 Do not put content on the brand signature area CENTRE FOR INVESTMENT EDUCATION AND LEARNING Equity Valuation and Analysis Author 1 & Author 2 Location - Date

Text should appear only within the demarcated area. Basic Approaches to Valuation 2  Price of an equity share in secondary market is dynamic  Investors use information on the company to assess how a company will perform  Profitability is the key factor used in stock analysis  Focus in equity valuation is on the future earnings and the estimates of growth in earnings

Text should appear only within the demarcated area. Basic Approaches to Valuation 3  Fundamental analysis is based on the premise that ‘fair value’ of an equity share can be estimated from information about the company  Technical analysis is about looking for clues in the share price itself, for its future behaviour.

Approaches to Fundamental Analysis  EIC Framework  Understanding fundamental factors impacting the earnings of a company  Micro and macro data and information  Economic(E), Industry (I) and Company (C) analyses  Top-Down Approach  Scanning the macro economic scenario and then identifying industries to choose from and zeroing in on companies  Bottom-Up Approach  Beginning at company-specific factors and moving up to the macro factors  Quantitative tables  Financial ratios 4

Text should appear only within the demarcated area. Price Earning Multiple  Indicates how much the market values per rupee of earning of a company  Presented as a multiple of a company’s earnings  Example: Company with PE ratio of ‘12x’ means stock is trading at twelve times its earnings   Formula:  Market Price per share / Earning per share  Historical PE is based on past earnings  Little value  Forward PE is based on ‘expected’ future earnings  Helps to assess to what extent is current price discounting the future earnings 5

Text should appear only within the demarcated area. Interpretation of PE Ratio  Gauge if the market is undervalued or overvalued  PE multiple of the index is high – market is overvalued  PE multiple of the index is low – market is undervalued  PE multiple moves high when prices run ahead of the earnings numbers  PE multiple drops when markets correct and uncertainty about future earnings increases  Value investors buy when the stocks are trading at a low PE  Analysts compare the PE of one company with another, to check relative value  PE of a large stable company will be higher than its smaller riskier peer 6

Text should appear only within the demarcated area. PEG Ratio  PE multiple and the earnings growth rates are linked  Earnings growth rate of a stock should be approximately equal the PE ratio  To be fairly valued, PEG Ratio should be 1  Formula for PEG Ratio:  PE Ratio / Earnings Growth Rate  Useful in identifying value stocks  Have growth potential but are trading at a low PE 7

Text should appear only within the demarcated area. Price to Book Value (PBV) Ratio  Compares market price of the stock to its book value  Formula:  Current Market Price / Book Value per share  Book Value per share = Net worth (capital + reserves) per share  Realizable value of the assets is not reflected in the book value is a key limitation  If PBV Ratio is less than 1, stock is deemed to be undervalued  PBV Ratio would be high in a bullish market 8

Text should appear only within the demarcated area. Dividend Yield  Compares the dividend per share to market price per share  Formula:  Dividend per share / Market Price per share  A higher dividend yield would mean that the income potential of the share is not yet reflected in market prices.  Preferred by value investors  A lower dividend yield is associated with a higher valuation for a share  Used to assess market cycles  A bull market will be marked by falling dividend yields, as prices move up.  A bear market will have a relatively higher and increasing dividend yields as prices tend to fall. 9

Text should appear only within the demarcated area. Technical Analysis  involves studying the price and volume patterns to understand how buyers and sellers are valuing a stock and acting on such valuation  Three essential elements are studied  History of past prices  Volume of trading  Time span  Uses price charts, points of support and resistance levels in charts and price trends to assess buying interest in a particular stock 10

Text should appear only within the demarcated area. Technical Indicators  Tools used to understand underlying patterns in prices in terms of strength, persistence and reversal  Moving average  Rate of change in price  Relative strength indicators  Moving-average convergence-divergence indicators 11