Equity Research & Analysis

8/7/2019 Equity Research & Analysis

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EQUITY RESEARCH AND ANALYSIS NAME: Abhishek Gupta

SEMESTER: 6th

ROLL NO: 243

ROOM : 11

ST.XAVIER'S COLLEGE

DEGREE: B.COM (HONOURS)

http://b.com/

http://b.com/



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ACKNOWLEDGEMENT

The satisfaction and euphoria that accompany the successful completion of anywork would be incomplete unless we mention some of the persons, as an expression

of gratitude, which made it possible, whose constant guidance and encouragement

served as a beckon light and crowned the efforts and success.

A project is a major milestone during the study period of a student. As such this

project was a challenge and was an opportunity to prove my caliber. It would not

have been possible to see through the undertaken project without the guidance of

Prof. M Hanif. It was purely on the basis of his experience and knowledge that I

was able to clear all the theoretical and technical hurdles during the development

phases of this project work.



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Contents Page

No.

Preface 4

Introduction 5

Approaches of Equity Analysis 6

Price Volume Relationship 7

Support & resistance 8

Role reversal 10

Tools of Technical Analysis 11

Moving averages 12

Exponential averages - short term trend 13

Exponential averages - medium term trend 14

Exponential averages - long term trend 15

Relative strength index 16Fundamental analysis 17

Dividend Discount Model 18

Price to Earnings (P/E Ratio) 19

Price Earnings to Growth (PEG Ratio) 20

Price to Book Value (P/B Ratio) 21

Fundamental analysis on BSE 30 index 22

Conclusion 38

Bibliographical References 39



Page 4

PREFACE

The project revolves around methods of equity research which is divided into

fundamental analysis and technical analysis. The project started with basic

concepts like price volume relationship, support, resistance and role reversal.

After basic concepts, tools of technical analysis such as moving average,

exponential moving average (EMA), EMA’s short term, medium term and long

term trends and relative strength index are explained.

Further methods of fundamental analysis are explained. Methods of fundamentalanalysis include dividend discount model, price to earnings ratio, PEG ratio and

price to book value ratio. Fair value or intrinsic value of a share is calculated

using fundamental valuation techniques. Fundamental analysis is used for making

long term decision whereas technical analysis is used for making short term

decisions.

Further, methods of fundamental analysis are used to evaluate intrinsic value of

few BSE 30 index shares. Price earnings ratio and price to book value ratio are

used to evaluate these stocks. Proper assumptions have been taken while

calculating the intrinsic value.



Page 5

INTRODUCTION

Today’s world is meant for money and developing with the money. Not for today but from many

years it is there in any form. Earlier nations were famous and powerful due to their money (goldcoins, valuable things and some special features). Now a days nation’s capacity depends upon

money, defense power and it depends on rise and fall in share market. Now its the biggest thing for

this world. Everybody wants to earn money and investing in shares is the best way to earn

unlimited money. But as it depends on the market, therefore which shares really can give more and

more money there is more risk attached to it. Hence a proper knowledge of shares and many more

things are required before investing in share market.

Equity Analysis refers to the methods used to determine the movements in the equity, direction of

the movements and the methods applied for the valuation of equities. It basically means analyzing

the performance of various shares in the stock market and taking investment decisions on the basis

of such analysis.



Page 6

APPROACHES OF EQUITY ANALYSIS

There are 2 approaches of Equity analysis. These two are:

1. Technical Analysis

2. Fundamental Analysis

Technical Analysis is the study of market action primarily through charts and other technical tools

with a view to identify overbought and oversold positions. It is a study of the past behavior

patterns. It is more suitable for short term traders and speculators. These technical analysts believe

that stock market movements are 90% psychological and 10% logical.

The objective of Fundamental analysis is to find out intrinsic value of the share based on future

fundamentals and compare the same with market price i.e. it is a Pricing Decision. It is a study of

the future. It is more suitable for long term investors. These fundamental analysts believe that

stock market movements are 90% logical and 10% psychological.

