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					     BANGLADESH RESEARCH PUBLICATIONS JOURNAL
                          ISSN: 1998-2003, Volume: 7, Issue: 1, Page: 46-54, May - June, 2012



   FUNDAMENTAL ANALYSIS AND ITS USAGE IN INDIAN CAPITAL
                  MARKETS: A SURVEY
                     Venkatesh, C. K. 1; Madhu Tyagi2 and Ganesh, L.3
Venkatesh, C. K.; Madhu Tyagi and Ganesh. L. (2012). Fundamental analysis and its usage
in Indian capital markets: A Survey. Bangladesh Res. Pub. J. 7(1): 46-54. Retrieve from
http://www.bdresearchpublications.com/admin/journal/upload/09313/09313.pdf

                                         Abstract
       This article reports the results of a questionnaire survey during
       September to November 2010 on the use of Fundamental Analysis
       by brokers/fund managers in Indian stock market to form their
       forecasts of share price movements. The findings of the research
       reveal that more than 85 percent of the respondents rely upon both
       Fundamental and Technical analysis for predicting future price
       movements at different time horizons. The survey envisages at
       providing insights about the way traders operate in the market by
       using the fundamental analysis information. The survey covered
       Brokers, Sub-Brokers, Fund managers, Portfolio managers and others.
       Fundamental analysis is widely recognized as EIC analysis, where, E
       stands for Economy, I stand for Industry and C stands for Company.
       In the current work an effort is made to understand these variables
       as a whole. The structured questionnaire comprehensively includes
       all these components so as to arrive at that factor which is driving
       the market. The study records top ten Economy and Company
       factors as considered important by the respondents. Indicators
       considered for investing, company financial and non-financial
       factors and various Economic factors considered for judging the
       growth of the economy were included in the questionnaire.
Key Words: Fundamental Analysis, Economy, Company, Industry.
Introduction
        Fundamental analysis is a method of finding out the future price of a stock
which an investor wishes to buy. It relates to the examination of the intrinsic worth
of a company to find out whether the current market price is fair or not, whether it
is overpriced or under priced. It believes that analyzing the economy, strategy,
management, product, financial status and other related information will help to
choose shares that will out perform the market and provide consistent gains to
the investor. It is the examination of the underlying forces that affect the interest
of the economy, industrial sectors and companies. It tries to forecast the future
movement of the capital market using signals from the Economy, Industry and
Company. It requires an examination of the market from a broader perspective.
The presumption behind Fundamental analysis is that a thriving economy fosters
industrial growth which leads to development of companies. Estimate of real


