BANGLADESH RESEARCH PUBLICATIONS JOURNAL

BANGLADESH RESEARCH PUBLICATIONS JOURNALISSN: 1998-2003, Volume: 7, Issue: 1, Page: 46-54, May - June, 2012FUNDAMENTAL ANALYSIS AND ITS USAGE IN INDIAN CAPITALMARKETS: A SURVEYVenkatesh, C. K. 1 ; Madhu Tyagi 2 and Ganesh, L. 3Venkatesh, C. K.; Madhu Tyagi and Ganesh. L. (2012). Fundamental analysis and its usagein Indian capital markets: A Survey. Bangladesh Res. Pub. J. 7(1): 46-54. Retrieve fromhttp://www.bdresearchpublications.com/admin/journal/upload/09313/09313.pdfAbstractThis article reports the results of a questionnaire survey duringSeptember to November 2010 on the use of Fundamental Analysisby brokers/fund managers in Indian stock market to form theirforecasts of share price movements. The findings of the researchreveal that more than 85 percent of the respondents rely upon bothFundamental and Technical analysis for predicting future pricemovements at different time horizons. The survey envisages atproviding insights about the way traders operate in the market byusing the fundamental analysis information. The survey coveredBrokers, Sub-Brokers, Fund managers, Portfolio managers and others.Fundamental analysis is widely recognized as EIC analysis, where, Estands for Economy, I stand for Industry and C stands for Company.In the current work an effort is made to understand these variablesas a whole. The structured questionnaire comprehensively includesall these components so as to arrive at that factor which is drivingthe market. The study records top ten Economy and Companyfactors as considered important by the respondents. Indicatorsconsidered for investing, company financial and non-financialfactors and various Economic factors considered for judging thegrowth of the economy were included in the questionnaire.Key Words: Fundamental Analysis, Economy, Company, Industry.IntroductionFundamental analysis is a method of finding out the future price of a stockwhich an investor wishes to buy. It relates to the examination of the intrinsic worthof a company to find out whether the current market price is fair or not, whether itis overpriced or under priced. It believes that analyzing the economy, strategy,management, product, financial status and other related information will help tochoose shares that will out perform the market and provide consistent gains tothe investor. It is the examination of the underlying forces that affect the interestof the economy, industrial sectors and companies. It tries to forecast the futuremovement of the capital market using signals from the Economy, Industry andCompany. It requires an examination of the market from a broader perspective.The presumption behind Fundamental analysis is that a thriving economy fostersindustrial growth which leads to development of companies. Estimate of real* Corresponding author: ckv_krishna@yahoo.co.in1. (Research Scholar, IGNOU, New Delhi) Assistant Professor, GFGC, Kadugudi, Bangalore-560 0672. Professor, School of management, IGNOU, Maidan Ghari, New Delhi tyagimadhu@hotmail.com3. Professor, Christ University Institute of Management, Hosur Road, Bangalore-560 029ganesh.l@christuniversity.in