The difference between the two abovementioned type of analysts can be undertood with the help of

the following example of shopping mall. In a shopping mall, a fundamental analyst would go to

each store, study the product that was being sold, and then decide whether to buy it or not. By

contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores.

Disregarding the intrinsic value of the products in the store, his or her decision would be based on

the patterns or activity of people going into each store.



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PRICE VOLUME RELATIONSHIP

Share prices are determined by demand and supply. Demand and supply, on the other hand, are

determined by a number of rational as well as irrational factors. Share prices moves in trend which

persist for an appreciable length of time.

There is a close relationship between share prices and volume i.e. the no. of shares traded. In the

direction of the trend, volume should be high and against the trend volume should be low. If this

does not happen , there is a clear cut indication of trend reversal.



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SUPPORT AND RESISTANCE

A support level is the price at which buyers are expected to enter the market in sufficient numbers

to take control from sellers.

The market has a memory. When price falls to a new Low and then rallies, buyers who missed out

on the first trough will be inclined to buy if price returns to that level. Afraid of missing out for a

second time, they may enter the market in sufficient numbers to take control from sellers. The

result is a rally, reinforcing perceptions that price is unlikely to fall further and creating a support

level.

http://www.incrediblecharts.com/technical/chart_basics.php#Control






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A resistance level is the price level at which sellers are expected to enter the market in sufficient

numbers to take control from buyers.

When price makes a new High and then retreats, sellers who missed the previous peak will be

inclined to sell when price returns to that level. Afraid of missing out a second time, they may

enter the market in numbers sufficient to overwhelm buyers. The resulting correction will reinforce

market perceptions that price is unlikely to move higher and establish a resistance level.





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ROLE REVERSAL

Support levels, once penetrated, frequently become resistance levels and vice versa.

The market logic is fairly simple: buyers who purchase near a support level, only to see price fall,

are likely to sell in order to recover their losses, when price rallies to near their break-even point.

The support level then becomes a resistance level.



Page 11

TOOLS OF TECHNICAL ANALYSIS

There are various tools of Technical analysis. The most popular of them

are as follows:

1. Moving Average

2. Relative Strength Index (RSI)



Page 12

MOVING AVERAGES

Moving averages are one of the oldest and most popular technical analysis tools. A moving

average is the average price of a financial instrument over a given time. The moving average

represents the consensus of investor’s expectations over the indicated period of time.



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Exponential Moving Average

It is a type of moving average that is similar to a simple moving average, except that more weight

is given to the latest data. The exponential moving average is also known as "exponentially

weighted moving average". This type of moving average reacts faster to recent price changes than

a simple moving average.

How to decide market trends through moving average?

Short term trends - In case of moving average short term period is less than 2 weeks. If the

market price of a share is more than 8 days exponential moving average (EMA) and if 8 days

EMA is more than 13 days EMA then it indicates market will be in a short term bull run. In the

graph below red line represents 8 days EMA and blue one represents 13 days EMA.

MP > 8 days EMA > 13 days EMA = short term bull run

Bullish (8>13)

Bearish (8<13)



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Medium term trends - In case of EMA medium term period is a time frame of 3 to 4 months.

If the market price of a share is more than 34 days exponential moving average (EMA) which is

again more than 55 days EMA then it indicates market will be in a medium term bull run. In the

graph below black line represents 55 days EMA and blue one represents 34 days EMA

MP > 34 days EMA > 55 days EMA = Medium term bull run

Buying pointMedium term

Bearish (34<55)



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Long term trend - Long term period is a period of more than 1 year. In general, the 50- and

200-day EMAs are used as signals of long-term trends. If the market price of a share is more than

50 days EMA which is again more than 200 days EMA then it is expected that the market will

experience a long term bull run. In the graph below red line represents 50 days EMA and blue one

represents 200 days EMA.

When the market is in between the two moving average then it is said to be the sideways market.