* Corresponding author: ckv_krishna@yahoo.co.in
1. (Research Scholar, IGNOU, New Delhi) Assistant Professor, GFGC, Kadugudi, Bangalore-560 067
2. Professor, School of management, IGNOU, Maidan Ghari, New Delhi tyagimadhu@hotmail.com
3. Professor, Christ University Institute of Management, Hosur Road, Bangalore-560 029
   ganesh.l@christuniversity.in
Analysis and usage in Indian capital markets                                       47
worth of a stock is made by considering the earning potential of the company
which depends on investment environment and factors relating to specific
industry, competitiveness, quality of management, operational efficiency,
profitability, capital structure and dividend policy.
       Fundamental analysis is also referred as E-I-C analysis, E stands for
Economy, and I stand for Industry and C for Company. The basic premise in this
approach is that the drivers of Economy, Industry and Company collectively
affect the security prices.
       Fundamental analysis believes that analyzing the Economy, Strategy,
Management, Product, Financial status and other related information will help
choose shares that will outperform the market and provide consistent gains to the
investor.
       Fundamental analysis is the examination of the underlying forces that
affect the interest of the Economy, Industrial sectors and companies. It tries to
forecast the future movement of the capital market using signals from the
Economy, Industry and Company. Fundamental analysis requires an examination
of the market from a broader perspective. The presumption behind Fundamental
analysis is that a thriving economy fosters industrial growth which leads to
development of companies.
       Fundamental analysis is a method of finding out the future price of a stock
which an investor wishes to buy. It relates to the examination of the intrinsic worth
of a company to find out whether the current market price is fair or not, whether it
is overpriced or under priced, in the back ground of the company’s performance
and in the background of the performance of the industry to which the company
belongs and also the general socio-political scenario of the country.
       The Fundamental approach suggest that every stock has an intrinsic value
which should be equal to the present value of the future stream of income from
the stock discounted at an appropriate risk related rate of interest. Estimate of
real worth of a stock is made by considering the earning potential of the
company which depends on investment environment and factors relating to
specific Industry, competitiveness, quality of management, operational
efficiency, profitability, capital structure and dividend policy.
       A basic assumption of Fundamental Analysis is that intrinsic value and
market price can differ from time to time. Those investors, who can perform good
Fundamental analysis and spot discrepancies between market price and intrinsic
value, are able to realize profits by taking suitable decisions before the
discrepancy is eliminated by the market.
Review of Literature
        The origin of Fundamental analysis for the share price valuation can be
dated back to Graham and Dodd (1934) in which the authors have argued the
importance of the fundamental factors in share price valuation. Theoretically, the
value of a company, hence its share price, is the sum of the present value of
future cash flows discounted by the risk adjusted discount rate. This conceptual
valuation frame work is the spirit of the renowned dividend discount model
developed by Gordon (1962). However, the dividend discount model valuation
involves the forecast of future dividend payment which is difficult due to the
changes in firm’s dividend policy. Thus, the subsequent studies along this line of
literature searched for the cash flow that is unaffected by the dividend policy and
can be obtained from the financial statements.
     A study by Yu-Hon Lui and David Mole (1998) reports on the use by foreign
exchange dealers in Hong Kong of fundamental and technical analyses to form
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Venkatesh et al.                                                                    48

their forecasts of exchange rate movements. The findings of this study reveal that
more than 90 percent of the respondents rely on both fundamental and
technical analyses for predicting future rate movements at different time horizons.
        Thomas Oberlechner (2001) presents the findings of a questionnaire and an
interview survey on the perceived importance of Technical and Fundamental
analysis among foreign exchange traders and financial journalists in Frankfurt,
London, Vienna and Zurich. Foreign Exchange traders confirm that, out of the
both forecasting approaches, technical analysis is more prominent than the
other. But the Financial journalists put more emphasis on fundamental analysis
than foreign exchange traders.
       Maureen Butler (2005) examine whether accounting based Fundamental
analysis can predict long term market performance in a strategic alliance
context. Alliances are more prevalent in high technology industries and the
purpose of alliance is generally related to growth. The researchers also document
the short term market reactions; the market does not in general correctly predict
long term performance for the firms participating in the alliances.
       Pascal Nguyen (2003) investigates the relationship between accounting
information and stock returns for Tokyo stock exchange firms over past 10 years.
The researchers construct a simple financial score designed to capture short term
changes in firm operating efficiency, profitability and financial policy. The
research scores exhibits a strong correlation with market adjusted returns in the
current fiscal period. The correlation remains significant with returns in the
following period, although its strength decreases when the holding period is
lagged. Over the sample period, market-adjusted stock returns exhibit a slight
mean reversion stock with high scores are characterized by momentum.
       Edward.P.Swanson (2001) emphasizes on the value relevance of
Fundamental Analysis for the years 1993-98, using Fundamental data for
companies traded on Mexican Bolsa. The researchers observed that the Mexican
firms were using a replacement cost, price level adjusted accounting system and
faced a currency devaluation and high inflation over the period studied.
Researchers have found that Fundamental Analysis has incremental value
relevance in comparison to earnings.
       Yanfeng Xue, May.H.Zhang (2001) examines whether institutional investors
trade on the fundamental signals and the implications of institutional investors
trading for stock valuation. The research work verifies that transient institutional
investors, trade on fundamental signals. The work also shows that the abnormal
returns associated with fundamental signals increase with transaction costs and
arbitrage risk, indicating the existence of the limits to arbitrage for this investment
strategy. It is further documented that transient institutions trade less aggressively
to exploit the fundamental – signal – based trading strategy in firms with higher
transactions costs and arbitrage risk.
Statement of the Problem
        The above reviewed research works concentrate mostly on foreign
exchange markets. Also reviews from the study do not throw light upon any of the
Economic, Industrial and Company (EIC) factors. The major aspect of the current
research is to understand as to which factor among EIC is most widely traced by
the market participants. The structured questionnaire contains various questions
pertaining to all the three factors of fundamental analysis. Therefore, the problem
identified for this study is concluded as follows:



