, STRUCTURE OF WORKING
CAPITAL NEEDS TO BE STUDIED. CAPITAL UNNECESSARILY
BLOCKED, UNDERUTILISED WILL NOT GENERATE INCOME.
• FINANCIAL ANALYSIS IS ANALYSIS OF FINANCIAL
STATEMENTS TO ASSESS FINANCIAL SOUNDNESS.
• FINANCIAL STATEMENTS ARE PROFIT AND LOSS ACCOUNT
AND BALANCE SHEET. STATEMENT INDICATING
APPROPRIATION OF PROFIT ALSO NECESSARY.
FINANCIAL ANALYSIS –CONTD..
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THE ANALYSIS INVOLVES FOLLOWING STEPS
A) COMPARISON OF STATEMENTS OF 3/5 YEARS.
B) RATIO ANALYSIS
C) FUNDS FLOW ANALYSIS
D) TREND ANALYSIS -OVER 5/10 YEARS.
COMPARISON OF FINANCIAL STATEMENTS
1) FIGURES OF THIS YEAR WITH EARLIER YEARS.
2) INTER FIRM COMPARISON—WITHIN INDUSTRY
3) FIGURES OF ONE PRODUCT WITH OTHER PRODUCTS
4) COMPARISON OF BUDGETED WITH ACTUAL FIGURES.
RATIO ANALYSIS
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RATIO IS A STATISTICAL YARDSTICK THAT PROVIDES A MEASURE
OF RELATIONSHIP BETWEEN ANY TWO VARIABLES.
BALANCE SHEET RATIOS– CURRENT ASSEETS TO CURRENT
LIABILITIES (CURRENT RATIO)
LIQUIDITY RATIO
DEBT TO EQUITY RATIO
ASSETS TO EQUITY RATIO.
P & L ACCOUNT RATIOS– GROSS PROFIT TO SALESS (GROSS
PROFIT MARGIN)
NET PROFIT RATIO
STOCK TURNOPVER/TURNOVER OF INVENTORY
RATIO ANALYSIS WILL BE USEFUL TO FIND OUT FINANCIAL
PERFORMANCE, OPERATIONAL EFFICIENCY, PROFIT MARGINS
OF THE SAME COMPANY – INTER COMPANY COMPARISONS..
FUNDS FLOW ANALYSIS
• THE OPERATIONS OF BUSINESS INVOLVES CONVERSION OF
CASH INTO DIFFERENT ASSETS AND THEN AGAIN BACK TO
CASH
• STATEMENT SHOWING SOURCES AND USES OF FUNDS IS
KNOWN AS FUNDS FLOW STATEMENT.
• CHANGES REPRESENTING SOURCES MAY BE ISSUE OF
DEBENTURES, INCREASE IN FUNDS, RESERVES &
SURPL;US,RETENTION OF EARNINGS.
• CHANGES IN USE OF FUNDS INCLUDE –A) ADDITION TO
ASSETS (2) ADDITION TO INVESTMENT © DECREASE IN
LIABILITIES BY PAYING OFF LOANS., DECREASE IN NET
WORTH ( INCURRING LOSSES)
TREND ANALYSIS
• IT IS A COMPARISON OF SOME IMPORTANT RATIOS AND
RATES OF GROWTH OVER A TIME PERIOD OF FEW YEARS.
• TRENDS OF GPM,SALES TURNOVER, RATE OF DIVIDEND,
EPS,ASSET/SALES GROWTH ARE USEFUL TO MEASURE
OPERATIONAL PERFORMANCE.
• USE OF ANY RATIO WITHOUT REFERENCE TO OTHER RATIO
MAY BE MISLEADING
• RATIOS ARE ONLY PRELIMINARY STEPS IN INTERPRETATION
AND MUST BE SUPPLEMENTED BY INVESTIGATION INTO
ALL OTHER ASPECTS OF OPERATIONS
• SCRUTINY OF DIRECTORS REPORTS,AUDITORS REPORTS IS
ALSO NECESSARY IN RESPECT OF CONTIGENT LIABLITIES,
UNPAID TAXES, DOUBTFUL DEBTS.
FUNDS FLOW AND CASH FLOW
• FUNDS FLOW IS USED TO INDICATE WORKINMG CAPITAL
CASH FLOW IS FOR ONLY CASH INFLOWS AND OUTFLOWS
• THE USEFULNESS OF CASH FLOW STATEMENT IS TO
ASSESS THE CASH GENERATED, FINANCIAL ACTIVITIES AND
INVESTMENT ACTIVITIES AND ADEQUACY OR OTHERWISE OF
THE CASH… THE TIMING OF FLOWS AND WHETHER
OUTFLOWS CAN BE MET BY INFLOWS –REFLECTS THE
ABILITY OF THE COMPANYTO BE SOLVENT..
TYPES OF SHARES IN THE MARKET
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BLUE CHIPS
EMERGING BLUE CHIPS—
INDUSTRIAL UNITS EXPANDING AND GROQWING
GENERALLY MARKET LEADERS HAVING GOOD MARKET SHARE.
CAPACITY TO DIVERSIFY/HIGHER SALES TURNOVER/GROWING
PROFIT MARGINS
PURPOSEFUL TAX PLANNING
MANAGEMENT OUTLOOK IS DYNAMIC
COMMITMENT TO RESEARCH AND DEVELOPMENT– QUICK TO
ADAPT NEW TECHNOLOGIES AND LOWER COSTS
GROWTH SHARES – EXPANDING HENCE GOOD FOR LONG TERM
CYCLICAL SHARES-RELATED TO BUSINESS CYCLES.
DEFENSIVE SHARES –PRICES ARE STABLE , REGULAR DIVIDEND
DISCOUNT SHARES – CURRENT REETURNS ARE LOW BUT LIKELY
TO GROW IN FUTURE