MP > 50 days EMA > 200 days EMA = long term bullish trend

Bull market

Bear market

Sideways market



Page 16

RELATIVE STRENGTH INDEX (RSI)

It is an extremely useful and popular momentum oscillator. Relative Strength compares the

magnitude of recent gains to recent losses to determine situations which may be overbought and

oversold.

In this chart the RSI ranges from 0 to 100. A security is said to be overbought when the RSI

approaches the 70 level, and according to theory, it may be overvalued and has increased potential

for a pullback. When the RSI approaches 30, it is an indication that the security may be

undervalued.

RSI is calculated with the help of the following formula:

100

RSI = 100 - -----------

1 + RS

Where RS = Average of n periods closes up/Average of n periods closes down



Page 17

FUNDAMENTAL ANALYSIS Fundamental analysis begins with the assertion that the true or intrinsic value of any financial asset

equals the present value of all cash flows that the owner of the asset expects to receive.

Accordingly the fundamental stock analyst attempts to forecast the timing and the size of these

cash flows and then converts them to their equivalent present value by using an appropriate

discount rate. The analyst must attempt not only to estimate this discount rate but also to forecast

the stream of dividends that a particular stock will provide in future. This process is equivalent to

forecasting the firm’s earning per ratio and payout ratio.

The primary task of security analysis is to identify mispriced security by determining the future

benefits of owning those securities. This is the valuation that people use to justify stock prices. The

most common example of this type of valuation methodology is P/E ratio, which stands for Price

to Earnings Ratio. This form of valuation is based on historic ratios and statistics and aims to

assign value to a stock based on measurable attributes. This form of valuation is typically what

drives long-term stock prices.

In short, there are many different ways to value stocks. The key is to take each approach into

account while formulating an overall opinion of the stock. And remember, a great company is not

always a great investment.

The following are the widely used techniques of valuing a stock:

1. Dividend Discount Model

2. Price to Earnings Ratio (P/E Ratio)

3. Price Earnings to Growth (PRG Ratio)

4. Price to Book Value (P/B Ratio)



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DIVIDEND DISCOUNT MODEL (DDM)

It is a valuation method used to estimate the attractiveness of an investment opportunity. Dividend

Discount Model (DDM) analysis uses future dividend projections and discounts them (most oftenusing the weighted average cost of capital) to arrive at a present value, which is used to evaluate

the potential for investment. If the value arrived at through DDM analysis is higher than the

current cost of the investment, the opportunity may be a good one. It is calculated as follows:

Dividend * (1 + growth rate)/ (Required rate – growth rate)

Dividend Discount Model is powerful, but it has shortcomings. DDM is merely a mechanical

valuation tool, which makes it subject to the axiom "garbage in, garbage out". Small changes ininputs can result in large changes in the value of a company. Instead of trying to project the

dividend to infinity, terminal value techniques are often used. A simple annuity is used to estimate

the terminal value. This is done because it is harder to come to a realistic estimate of the cash

flows as time goes on.



Page 19

PRICE TO EARNINGS (P/E RATIO)

The most common valuation technique used by analysts is the price to earnings ratio, or P/E. To

compute this figure, take the stock price and divide it by the annual EPS figure. For example, if the stock is trading at Rs10 and the EPS is Rs 0.50, the P/E is 20 times. To get a good feeling of

what P/E multiple a stock trades at, be sure to look at the historical and forward ratios.

Historical P/Es are computed by taking the current price divided by the sum of the EPS for the last

four quarters, or for the previous year. You should also look at the historical trends of the P/E by

viewing a chart of its historical P/E over the last several years. Specifically you want to find out

what range the P/E has traded in so that you can determine if the current P/E is high or low versus

its historical average.

Forward P/Es are probably the single most important valuation method because they reflect the

future growth of the company into the figure. And remember, all stocks are priced based on their

future earnings, not on their past earnings. However, past earnings are sometimes a good indicator

for future earnings. Forward P/Es are computed by taking the current stock price divided by the

sum of the EPS estimates for the next four quarters, or for the EPS estimate for next calendar of

fiscal year or two.