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Analysis and usage in Indian capital markets                                         49
      The problem for the current survey is that, as to which factor among EIC is
most widely traced by the market participants. Among all these factors as to
which variables are widely traced by the market participants.
Objective of the study
            To find out the commonly tracked factor in fundamental analysis by
the market participants
Specific Objectives
The objective of the study can be concluded by
  •     Understanding the demographic profile of respondents ( for the purpose of
        this study respondents         include, Brokers, Sub-brokers, Mutual fund
        companies, Institutional investors)
  •     Understanding the frequency of usage of analysis by various stock market
        participants
  •     Identifying top ten variables under EIC analysis
Data sources and Methodology
         After analysis from licensed stock broking firms, Sub-brokers, Mutual fund
companies, licensed banks and Stock market analysts, a close- ended
questionnaire was designed for the analysis. The data was collected from all
major Indian cities, namely, Delhi, Mumbai, Bangalore, Hubli, Hyderabad and
Cochin. The closed ended questionnaire was admitted to a sample of 600
respondents. Since the respondent’s chosen are from experienced seniors, the
analysis made was more accurate. The usage of these tools by informed investors
such as, Brokers, Sub-brokers, Fund managers, Institutional investors is also critically
reviewed in this study. The questionnaire is statistically validated using various
statistical tools such as, Mean, Standard deviation. One way ANOVA test is
conducted and it is tested at 1%, 5% and more than 5% significance levels.
Analysis and Interpretation
Descriptive Analysis
Analysis for the study can be done by
  a. Understanding the demographic profile: age of the respondents
  b. Understanding the frequency of usage of analysis by various stock market
     participants
Profile of the Respondents
         The success of any research work entirely depends upon the accuracy of
data and the way it is collected. For the purpose of the said research respondents
were chosen from various Broking Firms, Licensed Banks, Mutual Fund companies,
Institutional Investors, Equity Research firms, Foreign Banks and others.
Table - 1: Gender Analysis of Respondents
           Gender                                Frequency            Percent
            Male                                    419                 70%
           Female                                   181                 30%
            Total                                   600                100%
Source: Field Data




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Venkatesh et al.                                                                              50



                                                                 y
                                                 Respondents

                                        30%

                                                            70%


                                    Male                             Female

                                  Chart - 1: Gender Analysis of Respondents

         Table 1 and Chart 1 clearly indicate the dominance of Male in the arena
of 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 Hundred
and Eighty one) Female. It is of the common belief that Male are more dominant
in the arena of Stock trading and the current research proves that common
belief.
         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 market
is fully dominated by male.
Table – 2: Age analysis of the Respondents
              Age                                       Frequency                   Percent
          20 to 30 yrs                                     113                        19%
          31 to 40yrs                                      371                        62%
         Above 40 yrs                                      116                        19%
             Total                                         600                       100%
Source: Field Data
                                                      Respondents
                                                     19%         19%


                                                           62%

                                   20 to 30 yrs            31 to 40yrs        Above 40 yrs

                        Chart - 2: Age Analysis of Respondents
       Table 2 and Chart 2 analyses the age profile of the respondents, about
62% 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 years
respectively. This combination indicates the rich blend of experience and
expertise in the stock market operations. A substantial percentage of the
respondents belonged to the age group of 31 to 40 years which clearly shows
that the chosen sample has the richness of experience in the stock market
operations.