Analysis and usage in Indian capital marketsworth of a stock is made by considering the earning potential of the companywhich depends on investment environment and factors relating to specificindustry, competitiveness, quality of management, operational efficiency,profitability, capital structure and dividend policy.Fundamental analysis is also referred as E-I-C analysis, E stands forEconomy, and I stand for Industry and C for Company. The basic premise in thisapproach is that the drivers of Economy, Industry and Company collectivelyaffect the security prices.Fundamental analysis believes that analyzing the Economy, Strategy,Management, Product, Financial status and other related information will helpchoose shares that will outperform the market and provide consistent gains to theinvestor.Fundamental analysis is the examination of the underlying forces thataffect the interest of the Economy, Industrial sectors and companies. It tries toforecast the future movement of the capital market using signals from theEconomy, Industry and Company. Fundamental analysis requires an examinationof the market from a broader perspective. The presumption behind Fundamentalanalysis is that a thriving economy fosters industrial growth which leads todevelopment of companies.Fundamental analysis is a method of finding out the future price of a stockwhich an investor wishes to buy. It relates to the examination of the intrinsic worthof a company to find out whether the current market price is fair or not, whether itis overpriced or under priced, in the back ground of the company’s performanceand in the background of the performance of the industry to which the companybelongs and also the general socio-political scenario of the country.The Fundamental approach suggest that every stock has an intrinsic valuewhich should be equal to the present value of the future stream of income fromthe stock discounted at an appropriate risk related rate of interest. Estimate ofreal worth of a stock is made by considering the earning potential of thecompany which depends on investment environment and factors relating tospecific Industry, competitiveness, quality of management, operationalefficiency, profitability, capital structure and dividend policy.A basic assumption of Fundamental Analysis is that intrinsic value andmarket price can differ from time to time. Those investors, who can perform goodFundamental analysis and spot discrepancies between market price and intrinsicvalue, are able to realize profits by taking suitable decisions before thediscrepancy is eliminated by the market.Review of LiteratureThe origin of Fundamental analysis for the share price valuation can bedated back to Graham and Dodd (1934) in which the authors have argued theimportance of the fundamental factors in share price valuation. Theoretically, thevalue of a company, hence its share price, is the sum of the present value offuture cash flows discounted by the risk adjusted discount rate. This conceptualvaluation frame work is the spirit of the renowned dividend discount modeldeveloped by Gordon (1962). However, the dividend discount model valuationinvolves the forecast of future dividend payment which is difficult due to thechanges in firm’s dividend policy. Thus, the subsequent studies along this line ofliterature searched for the cash flow that is unaffected by the dividend policy andcan be obtained from the financial statements.A study by Yu-Hon Lui and David Mole (1998) reports on the use by foreignexchange dealers in Hong Kong of fundamental and technical analyses to formhttp://www.bdresearchpublications.com/journal/47

Venkatesh et al.their forecasts of exchange rate movements. The findings of this study reveal thatmore than 90 percent of the respondents rely on both fundamental andtechnical analyses for predicting future rate movements at different time horizons.Thomas Oberlechner (2001) presents the findings of a questionnaire and aninterview survey on the perceived importance of Technical and Fundamentalanalysis among foreign exchange traders and financial journalists in Frankfurt,London, Vienna and Zurich. Foreign Exchange traders confirm that, out of theboth forecasting approaches, technical analysis is more prominent than theother. But the Financial journalists put more emphasis on fundamental analysisthan foreign exchange traders.Maureen Butler (2005) examine whether accounting based Fundamentalanalysis can predict long term market performance in a strategic alliancecontext. Alliances are more prevalent in high technology industries and thepurpose of alliance is generally related to growth. The researchers also documentthe short term market reactions; the market does not in general correctly predictlong term performance for the firms participating in the alliances.Pascal Nguyen (2003) investigates the relationship between accountinginformation and stock returns for Tokyo stock exchange firms over past 10 years.The researchers construct a simple financial score designed to capture short termchanges in firm operating efficiency, profitability and financial policy. Theresearch scores exhibits a strong correlation with market adjusted returns in thecurrent fiscal period. The correlation remains significant with returns in thefollowing period, although its strength decreases when the holding period islagged. Over the sample period, market-adjusted stock returns exhibit a slightmean reversion stock with high scores are characterized by momentum.Edward.P.Swanson (2001) emphasizes on the value relevance ofFundamental Analysis for the years 1993-98, using Fundamental data forcompanies traded on Mexican Bolsa. The researchers observed that the Mexicanfirms were using a replacement cost, price level adjusted accounting system andfaced a currency devaluation and high inflation over the period studied.Researchers have found that Fundamental Analysis has incremental valuerelevance in comparison to earnings.Yanfeng Xue, May.H.Zhang (2001) examines whether institutional investorstrade on the fundamental signals and the implications of institutional investorstrading for stock valuation. The research work verifies that transient institutionalinvestors, trade on fundamental signals. The work also shows that the abnormalreturns associated with fundamental signals increase with transaction costs andarbitrage risk, indicating the existence of the limits to arbitrage for this investmentstrategy. It is further documented that transient institutions trade less aggressivelyto exploit the fundamental – signal – based trading strategy in firms with highertransactions costs and arbitrage risk.Statement of the ProblemThe above reviewed research works concentrate mostly on foreignexchange markets. Also reviews from the study do not throw light upon any of theEconomic, Industrial and Company (EIC) factors. The major aspect of the currentresearch is to understand as to which factor among EIC is most widely traced bythe market participants. The structured questionnaire contains various questionspertaining to all the three factors of fundamental analysis. Therefore, the problemidentified for this study is concluded as follows:48http://www.bdresearchpublications.com/journal/