Also, it is important to remember that P/Es change constantly. If there is a large price change in a

stock you are watching, or if the earnings (EPS) estimates change, be sure to recompute the ratio.



Page 20

PRICE EARNINGS TO GROWTH (PEG RATIO)

This valuation technique has really become popular over the past decade or so. It is better than just

looking at a P/E because it takes three factors into account; the price, earnings, and earningsgrowth rates. To compute the PEG ratio (a.k.a. Price Earnings to Growth ratio) divide the Forward

P/E by the expected earnings growth rate. This will yield a ratio that is usually expressed as a

percentage. The theory goes that as the percentage rises over 100% the stock becomes more and

more overvalued, and as the PEG ratio falls below 100% the stock becomes more and more

undervalued. The theory is based on a belief that P/E ratios should approximate the long-term

growth rate of a company's earnings.

Here's an example of how to use the PEG ratio. Say you are comparing two stocks that you are

thinking about buying. Stock A is trading at a forward P/E of 15 and expected to grow at 20%.

Stock B is trading at a forward P/E of 30 and expected to grow at 25%. The PEG ratio for Stock A

is 75% (15/20) and for Stock B is 120% (30/25). According to the PEG ratio, Stock A is a better

purchase because it has a lower PEG ratio, or in other words, you can purchase its future earnings

growth for a lower relative price than that of Stock B. Stock theory suggests that the stock market

should assign a PEG ratio of 100% to every stock. This would represent theoretical equilibrium

between the market value of a stock and anticipated earnings growth.

PEG ratio results greater than one suggest one of the following:

• Market expectation of growth is higher than consensus estimates.

• Stock is currently overvalued due to heightened demand for shares.

PEG ratio results of less than one suggest one of the following:

• Markets are underestimating growth and the stock is undervalued.

• Analysts' consensus estimates are currently set too low.

http://www.investopedia.com/terms/o/overvalued.asp

http://www.investopedia.com/terms/u/undervalued.asp

http://www.investopedia.com/terms/u/undervalued.asp

http://www.investopedia.com/terms/o/overvalued.asp



Page 21

PRICE TO BOOK VALUE (P/B RATIO)

P/B Ratio is a ratio used to compare a stock's market value to its book value. It is calculated by

dividing the current closing price of the stock by the latest quarter's book value per share. (P/BV).

Book value is the measure that each shareholder stands to get, were the company to be liquidated.

Calculated as:

A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that

something is fundamentally wrong with the company. As with most ratios, be aware that this

varies by industry.

This ratio also gives some idea of whether you're paying too much for what would be left if the

company went bankrupt immediately. Conventional wisdom suggests that there is very little

chance of going wrong if an investor were to put his money in a stock with a P/BV of less than

one.

Investors would need to look at the fundamentals of each sector over the medium term where

stocks are trading at a price to book value of less than one, and decide if there are growth

possibilities at the current stock prices.

This essentially means that, hypothetically, if you buy the complete equity of these stocks and sell

the assets in the market, the realization would be significantly higher than the price paid to buy the

shares. However, this is still a conjectural scenario; as such buy-outs would have to follow the

norms of a takeover which requires an open offer based on recent historical prices.



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Fundamental analysis on some BSE index shares

Valuation techniques like Price to Earnings (P/E) and Price to Book Value (P/B) will be used in

finding out the intrinsic value of the few stocks included in the Sensex Index..

Important assumptions

• For the purpose of calculating fair value by price to earning method we need earning per

share (EPS) of 4 quarters. Some analyst suggest to consider EPS of last four quarters and

some believe in considering sum of expected EPS for the next four quarters. Here we have

considered the EPS of the last 4 quarters.

• The industry average P/E Ratio has been considered based on the closing prices as on 1st

April, 2011.

• In the absence of latest information, book value per share as on 31st

March, 2010 has been

considered.



Page 23

BAJAJ AUTO LTD.

Industry : Auto – 2 & 3 wheelers

Price to Earnings (P/E):

The EPS of the last 4 quarters are as follows:

Quarter Ended EPS (`)

March 2010 36.54

June 2010 40.79

September 2010 23.57

December 2010 23.05

123.95

Industry P/E of Auto – 2 & 3 wheelers is 18.49.

