INDUSTRIAL ANALYSIS :

TYPES OF INDUSTRY:

1. Growth Industry :

Growth Industry is a commercial sector flourishing exponentially

in relation to other segments of an economy. It is mainly driven by
the development of avant-garde technology, relevant legal
amendments, and the evolution of buyers’ tastes. It indicates the
high-performance potential of companies constituting it.

A growth industry is characterized by huge profits, market demand

surge, soaring sales figures, and inundation of investments. All
companies that are part of the industry exhibit a higher growth rate
than their peers. They hold up against the competition and thrive in
the future. Therefore, being part of such an industry or making any
investment in it would most likely yield positive results.

2. Cyclical Industry:

Cyclical industries are those industries whose performance cycle is

highly correlated and sensitive to the economic cycles; these
companies grow when the economy is in the growth or expansion
stage and decline when there is a recession or depression in the
economy, for instance, automobiles, aviation, construction are few
examples of cyclical industries.

in the situation of economic growth, these industries increase their

workforce, purchase excess raw materials to meet the
requirements, and increase their production. Moreover, the salaries
and wages of their employees are often increased to motivate them
to produce more.

3. Defensive Industry:

n the situation of economic growth, these industries increase their

workforce, purchase excess raw materials to meet the
requirements, and increase their production. Moreover, the salaries
and wages of their employees are often increased to motivate them
to produce more.

These industries provide secured jobs due to continuous profits by

the companies. Employees working in these industries are more
satisfied with their jobs. These industries attract more investors
due to their continuous growth. But the rate of return provided by
these industries is comparatively less than other industries.
INDUSTRY LIFE CYCLE PHASE :

1. Introduction Phase :

The introduction, or startup, phase involves the development and

early marketing of a new product or service. Innovators often create
new businesses to enable the production and proliferation of the
new offering.

The industry or business tends to be highly fragmented in the

introduction stage. Participants tend to be unprofitable because
expenses are incurred to develop and market the offering while
revenues are still low.

2.Growth Phase :

In this second phase, consumers have come to understand the value

of the new offering, business, or industry. Demand grows rapidly.

A handful of important players usually becomes apparent, and they

compete to establish a share of the new market. Immediate profits
usually are not a top priority as companies spend on research and
development or marketing.

Business processes are improved, and geographical expansion is

common. Once the new product has demonstrated viability, larger
companies in adjacent industries tend to enter the market through
acquisitions or internal development.
3. Maturity Phase :

The maturity phase begins with a shakeout period, during which

sales growth slows, focus shifts toward expense reduction, and
consolidation occurs (as companies begin to merge or acquire each
other).

As maturity is achieved, barriers to entry become higher, and the

competitive landscape becomes more clear. Market share, cash
flow, and profitability become the primary goals of the remaining
companies now that growth is relatively less important.

Price competition becomes much more relevant as product

differentiation declines with consolidation.

4. Decline Phase :

The decline phase marks the end of an industry's or business' ability

to support growth. Obsolescence and evolving end markets (end
users) negatively impact demand, leading to declining revenues.
This creates margin pressure, forcing weaker competitors out of the
industry.

Further consolidation is common as participants seek synergies

and further gains from scale. The decline phase often signals the
end of viability for the incumbent business model, pushing industry
participants into adjacent markets.
 COMPANY ANALYSIS :

Company analysis refers to the detailed study of a company’s

operations, financials, management, products and services,
competitors, market position, and industry trends. Company
analysis is an essential part of fundamental analysis that investors
conduct before deciding to invest in a company’s stock. The goal of
company analysis is to gain a comprehensive understanding of the
business so investors determine if the stock is undervalued or
overvalued compared to its true worth.

TOOLS FOR COMPANY ANALYSIS:

I. CORE DOCUMENTS:

1. Balance Sheet Analysis :

Balance sheet analysis involves reviewing and evaluating all the

items on a company’s balance sheet to assess its financial health and
stability.

Balance sheet analysis helps investors determine the company’s

liquidity, leverage, solvency, efficiency, and risk. By studying
metrics like the current ratio, debt-to-equity ratio, and working
capital, investors evaluate the company’s ability to pay debts, fund
operations, and determine an optimal capital structure.
2.Income Statement Analysis:

Income statement analysis involves reviewing and evaluating all

components of a company’s income statement to assess its financial
performance.