Analysis and usage in Indian capital marketsThe problem for the current survey is that, as to which factor among EIC ismost widely traced by the market participants. Among all these factors as towhich variables are widely traced by the market participants.Objective of the study‣ To find out the commonly tracked factor in fundamental analysis bythe market participantsSpecific ObjectivesThe objective of the study can be concluded by• Understanding the demographic profile of respondents ( for the purpose ofthis study respondents include, Brokers, Sub-brokers, Mutual fundcompanies, Institutional investors)• Understanding the frequency of usage of analysis by various stock marketparticipants• Identifying top ten variables under EIC analysisData sources and MethodologyAfter analysis from licensed stock broking firms, Sub-brokers, Mutual fundcompanies, licensed banks and Stock market analysts, a close- endedquestionnaire was designed for the analysis. The data was collected from allmajor Indian cities, namely, Delhi, Mumbai, Bangalore, Hubli, Hyderabad andCochin. The closed ended questionnaire was admitted to a sample of 600respondents. Since the respondent’s chosen are from experienced seniors, theanalysis made was more accurate. The usage of these tools by informed investorssuch as, Brokers, Sub-brokers, Fund managers, Institutional investors is also criticallyreviewed in this study. The questionnaire is statistically validated using variousstatistical tools such as, Mean, Standard deviation. One way ANOVA test isconducted and it is tested at 1%, 5% and more than 5% significance levels.Analysis and InterpretationDescriptive AnalysisAnalysis for the study can be done bya. Understanding the demographic profile: age of the respondentsb. Understanding the frequency of usage of analysis by various stock marketparticipantsProfile of the RespondentsThe success of any research work entirely depends upon the accuracy ofdata and the way it is collected. For the purpose of the said research respondentswere chosen from various Broking Firms, Licensed Banks, Mutual Fund companies,Institutional Investors, Equity Research firms, Foreign Banks and others.Table - 1: Gender Analysis of RespondentsGender Frequency PercentMale 419 70%Female 181 30%Total 600 100%Source: Field Data49http://www.bdresearchpublications.com/journal/

Venkatesh et al.50Respondentsy30%70%MaleFemaleChart - 1: Gender Analysis of RespondentsTable 1 and Chart 1 clearly indicate the dominance of Male in the arenaof Stock trading. The total respondents of the research work was 600 (Six Hundred)out of which 419 (Four Hundred and Nineteen) is Male and 181 (One Hundredand Eighty one) Female. It is of the common belief that Male are more dominantin the arena of Stock trading and the current research proves that commonbelief.Close to 70% (69.83%) of the respondents constitute male and 30% (30.16%)of the respondents are female. This analysis envisages the fact that, Stock marketis fully dominated by male.Table – 2: Age analysis of the RespondentsAgeFrequencyPercent20 to 30 yrs 113 19%31 to 40yrs 371 62%Above 40 yrs 116 19%Total 600 100%Source: Field DataRespondents19%19%62%20 to 30 yrs 31 to 40yrs Above 40 yrsChart - 2: Age Analysis of RespondentsTable 2 and Chart 2 analyses the age profile of the respondents, about62% of the total respondents belonged to the age group of 31 to 40 years, 19%each belonged to the age group of 20 to 30 years and above 40 yearsrespectively. This combination indicates the rich blend of experience andexpertise in the stock market operations. A substantial percentage of therespondents belonged to the age group of 31 to 40 years which clearly showsthat the chosen sample has the richness of experience in the stock marketoperations.http://www.bdresearchpublications.com/journal/