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Analysis and usage in Indian capital markets                                                       51
Table 3: Showing Indicators considered for investing
       Indicators Considered                            Frequency               Percentage
          Indian 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 Data
       The above table exhibits the results of the survey, which shows various
indicators considered for investing. These indicators vary from Indian economy to
company considerations. Most of the respondents have considered Indian
economy as a strong Macro Variable for considering the investment flow. It
upholds the fact that since 2002 to 2006 India as a market has given more than
100% returns. Other important variable considered by the respondents is the
company considerations. More than 98% of the respondents have placed their
faith on the company factors. If a company performs well it can overcome the
adversities of the market. Therefore, the two factors identified here are been
included in fundamental analysis, which is popularly known as EIC analysis where
E Stands for Economy, I stand for Industry and C stands for Company. In the
above analysis more number of respondents has placed their trust on the two
fundamental factors that is Economy and the Company.
Table 4: Company Factors Highly Considered
                                                   Descriptive Statics
                             N                   Minimum      Maximum    Mean     Std. Deviation
 Price Earning               600                 3            7          6.55     .662
 EPS                         600                 4            7          6.4      .645
 Company                     600                 3            7          6.07     .780
 Management
 Gross    profit 600                             3          7            6.04     .738
 margin
 Book Value of 600                               3          7            5.93     .769
 Share
 Debt-Equity     600                             2          7            5.21     .935
 ratio
 EBIDTA          600                             3          7            5.69     .879
Source: Field Data
        Fundamental analysis is popularly referred as EIC analysis, as a part of it
various variables pertaining to Economy, Industry and Company were included in
the questionnaire. The above table records the results of Company factors highly
preferred by the respondents. The success of any company is measured in terms
of its profits and the ability to maximise profits. But, the respondents have placed
priority over the Price Earning ratio of the company, which establishes the
relationship between Earning per share and Market price per share. The ratio is
calculated to make an estimate of appreciation in the value of a share of a
company and is widely used by investors to decide whether or not to buy shares
in a particular company.
       Earning per share is the other variable which is considered as favourite
choice by the respondents. The Earning per share is a good measure of
profitability and when compared with EPS of similar companies, it gives a view of
the comparative earnings or earnings power of a firm. EPS calculated for a
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Venkatesh et al.                                                                                     52

number of years indicate whether or not earning power of the company has
increased.
       These two variables are followed by Company Management, the success
of any business entirely depends upon the professionals involved in managing it.
Professional Management team would give competitive advantage to the
company. The team of Professionals can create Brand Equity which will last for a
longer period of time. As it is rightly indicated, Professional Management has
assumed a prime place after two financial variables. Therefore, a company
having efficient team of Professionals can perform better.
       The other variables preferred by the respondents after these three are
purely financials which include, Book value of the share, Gross profit and Debt
Equity ratio.
       Book value per share indicates the strength of the company, it is
calculated 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 equity
shares to arrive at the book value of the share. Book value per share indicates the
net worth per equity share. This along with Market value may be used to analyse
the strength of a particular stock. Therefore, this research work gives special
emphasis to this variable while analysing the secondary data. Book-to-Market
value ratio is taken as the base to understand and interpret the results of
secondary data.
Table 10: Economic Factors Considered
                                                    Descriptive Statistics
                                 N               Minimum      Maximum        Mean   Std. Deviation
 Inflation rate                  600                 2            7          5.33        .996
 Government                      600                 2            6          5.28        .876
 intervention

 Fiscal Policy                   600                 1             7         5.23       .922

 Pricing Policy                  600                 2             5         5.03       1.000

