FUNDAMENTAL ANALYSIS
LESSON NO. 3
I have been getting good number of e-mails from people who are expecting further lessons in Fundamental Analysis of companies. I am therefore, sending the lesson No. 3 as under :
i) One important ratio is the Debt Equity Ratio. If the ratio is less than one, it means that the company’s borrowings are less than the Equity and if it is more than 1, it means that the borrowings are more than the Equity. Here also there is no proper yardstick laid down, but any Debt Equity Ratio more than 2 is not very healthy.
ii) Analysis of share holding pattern :
a) If the promoters are holding at least 30 percent, and there is substantial institutional holdings (like Banks, Mutual Funds etc.) and also FII holdings (subject to Government regulations), the company is safe bet. In some closely held companies, the promoters holding may be as high as 80 percent. Companies with high promoters’ holding are safe bets.
b) Some companies may be part of a group of companies where cross holdings will be seen. For eg. TVS Group companies, TATA Group companies. In such companies, apart from the income from operations, there will an “Other Income Component” (mostly dividend on shares of group companies held by them). Such companies are reasonably safe for investment.
c) In companies where Government or some Statutory Body is also a share holder, we can safely consider investing in the shares of such companies.
iii) For comparing the performance of a company, it is always advisable to compare the Year on Year growth rather than Quarter on Quarter growth. As mentioned in para (b) above, in group companies when the dividend etc. is declared it may accrue in one particular quarter and in the next quarter the overall income may be less or stagnant for the above reason. Therefore YOY study is a better barometer.
iv) In many cases, there may be an impending news of promoters or persons associated with the promoters or directors who may acquire shares of the company and increase their holdings. The company may be in the process of allotting shares or convertible warrants to above persons. In such cases, it is very very safe and advisable to purchase shares of such companies because, such shares will get re-rated very soon.
For information of all investors, if a promoter or CEO or director or any such person purchases the shares of the company that he is interested in, it is mandatory on his part to disclose such acquisition to the exchange. Similarly, when the company is in the process of allotting such shares, they are expected to inform the exchanges. So, if the investors keep a close watch on such companies, they can find out the details.
For eg. In June/July 2007 M/s DCW were in the process of allotting shares to promoter group and FIIs at Rs.12.00 per share (Rs.2.00 + 10.00 premium). At that time, the share price was moving at around 11.50 to 12.00 and we had sent e-mails to over 40 persons and stated a price target of 20 by March 2008. DCW recently touched a high of about 44.
v) In case of some ancillary companies, if the main companies or the sector is in bad shape, it is better to avoid such ancillary companies. For Eg. Auto ancillary sector was neglected for some time but now analysts are expecting the sector to look up as the auto demand is expected to perk up.
vi) If a holding company floats a subsidiary company and the latter’s shares are issued at a premium in the market and fully subscribed, the holding company’s shares will also get an automatic re-rating. Therefore, it is advisable to enter into the shares of the holding company much before the shares of the subsidiary company are listed. (For eg. Shares of Mahindra & Mahindra got re-rated after successful issue of Tech Mahindra shares). Recently ICICI Bank has decided to list its subsidiaries (Insurance Co. and Mutual Fund). Accordingly shares of ICICI Bank have started inching upwards.
Investors should keep their eyes and ears open for any such news/announcements.
LESSON NO. 3
I have been getting good number of e-mails from people who are expecting further lessons in Fundamental Analysis of companies. I am therefore, sending the lesson No. 3 as under :
i) One important ratio is the Debt Equity Ratio. If the ratio is less than one, it means that the company’s borrowings are less than the Equity and if it is more than 1, it means that the borrowings are more than the Equity. Here also there is no proper yardstick laid down, but any Debt Equity Ratio more than 2 is not very healthy.
ii) Analysis of share holding pattern :
a) If the promoters are holding at least 30 percent, and there is substantial institutional holdings (like Banks, Mutual Funds etc.) and also FII holdings (subject to Government regulations), the company is safe bet. In some closely held companies, the promoters holding may be as high as 80 percent. Companies with high promoters’ holding are safe bets.
b) Some companies may be part of a group of companies where cross holdings will be seen. For eg. TVS Group companies, TATA Group companies. In such companies, apart from the income from operations, there will an “Other Income Component” (mostly dividend on shares of group companies held by them). Such companies are reasonably safe for investment.
c) In companies where Government or some Statutory Body is also a share holder, we can safely consider investing in the shares of such companies.
iii) For comparing the performance of a company, it is always advisable to compare the Year on Year growth rather than Quarter on Quarter growth. As mentioned in para (b) above, in group companies when the dividend etc. is declared it may accrue in one particular quarter and in the next quarter the overall income may be less or stagnant for the above reason. Therefore YOY study is a better barometer.
iv) In many cases, there may be an impending news of promoters or persons associated with the promoters or directors who may acquire shares of the company and increase their holdings. The company may be in the process of allotting shares or convertible warrants to above persons. In such cases, it is very very safe and advisable to purchase shares of such companies because, such shares will get re-rated very soon.
For information of all investors, if a promoter or CEO or director or any such person purchases the shares of the company that he is interested in, it is mandatory on his part to disclose such acquisition to the exchange. Similarly, when the company is in the process of allotting such shares, they are expected to inform the exchanges. So, if the investors keep a close watch on such companies, they can find out the details.
For eg. In June/July 2007 M/s DCW were in the process of allotting shares to promoter group and FIIs at Rs.12.00 per share (Rs.2.00 + 10.00 premium). At that time, the share price was moving at around 11.50 to 12.00 and we had sent e-mails to over 40 persons and stated a price target of 20 by March 2008. DCW recently touched a high of about 44.
v) In case of some ancillary companies, if the main companies or the sector is in bad shape, it is better to avoid such ancillary companies. For Eg. Auto ancillary sector was neglected for some time but now analysts are expecting the sector to look up as the auto demand is expected to perk up.
vi) If a holding company floats a subsidiary company and the latter’s shares are issued at a premium in the market and fully subscribed, the holding company’s shares will also get an automatic re-rating. Therefore, it is advisable to enter into the shares of the holding company much before the shares of the subsidiary company are listed. (For eg. Shares of Mahindra & Mahindra got re-rated after successful issue of Tech Mahindra shares). Recently ICICI Bank has decided to list its subsidiaries (Insurance Co. and Mutual Fund). Accordingly shares of ICICI Bank have started inching upwards.
Investors should keep their eyes and ears open for any such news/announcements.
(KASHIWALA)
2 comments:
Very informative. Thanks
Dear Ajay
add me on u r mailing list. my id is harish1thakur@gmail.com
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