Analysis and usage in Indian capital marketsTable 3: Showing Indicators considered for investingIndicators Considered Frequency PercentageIndian Economy 548 92%Global Economy 286 48%Industry wise 175 29%Sector wise 144 24%Company 584 98%Others 3 1%Total 600 100%Source: Field DataThe above table exhibits the results of the survey, which shows variousindicators considered for investing. These indicators vary from Indian economy tocompany considerations. Most of the respondents have considered Indianeconomy as a strong Macro Variable for considering the investment flow. Itupholds the fact that since 2002 to 2006 India as a market has given more than100% returns. Other important variable considered by the respondents is thecompany considerations. More than 98% of the respondents have placed theirfaith on the company factors. If a company performs well it can overcome theadversities of the market. Therefore, the two factors identified here are beenincluded in fundamental analysis, which is popularly known as EIC analysis whereE Stands for Economy, I stand for Industry and C stands for Company. In theabove analysis more number of respondents has placed their trust on the twofundamental factors that is Economy and the Company.Table 4: Company Factors Highly ConsideredDescriptive StaticsN Minimum Maximum Mean Std. DeviationPrice Earning 600 3 7 6.55 .662EPS 600 4 7 6.4 .645Company 600 3 7 6.07 .780ManagementGross profit 600 3 7 6.04 .738marginBook Value of 600 3 7 5.93 .769ShareDebt-Equity 600 2 7 5.21 .935ratioEBIDTA 600 3 7 5.69 .879Source: Field DataFundamental analysis is popularly referred as EIC analysis, as a part of itvarious variables pertaining to Economy, Industry and Company were included inthe questionnaire. The above table records the results of Company factors highlypreferred by the respondents. The success of any company is measured in termsof its profits and the ability to maximise profits. But, the respondents have placedpriority over the Price Earning ratio of the company, which establishes therelationship between Earning per share and Market price per share. The ratio iscalculated to make an estimate of appreciation in the value of a share of acompany and is widely used by investors to decide whether or not to buy sharesin a particular company.Earning per share is the other variable which is considered as favouritechoice by the respondents. The Earning per share is a good measure ofprofitability and when compared with EPS of similar companies, it gives a view ofthe comparative earnings or earnings power of a firm. EPS calculated for ahttp://www.bdresearchpublications.com/journal/51

Venkatesh et al.number of years indicate whether or not earning power of the company hasincreased.These two variables are followed by Company Management, the successof any business entirely depends upon the professionals involved in managing it.Professional Management team would give competitive advantage to thecompany. The team of Professionals can create Brand Equity which will last for alonger period of time. As it is rightly indicated, Professional Management hasassumed a prime place after two financial variables. Therefore, a companyhaving efficient team of Professionals can perform better.The other variables preferred by the respondents after these three arepurely financials which include, Book value of the share, Gross profit and DebtEquity ratio.Book value per share indicates the strength of the company, it iscalculated by considering the total Equity capital and Reserves of the company.Total Net worth of the company will get divided by the total number of equityshares to arrive at the book value of the share. Book value per share indicates thenet worth per equity share. This along with Market value may be used to analysethe strength of a particular stock. Therefore, this research work gives specialemphasis to this variable while analysing the secondary data. Book-to-Marketvalue ratio is taken as the base to understand and interpret the results ofsecondary data.Table 10: Economic Factors ConsideredDescriptive StatisticsN Minimum Maximum Mean Std. DeviationInflation rate 600 2 7 5.33 .996Governmentintervention600 2 6 5.28 .876Fiscal Policy 600 1 7 5.23 .922Pricing Policy 600 2 5 5.03 1.000Licensing 600 2 5 4.89 .994Demand& 600 1 7 4.72 1.168Supply GapPeer group 600 2 5 4.71 1.093comparisonsSource: Field DataEconomic Environment of the country will have a great impact on theworking of capital markets. The growth or decline of capital markets in themodern era is dependent upon the economic factors prevailing in the country.For the purpose of measuring the impact of economic factors the researcher haschosen various variables which will have a strong bearing on the working of themarkets. The variables range from Inflation to Fiscal policy to the peer groupcomparison. Of all the variables inflation is chosen as the variable which has astrong bearing on the working of the capital markets. Respondents have giventheir priority over inflation to the rest of the variables. Inflation leads to a rise ingeneral price level, regulating and taming inflation is in the hands of the CentralBank of a country. No individual can regulate inflation and therefore, it is thebeyond the control of the participants in the capital market.52http://www.bdresearchpublications.com/journal/