So, Intrinsic Value = P/E * EPS of last 4 quarters

= 18.49 * 123.95 = ` 2291.84

The actual closing price as on 1st April, 2011 is `1459.50. This means the stock is quite

underpriced.

Price-To-Book Value Ratio: The company’s book value as on 31st

March 2010 is 101.20 per

share.

Hence P/B Ratio = Market Price / Book Value

= 1459.50 / 101.20 = 14.42 times



Page 24

CIPLA LTD.

Industry : Pharmaceuticals




March 2010 3.43

June 2010 3.21

September 2010 3.28

December 2010 2.90

12.82

Industry P/E of pharmaceuticals industry is 22.61.


= 22.61 * 12.82 = ` 289.86

The actual closing price as on 1st April, 2011 is ` 320.80. This means that the stock is more or less

fairly priced.



share.


= 320.80 / 73.55 = 4.36 times



Page 25

DLF LTD.

Industry : Construction & Contracting – Real Estate




March 2010 2.42

June 2010 1.21

September 2010 0.72

December 2010 1.21

5.56

Industry P/E of construction – real estate industry is 27.21.


= ` 151.29

The actual closing price as on 1st April, 2011 is ` 271.30. This means that the stock is quite

overpriced.



share.


= 271.30 / 75.58 = 3.59 times



Page 26

HDFC BANK LTD.

Industry : Banks – Private Sector




March 2010 18.28

June 2010 17.66


December 2010 23.43

79.09

Industry P/E of banks – private sector is 29.16.


= ` 2306.26

The actual closing price as on 1st April, 2011 is ` 2333.65. This means that the stock is fairly

priced in the stock market.



share.


= 2333.65 / 433.66 = 5.03 times



Page 27

INFOSYS TECHNOLOGIES LTD.

Industry : Computers - Software




March 2010 24.91

June 2010 24.93


December 2010 28.59

107.02

Industry P/E of Computers - Software is 26.35.


= ` 2819.98

The actual closing price as on 1st April, 2011 is ` 3218.20. This means that the stock is slightly

overpriced.



share.


= 3218.20 / 383.82 = 8.38 times



Page 28

LARSEN & TOUBRO LTD.

Industry : Engineering - Heavy




March 2010 23.88

June 2010 11.04


December 2010 13.83

61.40

Industry P/E of Engineering – Heavy industry is 18.57.


= ` 1140.20

The actual closing price as on 1st April, 2011 is ` 1650.95. This means that the stock is overpriced.



share.


= 1650.95 / 300.50 = 5.49 times



Page 29

OIL & NATURAL GAS CORPORATION

Industry : Oil Drilling & Exploration




March 2010 17.66

June 2010 17.12


December 2010 33.12

93.09

Industry P/E of oil drilling and exploration industry is 14.69.


= ` 1367.49

The actual closing price as on 1st April, 2011 is ` 292.85. This means that the stock is highly

underpriced.



share.


= 292.85 / 102.02 = 2.87 times



Page 30

STATE BANK OF INDIA

Industry : Banks – Public Sector




March 2010 29.40

June 2010 45.90


December 2010 44.54

159.23

Industry P/E of banks – public sector is 11.45.


= ` 1823.18


overpriced.


March 2010 is 1038.57

per share.


= 2719.50 / 1038.57 = 2.62 times



Page 31

TATA MOTORS LTD.

Industry : Auto – LCVs/HCVs




March 2010 10.46

June 2010 6.94

September 2010 7.58

December 2010 6.48

31.46

Industry P/E of auto – LCVs/HCVs industry is 32.24.


= ` 1014.27


overpriced.



share.


= 1242.90 / 237.37 = 5.24 times



Page 32

TATA STEEL LTD.

Industry : Steel




March 2010 24.37

June 2010 17.80


December 2010 16.77

81.82

Industry P/E of Steel industry is 11.36.