 Licensing                       600                 2             5         4.89       .994
 Demand&           600                               1             7         4.72       1.168
 Supply Gap
 Peer       group 600                                2             5         4.71       1.093
 comparisons
Source: Field Data
       Economic Environment of the country will have a great impact on the
working of capital markets. The growth or decline of capital markets in the
modern era is dependent upon the economic factors prevailing in the country.
For the purpose of measuring the impact of economic factors the researcher has
chosen various variables which will have a strong bearing on the working of the
markets. The variables range from Inflation to Fiscal policy to the peer group
comparison. Of all the variables inflation is chosen as the variable which has a
strong bearing on the working of the capital markets. Respondents have given
their priority over inflation to the rest of the variables. Inflation leads to a rise in
general price level, regulating and taming inflation is in the hands of the Central
Bank of a country. No individual can regulate inflation and therefore, it is the
beyond the control of the participants in the capital market.


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Analysis and usage in Indian capital markets                                       53
       The other factors considered important are the Government Intervention,
Fiscal policy, pricing policy, Licensing, Demand and supply gap. Government
intervention in the working of a business is considered as a major barrier by the
respondents 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 and
Capital account etc. These factors will have a bearing on the working of a
business and will positively influence in its growth and profits.
       Taxation and public expenditure policy followed by any Union
Government is referred as Fiscal policy. The various fiscal benefits and the
structure of fiscal policy shall influence functioning of the business. Fiscal
incentives extended will encourage the business to do better and at the same
time 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 other
variables which the respondents have considered to be more influential in
affecting the share prices.
       The Government policy is announced in the Industrial policy resolutions and
subsequent announcements from time to time by the government. The policy can
also be seen from strategy as laid down in the five year plans and importance
given to the industry by the Planning Commission and the expected demand in
the economy. The plan priorities for the industry, the physical and financial targets
of investment and foreign collaboration in that industry are important variables
affecting its fortunes. The government has power of control over industry in terms
of output, price and distribution of the product and a number of other aspects.
The government policy with regard to granting of clearances, installed capacity
and reservation of the products for small industry etc. are also factors to be
considered for industrial analysis.
Chart 8: Showing Top 10 and Bottom 10 Company and Economic factors
      considered for analysis




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Venkatesh et al.                                                                   54




       The unique feature of this research work is identification of various factors,
each under the category of EIC analysis, that is, Economy, Industry and Company
analysis. Economy and Industry analysis factors are recorded in the previous part.
The above Chart indicates various company factors used in the current research
to assess the most important ten factors as considered by the respondents.
Bottom Line
        At the bottom line the survey concludes that, Economy and Company
factors are most widely used fundamental analysis components for forming
forecasting views. 98% of the respondents have envisaged the fact that company
factors are important than the economy or the industry. With this it is concluded
that among EIC factors Company specific financial and non-financial information
acts as a major influencing factor while deciding upon the construction of the
portfolios.
References
DoronNissim, Stephen Penman, (2001). Ratio Analysis and Equity valuation; From
     research to Practice—Review of Accounting Studies 6, 109—154, 2001
http://www.suite101.com/content/the-truth-of-fundamental-vs-technical-analysis-
       of-stocks-a304962#ixzz1AAew9FKQ
Jennit.L.Bettman,Stephen.J.Salut, Emmenn L Schultz, (2009) Fundamental and
       Technical Analysis, Substitutes of Compliments, Accounting and Finance 49
       (2009) 21-36
Nobert M. Fiers, Ronald Macdonald, (2002). Towards the Fundamentals of
      Technical Analysis, Economic Modelling, 19 (2002) 353—374
Sanjay Sehgal and Meenakshi Gupta, (2005) Technical analysis in the Indian
      Capital Market—A Survery, Decision, Volume 32,No.1, January-June2005
Thomas Oberlechner (2001) Importance of Technical and Fundamental analysis in
     the European Foreign Exchange Market, International Journal of Finance
     and Economics, January-2001; 6, 81-93 (2001)
Yu-Hon Lui and David Mole (1998). The use of Fundamental and Technical analysis
      by Foreign exchange dealers: Hongkong evidence, Journal of International
      Money and Finance, 17 (1998) 535-545
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