Analysis and usage in Indian capital marketsThe other factors considered important are the Government Intervention,Fiscal policy, pricing policy, Licensing, Demand and supply gap. Governmentintervention in the working of a business is considered as a major barrier by therespondents and the respondents have placed a high rating on this component.Intervention may be in terms of framing regulations and giving various subsidies,extension of facilities, inviting foreign capital, conversion of Current account andCapital account etc. These factors will have a bearing on the working of abusiness and will positively influence in its growth and profits.Taxation and public expenditure policy followed by any UnionGovernment is referred as Fiscal policy. The various fiscal benefits and thestructure of fiscal policy shall influence functioning of the business. Fiscalincentives extended will encourage the business to do better and at the sametime fiscal restrictions will bring down the growth prospects of the business.Therefore, respondents have given their special preference towards this variable.Pricing policy, Licensing policy, Demand and supply gap are the othervariables which the respondents have considered to be more influential inaffecting the share prices.The Government policy is announced in the Industrial policy resolutions andsubsequent announcements from time to time by the government. The policy canalso be seen from strategy as laid down in the five year plans and importancegiven to the industry by the Planning Commission and the expected demand inthe economy. The plan priorities for the industry, the physical and financial targetsof investment and foreign collaboration in that industry are important variablesaffecting its fortunes. The government has power of control over industry in termsof output, price and distribution of the product and a number of other aspects.The government policy with regard to granting of clearances, installed capacityand reservation of the products for small industry etc. are also factors to beconsidered for industrial analysis.Chart 8: Showing Top 10 and Bottom 10 Company and Economic factorsconsidered for analysis53http://www.bdresearchpublications.com/journal/

Venkatesh et al.54The unique feature of this research work is identification of various factors,each under the category of EIC analysis, that is, Economy, Industry and Companyanalysis. Economy and Industry analysis factors are recorded in the previous part.The above Chart indicates various company factors used in the current researchto assess the most important ten factors as considered by the respondents.Bottom LineAt the bottom line the survey concludes that, Economy and Companyfactors are most widely used fundamental analysis components for formingforecasting views. 98% of the respondents have envisaged the fact that companyfactors are important than the economy or the industry. With this it is concludedthat among EIC factors Company specific financial and non-financial informationacts as a major influencing factor while deciding upon the construction of theportfolios.ReferencesDoronNissim, Stephen Penman, (2001). Ratio Analysis and Equity valuation; Fromresearch to Practice—Review of Accounting Studies 6, 109—154, 2001http://www.suite101.com/content/the-truth-of-fundamental-vs-technical-analysisof-stocks-a304962#ixzz1AAew9FKQJennit.L.Bettman,Stephen.J.Salut, Emmenn L Schultz, (2009) Fundamental andTechnical Analysis, Substitutes of Compliments, Accounting and Finance 49(2009) 21-36Nobert M. Fiers, Ronald Macdonald, (2002). Towards the Fundamentals ofTechnical Analysis, Economic Modelling, 19 (2002) 353—374Sanjay Sehgal and Meenakshi Gupta, (2005) Technical analysis in the IndianCapital Market—A Survery, Decision, Volume 32,No.1, January-June2005Thomas Oberlechner (2001) Importance of Technical and Fundamental analysis inthe European Foreign Exchange Market, International Journal of Financeand Economics, January-2001; 6, 81-93 (2001)Yu-Hon Lui and David Mole (1998). The use of Fundamental and Technical analysisby Foreign exchange dealers: Hongkong evidence, Journal of InternationalMoney and Finance, 17 (1998) 535-545http://www.bdresearchpublications.com/journal/