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Quantitative factors of company in stock investing



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Hi All!

Good Evening!

Yesterday, i gave an assignment.

Take one of your favorite stock and do *qualitative analysis* on it.

I hope all of u have done.

Yesterday we did a recap on some rules for identification of fundamentally good stocks.

Then we specified two important types of factors for the analysis

1. Qualitative factors

2. Quantitative factors

  • Qualitative factors* = about the quality aspects such as management, promoters etc.
  • Quantitative factors* = about company numbers such as Financial ratios, Profit and Loss.

1. The background of the promoters and the management is important. (Example: GeeCee Ventures)

2. Does the company have Business ethics? (Ex: Vijay Mallya and UB Group)

3. *Corporate governance* and the way the company is run (Ex: Inox Group)

4. How does the company treat *minority shareholders*? (Example: Apollo Hospitals)

5. *Share holding structure* of the promoters is important. (family members and their control)

6. *Salaries paid and expenses incurred* for promoters (Ex: Crompton Greaves)

7. Connection with *Political parties*

8. Avoid companies with *hifi lifestyle of promoters*. (Ex: Vijay Mallya, VRL Logistics)

9. Keep an eye on *major shareholders* i.e those who own more than 1% of the company. (Example: Rakesh Jhujhuwala, Vijay Kedia etc.)

Then, we said, we need to collate information form newspapers, stock websites, stock exchange websites and the official website of the company

We said we need to track updates of our stocks daily.

This is why we limit our portfolio to 5 stocks max.

Now see how shareholders react to news:

News: Lavish spending, Arrogant promoter => Stock Down

News: GST if passed, will benefit logistics => Stock Up

This means,

People seriously follow news to make their buy or sell decisions.

In the case of VRL Logistics that we discussed yesterday,

the promoter has taken his words back,

in a way it could be a trick of the promoter to get attention.

Whatever it is with that promoter,

i would refrain from entering into such stocks.

Not just me,

but there are FIIs, international fund mangers and foreign insurance and pension fund managers

will take very serious about this type of things.

Caution: Stay away from companies whose promoters had a bad reputation!

If you are into such companies, there is always a fear of something surprising to happen.

Can we continue ? There are two types of factors in regard to news analysis.

  • Micro factors*: News about the company / industry / sector
  • Macro factors*: News happening outside the company but impact the company. Example: The country economy

As fundamental analysts, we need to track both these types of news.

Most people ask this question:

Top shares (usually large caps) are costly and at very high price all the time! How can we buy them?

Even better: How can we determine if the share price is right (fair) or not?

Now today, we will introduce *quantitative factors*

Quantitative = Numbers, Ratios, Percentages etc.

There are several Quantitative factors that we come across during fundamental analysis.

I will list them down here.

Spend a minute to understand the term and try to correlate the term with regard to your favorite stock.

1. Profits

2. Margins they get in business

3. Sales Turnover

4. Pricing power of the company

5. Tax payments

6. Dividends

7. Cash Flow

8. Debt and its management

9. Working capital and cash in hand

10. Other financials like PE, EPS etc

One important problem we have with good quality shares is that..

they are always either rightly valued or expensive.

But..

We want to buy shares that are cheap or attractive.

Right?

Also, The share price of our chosen company should be attractive or at least be available at fair price so that we can buy them.

We should not buy a company that is already expensive in share price

How to know these?

We can determine this using several website.

For instance, you can get some quantitative data from the company Balance Sheet

From the P & L statement, from the quarterly results report etc

Fortunately, we have many websites that evaluate share fundamentals.

We start with one such good website called http://screener.in

For instance, to know about SBI,

go to http://www.screener.in/company/SBIN/consolidated/

We need to constantly keep evaluating companies from top to down (as per market cap / index) to find the good companies

.. and we need to determine what is the fair price for the share.

I will tell about finding fair price here a little later.

How one can identify if a company stock is good or bad?

If you visit screener,

the website displays the positive and negative points of the stock in simple English.

For example,

If you visit screener page on REC Ltd (a rural electrification company) at http://www.screener.in/company/RECLTD/

you will notice:

Pros:

- Stock is trading at 0.79 times its book value

- Stock is providing a good dividend yield of 7.08%.

- Company has been maintaining a healthy dividend payout of 23.65%

Cons:

- Company has low interest coverage ratio.

- Promoter's stake has decreased

We know,

.. pros are good for us

.. cons are bad for us.

Every company has pros and cons.

We need to use our own judgement to decide and weight if the pros and cons are worth it.

If you feel the cons are really really bad.. avoid the company.

In this example, we are talking about a company called REC Ltd.