Income statement analysis helps investors understand the drivers

of a company’s profitability, including factors like revenue growth,
cost management, taxation, and extraordinary gains or losses. Key
metrics assessed include gross margin, operating margin, EPS,
EBITDA, and net income.

3. Cash Flow Statement Analysis:

Cash flow statement analysis involves reviewing all cash inflows and
outflows to assess a company’s liquidity, solvency, and financial
health.

Analysis of the cash flow statement helps investors evaluate a

company’s ability to generate cash from operations, meet financial
obligations, pay dividends, and fund capital expenditures. Key
metrics assessed include operating cash flow, free cash flow, cash
conversion cycle, and cash flow from financing activities.
II. FINANCIAL PERFORMANCE METRICS:

1. Financial Ratios :

Financial ratios refer to mathematical metrics calculated from a

company’s financial statements like the balance sheet, income
statement, and cash flow statement. Analysis of financial ratios
helps investors thoroughly evaluate a company for investment
decisions. Key ratios such as debt-to-equity, current ratio, return on
equity, earnings per share, price-to-earnings, and dividend yield
provide insights into a company’s profitability, liquidity, leverage,
and operations.

2. Profitability Ratio Analysis :

Profitability Ratios Analysis refers to financial metrics that assess

a company’s ability to generate profits relative to revenue, assets,
operating costs, and equity. It helps in company analysis for stock
market investors by providing insights into management efficiency,
pricing power, and overall profitability. Some key profitability
ratios include gross profit margin, operating profit margin, net
profit margin, return on assets, and return on equity.

3. Leverage Ratio Analysis :

Leverage Ratios Analysis refers to metrics that measure the extent

to which a company uses debt financing to fund operations and
growth. It helps in company analysis for stock investors by assessing
financial risk, debt repayment capacity, and capital structure
efficiency. Key leverage ratios include debt-to-equity, debt-to-assets,
and interest coverage ratio.
4. Operating Ratio Analysis :

Operating Ratio Analysis refers to evaluating the operating

efficiency and cost management of a company. It measures the cost
of operating a business as a percentage of revenue and helps assess
profitability potential. The operating ratio is calculated by dividing
operating expenses by net sales, using figures from the income
statement.

5. Liquidity Ratio Analysis :

Liquidity Ratio Analysis refers to metrics that measure a company’s

ability to meet its short-term financial obligations and fund ongoing
operations. It evaluates the availability of cash and liquid assets to
cover current liabilities. Key liquidity ratios are the current ratio
and quick ratio, calculated using balance sheet figures.

III. STRATEGIC AND OPERATIONAL ANALYSIS :

1. SWOT Reports :

SWOT reports refer to an analysis framework that evaluates a

company’s internal Strengths and Weaknesses as well as external
Opportunities and Threats. It helps in company analysis by
providing a comprehensive look at a firm’s current strategic
position. SWOT reports are created by examining a company’s
financial statements, competitor analysis, economic conditions, and
other quantitative and qualitative factors.

2. Management Reports :

Management reports are a valuable source of information for

investors analysing a stock. These reports are issued by company
executives to communicate business performance, strategies, and
future outlooks.
 TECHNICAL ANALYSIS

TOOLS FOR TECHNICAL ANALYSIS:

I. MOMENTUM INDICATOR :

1. The Average Directional Index (ADX)

The Average Directional Index (ADX) is a trend indicator used to

measure the strength and momentum of a trend. Trading in the
direction of a trend reduces risk and also increases profit potential.

The Average Directional Index (ADX) is used to assess when the

price is trending strongly. ADX calculations are based on a moving
average of price range expansion over a period of time. The default
setting is 14 bars.

2. Aroon

Aroon Indicator is a technical analysis indicator used to measure

whether a security is in a trend. It is used to identify when trends
are likely to change direction. This indicator measures the time it
takes for the price to reach the highest or lowest points over a
particular timeframe.

The indicator consists of the “Aroon up” line and “Aroon down”
line. The Aaron up line measures the strength of the uptrend
whereas the “Aaron down” line measures the strength of the
downtrend.
3. Moving Average Convergence Divergence (MACD) Indicator

The Moving Average Convergence Divergence (MACD) is a trend-

following indicator and momentum indicator which shows the
relationship between two moving averages of a security’s price.

4. The Relative Strength Index (RSI)

Relative Strength Index is a momentum indicator that measures

the magnitude of current price changes to determine whether the
stock is overvalued or undervalued. This indicator was originally
developed by J. Welles Wilder.

