EQUITY RESEARCH IN BANKING SECTOR

Masters of Management Studies University of Mumbai By Prerna Jeswani

WHY BANKING SECTOR?

Growing Demand for Credit. Strong regulatory system.

Strong inflows from foreign markets.

Opportunity in Rural market.

WHY EQUITY?
Advance in Technology. Equities have the potential to increase in value over time. It provides your portfolio with the growth necessary to reach your long term investment goals. Equities are considered the most challenging and the rewarding, when compared to other investment options.

EQUITY INVESTMENT
Equity investments generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gain as the value of the stock rises. The process of investment starts with analyzing a sector, understanding its growth prospects, then analyzing companies in the chosen sector using fundamental and technical analysis.

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Research studies have proved that the equities have outperformed most other forms of investments in the long term. However, It is important for investors to note that while equity shares give highest return as compared to other investment avenues it also carries highest risk therefore it is important to find real value or intrinsic value of the security before investing in it.

Objective of the study

To be able to value equity, we need to first understand how equity is to be analyzed. Equity Share of any company can be analyzed through Fundamental Analysis Technical Analysis

SCOPE & LIMITATIONS

The scope of project is limited to understanding the basics of Fundamental analysis and Technical analysis and apply it to take a decision of investing in stocks. The project has been limited to investment analysis of stocks of banking sector only.

FUNDAMENTAL ANALYSIS
Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices. The fundamental information that is analyzed can include a company's financial reports, and nonfinancial information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economywide changes, changes in government policies etc..

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A fundamental analyst believes that analyzing strategy, management, product, financial stats and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market. Fundamental analysis serves to answer questions, such as: Is the companys revenue growing? Is it actually making a profit? Is it in a strong-enough position to beat out its competitors in the future? Is it able to repay its debts?

Fundamentals: Quantitative and Qualitative

QUALITATIVE FACTOR THE INDUSTRY Each industry has differences in terms of its customer base, market share among firms, industry-wide growth, competition, regulation and business cycles. Learning about how the industry works will give an investor a deeper understanding of a company's financial health.

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QUALITATIVE FACTOR THE COMPANY Following are the qualitative factors of the company that investor should be aware of Business Model What exactly does the company do? This is referred to as a company's business model. Its how a company makes money? Competitive Advantage A company's long-term success is driven largely by its ability to maintain a competitive advantage - and keep it.

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Management It is the most important aspect for investing in a company. It makes sense - even the best business model is doomed if the leaders of the company fail to properly execute the plan.

QUANTITATIVE FACTOR
Quantitative factor include analysis of financial statement of the company. RATIO ANALYSIS Financial ratios are tools for interpreting financial statements to provide a basis for valuing securities and appraising financial and management performance. In general, there are 4 kinds of financial ratios that a financial analyst will use most frequently, these are: Performance ratios Working capital ratios Liquidity ratios Solvency ratios

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These 4 financial ratios allow a good financial analyst to quickly and efficiently address the following questions or concerns: Performance ratios What return is the company making on its capital investment? What are its profit margins?

Working capital ratios How quickly are debts paid? How many times is inventory turned?
Liquidity ratios Can the company continue to pay its liabilities and debts? Solvency ratios (Longer term) What is the level of debt in relation to other assets and to equity? Is the level of interest payable out of profits?

RATIOS
CURRENT RATIO LIQUIDITY RATIO DEBT- EQUITY RATIO FIXED ASSET RATIO WORKING CAPITAL RATIO STOCK TURNOVER RATIO DEBTORS TURNOVER RATIO CREDITORS TURNOVER RATIO NET PROFIT RATIO

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RETURN ON INVESTMENT RETURN ON EQUITY EARNINGS PER SHARE PRICE/EARNINGS RATIO CAPITAL ADEQUACY RATIO DIVIDEND PAYOUT RATIO

TECHNICAL ANALYSIS
Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. Technical analysis is the study of prices, with charts being the primary tool. Technical analysts are only concerned with two things: 1. What is the current price? 2. What is the history of the price movement? The objective of analysis is to forecast the direction of the future price.

CHART
A price chart is a sequence of prices plotted over a specific timeframe. In statistical terms, charts are referred to as time series plots. DIFFERENT TYPE OF CHARTS Line Chart It is one of the simplest charts. It is formed by plotting one price point, usually the close, of a security over a period of time.

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Bar Chart The high, low and close are required to form the price plot for each period of a bar chart. Candlestick Chart Originated in Japan over 300 years ago. For a candlestick chart, the open, high, low and close are all required.

USE OF TRENDS
Technical analysis is built on the assumption that prices moves in trend. Trendlines are an important tool in technical analysis for both trend identification and confirmation. A trendline is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance Trends in charts are found to take decision regarding buying, selling or holding the stock.

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Types of Trend There are three types of trend: Uptrend When each successive peak and trough is higher, it's referred to as an upward trend. Downtrend If the peaks and troughs are getting lower, it's a downtrend. Sideways/Horizontal Trends When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend.

Trend Lengths
Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as: Long-term trend,(longer than a year) Intermediate trend (between 1 & 3 mnths) Short-term trend. (less than a mnth)

CHART PATTERNS