Rural Electrification Corporation Ltd

It is into financing power projects.

The company is categorized as an NBFC.

NBFC = Non Banking Finance Company

Observe the cons of REC:

  • Company has low interest coverage ratio.*

means, roughly speaking

=> Company is paying more and more interest for loans / debt it has taken

REC being a power financing company will have to take loans. so this is a common thing.

In REC's case: *Promoter's stake has decreased*

Who is the promoter of REC?

REC is a Govt company. Promoter is Govt. of India.

And we know Govt is disinvesting.

So, obviously, the promoter holding is going down.

BTW, it is a Navaratna company!

Navaratna = Good quality government companies


Now looking at the REC Cons, do you they are worrysome?

- Company has low interest coverage ratio.

- Promoter's stake has decreased

Finance company has to take loans to give loans

Govt Disinvestment is a thing not under the control of the company.

So we may say cons are not that bad

So, for now, we an say REC is a good company to invest.

Of course, u need to take other paraments as well before arriving at a complete judgement.

Now let us check in the case of Unitech

Unitech Ltd screener page is http://www.screener.in/company/UNITECH/consolidated/

Pros:

- Stock is trading at 0.15 times its book value

Cons:

- Company has low interest coverage ratio.

- Promoter's stake has decreased

- The company has delivered a poor growth of 3.20% over past five years.

- Promoter holding is low: 26.77%

- Company has a low return on equity of -2.72% for last 3 years.

- Company might be capitalizing the interest cost

- Promoters have pledged 83.42% of their holding

Looking at the information, can you tell if it is a good / bad company?

Current Price: Rs 6.20

Can we invest in this company for the long term?

I already told u to stay away from penny stocks.

A big no to investing in this type of companies.

So, study the pros and cons helps u decide urself if it is a good one or not.

  • Assignment*

Do Screener test on the stocks that you hold or those that you keep tracking

Give me name of:

1. One Good stock

2. One Bad Stock

Screen as many stocks as possible.

No need to be totally good or totally bad. Almost good and Almost bad are okay too.

Sarasan asked:

One doubt if we bought one stock through SIP and suddenly any bad news came is this better to sell it immediately or wait and watch

This depends on the bad news and how much it impacts.

If the news impacts the total business itself, then better to exit.

If the news impacts only profits etc. then better to wait and watch to decide how the company overcomes this.

I will give you an example:

RJio launches free voice calls offer. Almost all telecom stocks are effected.

Right?

Many of us hold telecom stocks.

Now, Airtel, Idea, RCOM etc would be crushed if RJio gets popular

A good company in this challenging situation will come up some strategy to overcome the impact.

Look at the management capabilities, i would say, Airtel is better prepared over others

To confirm this, we need to wait for a quarter to decide if Airtel can withstand RJio pressure or not and then exit it if we feel it cannot stand up.

Pious asked:

grateful if separately all finance ratio and financial terms are explained during the class which may also include how to calculate it

I am not sure if we can cover all the ratios and terms but i will try to cover as many as possible.

I will surely explain important ones that help us make simple decision making.

How to calculate ratios? Would be complex. Why do we need to calculate when the Quarterly reports and screener gives the numbers straight away.

Sir give any source ya site name which give micro and macro news

@Sumit: Track company and sector specific news on MoneyControl and Economic Times. They provide a lot of information.

Also check the press releases section of the company website. This is very important

@Sumit:

But sir how to calculate share price are overvalued or undervalued

There is no single way of determining this. Ratios such as PE and EPS will tell this.

If there is a single number, all of us would be investing using just that.

In regard to Sun Pharma, in Screener page, we got the following data: - Promoter's stake has decreased - Though the company is reporting regular profits, it is not paying out tax - Company might be capitalizing the interest cost

https://www.screener.in/company/SUNPHARMA/consolidated/

How to interpret this?

  • Promoter's stake has decreased* means Promoter sold their shares in the market or to other investors or might have pledged the shares and the finance company has invoked the pledge and sold the shares in the market.

In regard to Sun Pharma, this is an old news and Screener seem to have not updated. For the last three quarters, promoter holding is constant at 54.97% which is good enough. Looks like there is some pledging still.

  • Though the company is reporting regular profits, it is not paying out tax*. This may be because in the last quarter (q1), the company made a loss of 17k cr but on a yearly basis, they might come to positive.
  • Company might be capitalizing the interest cost* means profits from the company is used for repaying loans. But interest burden has come down from 14 cr to 10k cr.

We can check these datails from the Quarterly Results (q1) of the company at http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/077E6A44_345B_4F71_9627_D07B5AF7D9DB_141942.pdf

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