5. The Stochastic Oscillator

The Stochastic Oscillator is an indicator that measures the current

price relative to the price range over a number of periods. This
indicator was developed by George Lane. It is used to compare
where security’s prices close over a selected period. Stochastic most
commonly uses 14 periods.
II. TREND INDICATORS:

6. Moving Averages

Moving average is a trend indicator that smooth out price data

constantly by making average prices. On a price chart, a moving
average is a flat line that reduces variations because of random
price fluctuations.

7. Super trend

As the name suggests, Super trend is a trend indicator and indicates

that the direction of the price movement in a market is trending,

A super-trend indicator is plotted either above or below the closing

price. The indicator changes color based on the change in the
direction of the trend.

If the super-trend indicator moves below the closing price, then the
indicator turns green and gives a buy signal. Conversely, if a super-
trend closes above, the indicator shows a sell signal in red.

8. Parabolic SAR

The Parabolic SAR is one of the best technical analysis indicators

which is used to determine the price direction of security and also
when the price direction is changing. It is also known as the “stop
and reverse system”. It was developed by Welles Wilder.

The Parabolic SAR is graphically shown on the chart of security as

a series of dots placed either above or below the price. A small dot is
placed above the price in case of a downtrend. On the other hand,
the dot is placed below the price in case of an uptrend.
III. VOLUME INDICATORS :

9. The On-Balance-Volume indicator (OBV)

The On-Balance-Volume is a technical analysis indicator used to

measure the positive and negative flow of volume in a security over
time. It is a momentum indicator that measures positive and
negative volume flow.

This indicator was developed by Joseph Granville. According to

him, when volume increases sharply without a significant change in
the stock’s price then the price will eventually jump up and when
volume decreases sharply without a significant change in the stock’s
price then the price will eventually jump down.

10. The Accumulation/Distribution line (A/D line)

Accumulation and Distribution are among the most commonly used

technical analysis indicators to determine the money flow in and out
of security.

This indicator is developed by Marc Chaikin to measure the

cumulative flow of money in and out of the security. This indicator
was named earlier as the Cumulative Money Flow Line.
Equity valuation refers to the process of determining the intrinsic
value or fair value of a company's stock. It is a critical task for
investors, analysts, and financial professionals, as it helps assess
whether a stock is overvalued, undervalued, or fairly priced in the
market. There are several different methods for valuing equity, each
with its own approach and considerations.

Balance Sheet Valuation is a method of determining the value of a

company based on the financial information presented in its
balance sheet. This approach focuses on the company's assets and
liabilities to assess its equity value. It's often used when the
company is in distress, asset-heavy, or in liquidation scenarios. In
contrast to income-based methods like Discounted Cash Flow
(DCF) or Comparable Company Analysis (CCA), the balance sheet
valuation emphasizes the company's net assets (assets minus
liabilities).
SUMMARY OF EQUITY VALUATION METHODS:

Best Used
Method Key Focus Advantages Disadvantages
For
Thorough
Future
and Sensitive to
cash flows Companies
Discounted company- assumptions,
and risk with
Cash Flow specific, hard for early-
adjusted predictable
(DCF) accounts for stage
discount cash flows
time value of companies
rate
money
Market
Comparable Mature Difficult to find
pricing via Simple,
Company companies truly
peer market-
Analysis with public comparable
group driven
(CCA) peers companies
multiples
Precedent Companies Not applicable
M&A Reflects real
Transaction in active for companies
market market
Analysis M&A without M&A
multiples premiums
(PTA) sectors activity
Ignores
Asset Asset-heavy Quick and earnings
Asset-Based value, net companies, easy for potential, not
Valuation of distressed asset-heavy applicable for
liabilities firms companies growth
companies
Good for Only for
Dividend
Present Companies stable, dividend
Discount
value of with stable dividend- payers,
Model
dividends dividends paying assumes stable
(DDM)
companies growth
Summary of Balance Sheet Valuation Methods:

Method Description Best For Advantages Disadvantages

Calculates
the
difference
Established Ignores future
between Simple and
Net Asset companies earnings,
assets and easy to
Method with stable relies on book
liabilities calculate
assets value of assets
based on
historical
cost
Values the
company
based on Provides May
Distressed
Liquidation what assets conservative significantly
or bankrupt
Value could be valuation in undervalue a
companies
sold for in a distress company
liquidation
scenario
Adjusts the
Companies
book value More
with Requires
of assets accurate
Adjusted substantial detailed
and than net
Book Value changes in market value
liabilities to asset
asset data
their market method
values
value
 BOND VALUATION

The bond valuation enables an investor to estimate the present

value of their future earnings from interest payments and adds it to
the bond's par value or the principal amount.