= ` 929.48


underpriced.



share.


= 625.65 / 412.14 = 1.52 times



Page 33

NTPC

Industry : Power – Generation & Distribution




March 2010 2.45

June 2010 2.23

September 2010 2.56

December 2010 2.88

10.12

Industry P/E of power – generation and distribution industry is 20.20.


= ` 204.42

The actual closing price as on 1st April, 2011 is ` 188.90. This means that the stock is quite fairly

priced.



share.


= 188.90 / 77.28 = 2.44 times



Page 34

ITC LTD.

Industry : Cigarettes




March 2010 2.69

June 2010 2.80

September 2010 1.62

December 2010 1.80

8.91

Industry P/E of Cigarettes industry is 33.38.


= ` 297.42


underpriced.



share.


= 182.70 / 18.12 = 10.08 times



Page 35

RELIANCE INDUSTRIES LTD.

Industry : Refineries




March 2010 14.40

June 2010 14.83


December 2010 15.69

59.97

Industry P/E of Refineries industry is 18.57.


= ` 1113.64


underpriced.



share.


= 1035.30 / 392.21 = 2.64 times



Page 36

SUMMARY OF ANALYSIS

The above analysis can be summarized as follows :

Name of Company Pricing as per P/E Ratio P/B Ratio

Bajaj Auto Ltd. Underpriced 14.42

Cipla Ltd. Fairly Priced 4.36

DLF Ltd. Overpriced 3.59

HDFC Bank Ltd. Fairly Priced 5.03

Infosys Technologies Ltd. Overpriced 8.38

Larsen & Toubro Ltd. Overpriced 5.49

Oil & Natural Gas Corporation Underpriced 2.87

State Bank of India Overpriced 2.62

Tata Motors Ltd. Overpriced 5.24

Tata Steel Ltd. Underpriced 1.52

NTPC Fairly Priced 2.44

ITC Ltd. Underpriced 10.08

Reliance Industries Ltd. Underpriced 2.64

From the table, we can note that Bajaj Auto Ltd. And ITC Ltd. are underpriced according to P/E

analysis. However, these two stocks have a very high P/B ratio which suggests that they are quite

overpriced. Thus, there is a conflict under the two valuation methods.



Page 37

Similarly, State Bank of India and DLF Ltd. are overpriced according to P/E analysis. However,

both the stocks have a P/B ratio which is not too high which suggest that they may be slightly

underpriced or fairly priced. Hence, there is a conflict in both the valuation techniques.

In such situations, the investors have to consider various other factors affecting the stock prices

and the company’s future prospects before taking any investment decision. Also, technical analysis

may be considered in such situations.

The P/B Ratio of different companies is shown in the following chart :



Page 38

CONCLUSION

Stock markets movement is more influenced by sentiments rather than fundamental

reasons. There are a lot more factor which influences equity market both in short

term and long term. Factors such as political stability, government policies towards

a particular industry, foreign investments in the country, inflation, country’s growth

rate, technological environment etc are responsible for the growth of stock market.

Besides this it is very difficult to find out expected dividend growth. Required rate of

return are different for different persons depending upon the risk profile of the

investor. It is the investors who have to decide how much return he wants. IndustryP/E is taken as a benchmark but industry P/E does not differentiate between a strong

company and a weak company. A good company is always not a good investment.

The above fundamental and technical methods are not 100% correct. It only gives its

view just like other factors do. Therefore a wise investor will invest considering

every factor which influences stock market.



Bibliographical References

Websites:

• www.moneycontrol.com

• www.investopedia.com

• www.economictimes.com

• www.wikipedia.org

Books:

• Strategic Financial Management Study Module – By ICAI

• Strategic Financial Management – By Sanjay Saraf

Newapapers:

• The Economic Times

• The Telegraph

http://www.moneycontrol.com/

http://www.investopedia.com/

http://www.economictimes.com/

http://www.wikipedia.org/



http://www.wikipedia.org/

http://www.economictimes.com/

http://www.investopedia.com/


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Equity Research & Analysis