A bond is a debt instrument, meaning the bond issuer borrows from

an investor or lender. In exchange, the bond issuer ensures a fixed
interest rate for the period the investor holds the bond. Thus, the
interest provides a steady income for the bondholder till the
maturity date of the bond. Hence, upon maturity, the borrower
repays the bondholder per the face value, less than the face or more
than the face value.

METHODS OF BOND VALUATION :

1. Present Value of Cash Flows (Discounted Cash Flow Method) :

The most common method for valuing a bond is to calculate the

present value (PV) of its future cash flows. These cash flows consist
of:

The coupon payments (interest payments).

The face value (par value or principal) to be paid at maturity

Key Insights:

If the bond's coupon rate is higher than the market interest rate,
the bond will trade at a premium (above par value).

If the coupon rate is lower than the market rate, the bond will trade
at a discount (below par value).
2. Yield to Maturity (YTM) Method :

Yield to maturity is the discount rate that equates the present value
of a bond’s future cash flows to its current price. It represents the
total return an investor can expect if the bond is held until maturity.

Key Insights:

YTM is used by investors to compare bonds with different prices,

coupon rates, and maturities.

It assumes that the bond is held to maturity and all coupon

payments are reinvested at the same rate.

3. Current Yield Method :

Current yield is a simpler method, which only considers the bond's

annual coupon payment relative to its current market price.

Key Insights:

Current yield is a quick way to estimate the bond’s yield based on its
price and coupon payment but does not account for capital gains or
losses if the bond is held until maturity.

4. Yield to Call (YTC) :

For callable bonds, yield to call is the yield assuming that the bond
will be called (redeemed early) by the issuer before maturity.
Callable bonds give the issuer the right to redeem the bond before
the maturity date, usually when interest rates have fallen.
Key Insights:

If the bond is called, the investor will receive the face value earlier,
along with any accrued interest up to the call date.

YTC can be lower than YTM if the bond is likely to be called early
due to favorable interest rate movements.

5. Yield to Worst (YTW) :

Yield to worst is the lowest yield an investor can receive if the bond
is called or matures early. It is the more conservative estimate,
taking into account the possibility of early call or prepayment.

Key Insights:

YTW is often used for callable bonds, where the issuer might
redeem the bond before maturity to take advantage of lower interest
rates.

It helps investors assess the worst-case scenario in terms of yield.

6. Bond Price Formula for Zero-Coupon Bonds :

Zero-coupon bonds do not make periodic coupon payments; instead,

they are issued at a discount to their face value and pay the full face
value at maturity.

Key Insights:

The price of a zero-coupon bond will always be lower than its face
value and will increase as it approaches maturity.
The return on a zero-coupon bond comes entirely from the
difference between the purchase price and the face value at
maturity

7. Adjustments for Credit Risk and Liquidity Premiums :

In practice, bond prices may also be adjusted for:

Credit Risk: If the issuer’s credit rating is poor, the bond price will
be lower because investors demand a higher yield to compensate for
the added risk of default.

Liquidity Premium: Bonds with low trading volumes or that are

harder to sell might trade at a discount, as investors demand a
higher yield for the added liquidity risk.
 CONVERTIBLE BONDS AND ITS TYPES :

A convertible bond is a type of hybrid financial instrument that

combines features of both debt and equity. It is a bond (a debt
instrument) that gives the bondholder the option to convert the
bond into a specified number of the company's equity shares
(stocks) at certain times during its life, usually at the discretion of
the bondholder. This option provides the bondholder with the
potential to participate in the company's equity upside, while still
maintaining the security of bondholder rights, such as receiving
fixed interest payments and repayment of principal.

Features of a Convertible Bond:

1. Convertible Option: The bondholder has the right, but not the
obligation, to convert the bond into a predetermined number of
shares of the issuing company.

2. Coupon Payments: Similar to traditional bonds, convertible

bonds usually offer periodic interest payments, called coupons, until
conversion or maturity.

3. Conversion Price: The price at which the bondholder can convert

the bond into shares of the company. This is typically set at a
premium to the stock's current price at the time of issuance.

4. Maturity Date: Like regular bonds, convertible bonds have a set

maturity date at which the bondholder will receive the face value of
the bond if it is not converted into shares.
TYPES OF CONVERTIBLE BONDS:

1. Vanilla (Straight) Convertible Bonds :

Description:

This is the standard type of convertible bond, where the bondholder

has the option to convert the bond into equity at a fixed conversion
price during a set period.

Features:

Conversion occurs at the bondholder’s discretion.

Conversion price is fixed at the time of issuance.

The bondholder receives coupon payments unless the bond is

converted.

Risk/Reward:

Investors can benefit from the bond’s fixed income if they choose
not to convert. However, if the company’s stock price rises
significantly, they may opt for conversion to equity and share in the
capital appreciation.

2. Mandatory Convertible Bonds :

Description:

In contrast to a vanilla convertible bond, mandatory convertible

bonds do not provide the bondholder with an option to convert;
instead, the bond must be converted into equity at a specified time
or date.
Features:

The bondholder is obligated to convert the bond into stock at a set

conversion date.

There is no discretion for the bondholder to hold the bond till

maturity; conversion is mandatory.

Typically, the conversion takes place at a pre-determined

conversion ratio.

Risk/Reward:

This type of bond is often issued when the company wants to raise
equity capital without immediately diluting its stock. Bondholders
may receive interest payments until conversion, but they know that
the bond will eventually be converted into equity.

3. Reverse Convertible Bonds :

Description:

Reverse convertible bonds are issued with an embedded option that

benefits the issuer. In this case, the bondholder can be forced to
convert the bond into shares if the stock price falls below a certain
threshold.

Features:

The issuer has the right to force the bondholder to convert the bond
into stock if the share price falls below a set threshold.

The bondholder receives a high coupon rate but is exposed to the

risk of converting to equity at a lower stock price.

Risk/Reward:
The bondholder receives higher interest payments but faces the risk
of being converted into equity under unfavorable market conditions.
This is generally a more risky option for the investor.

4. Contingent Convertible Bonds (CoCo Bonds) :

Description:

CoCo bonds are a type of convertible bond often used by banks and
other financial institutions. They convert into equity when certain
predetermined conditions (such as a decline in the issuer's capital
ratio or a regulatory trigger) are met.

Features:

CoCo bonds are designed to automatically convert into equity if the

issuer's financial situation deteriorates.

These bonds are usually issued with higher coupon rates to

compensate for the added risk.

They are primarily used by banks and financial institutions to

increase regulatory capital in times of stress.

Risk/Reward:

CoCo bonds offer higher yields but come with significant risks. If
the triggering event occurs, bondholders could end up with equity in
a company that is in financial distress.
5. Equity-Linked Convertible Bonds :

Description:

This type of convertible bond is specifically structured to allow the

bondholder to convert into stock under favorable market
conditions, often with a premium to the current stock price.

Features:

The conversion feature is more flexible, offering various options for

bondholders to convert into equity depending on the stock’s
performance.

This type of bond often includes an option for early conversion or

conversion at different conversion ratios.

Risk/Reward:

This bond provides more flexible conversion options than standard

convertible bonds, but it also typically carries a higher coupon rate.

6. Convertible Preferred Bonds:

Description: Convertible preferred bonds are hybrid instruments

that combine features of both convertible bonds and preferred
stock. These bonds can be converted into a specified number of the
company's common stock, but they offer preferred stock-like rights,
such as priority for dividends and liquidation.

Features:

Provides the bondholder with preferred stock benefits (priority

over common stock in dividends and liquidation).

Can be converted into common equity if the bondholder chooses.

Risk/Reward:

Convertible preferred bonds offer lower risk than standard

common stock but higher returns than regular convertible bonds.
They allow investors to participate in the company’s growth while
benefiting from the security of preferred stock.

7. Perpetual Convertible Bonds :

Description: These are convertible bonds that do not have a fixed

maturity date and can be converted into equity at any time, typically
subject to certain conditions.

Features:

No maturity date, meaning the bond can theoretically remain

outstanding indefinitely unless converted.

The conversion feature is often exercised by the bondholder if the

stock price appreciates significantly.

Risk/Reward:

The main advantage for investors is the potential for unlimited

participation in the company's equity upside. However, the lack of
maturity can be disadvantageous if the company faces financial
difficulties and the stock price remains depressed.

THE END