Chapter 1 - Introduction to Research Analyst Profession

1.1 PRIMARY ROLE OF RESEARCH ANALYST (RA)

• Investors/Clients want to invest in Stock market BUT they don't have time, they are not in
stock market as full time. So they hire SEBI Registered RAs to help them in their Investment
Decision. Research is a time consuming process. RA collects data/info about

2. Industry Analysis related to your selected company on which research is to be done.

3. Company about management and decisions and other factors info

• Economic info or data from Govt Statistics/ Data provided by RBI - local info
• For Global data - International Monetary Fund (IMF), Asian Development Bank (ADB),
World Bank
• For company specific data - Annual Report (AR), Quarterly Result, DRHP etc
• Analysis & Decision making Process = Qualitative -Management Quality ( ethical
perspective) +Quantitative – (Company's performance - profit, revenue, cash, etc) factors.

A. Sell Side Analyst B. Buy Side Analyst

- publically available - For own investment
- Specific recommendation to B/S/Hold - Example: Mutual fund, Pension fund, etc
- Income through brokerage - Generation of brokerage
- Not for own investment - Now the company can act upon the result
- Ex: Investment Banks, Brokers of the research to B/S/Hold for their own on
behalf of their clients

C. Independent Research Analyst

- Full time RA/Boutique firms sell their research on subscriptions basis (may be monthly,
annually, Qly, etc). Anyone can be a client # Investor # Institution, etc. No brokerage (like
sell side). No own benefits/Investment (like buy side). They also provide customised reports.
D. Apart from above 3 categories : Newspaper ,media, Tv also provide research reports
1.2 PRIMARY RESPONSIBILITIES OF A RA

ECONOMY • British economist John Maynard Keynes believed Government can change the
economic performances - By changing/ adjusting tax rates & Government spending.
Focus areas for economy: Various macroeconomic factor, Monetary & Fiscal policies, Saving
& Investment pattern, Flow from FDI & FPI, GDP Growth, Import/Export Transaction
Industry understanding: • you either know everything about the industry, or maybe parts of
it • Whichever company you are researching about, it's important to learn about the
industry too at the same time • Topics like business models, operating factors etc are
needed to be understand
Companies understanding

Ex: Rahul Dravid (Defensive) & Virendra Sehwag (Aggressive) - Both are great players but
different style, same in business. Depending on the nature of the business, the research can
vary according to their business model, financials, etc

1.3. INTERACTION WITH COMPANY / CLIENT

Internet has a lot of info already but it's always better to communicate with the company's
management (One on one communication helps always as it is not necessary everything in
internet is correct). But management can mislead the RAs too, By showing all the positives about
company, therefore Cross checking is important.
Some GUIDELINES to follow : Report must be simple, clear & concise. Non biased report.
Avoid hard words/ tough words/ jargons. Conflict of interest should be disclosed before for
transparency - Agar RA khud uss company k shares hold karta hai Jiski research report usko
banani hai apne clients k liye Isliye independently Bina emotions & personal agenda se
report banana. Yaha par psychology & emotional impact kar Sakti hai. Agar kuch
assumptions hai toh disclose / note mention karna padega. It's advisable to use recording
devices while Interviewing with management/Communicating with clients but after taking
consent only, it will act as a proof in case of conflict.

1.4 IMPORTANT QUALITIES OF RESEARCH ANALYST

Curious and enquiring mind - Always ready to ask the question. Info about different types of
sources for data/info. Good qualitative (Understanding of business) and quantitative (Good
at numbers) skills. Clarity in decision making. Attentive with good communication skills.
Hands on excel and clarity in financial concept (To be able to read financial statements and
report). Always eager to learn and study about the sector, company, economics etc. Always
up to date with the relevant data. Take tests.

Chapter 2 - Introduction to Securities Market

2.1 INTRODUCTION TO SECURITIES & SECURITIES MARKET
What are securities? - Transferable financial instruments showing ownership or
indebtedness in an entity's assets. Issued by Companies, Government and Financial
Institutions. Types include equity shares, preference shares, debentures, bonds, etc.
What is a security market? - Facilitate buying and selling of securities. Create liquidity by
bringing together numerous buyers and sellers. Enable transactions at market prices.
Companies raise money by issuing securities at some cost and Investors invest their savings
in exchange for returns on their investment.
Constituents of the Securities market
The term "securities" has been defined in Section 2(h) of the Securities Contracts
(Regulation) Act,1956(SCRA). Term Securities include various instruments like shares, bonds,
derivatives, government securities, and others declared by the Central Government.

2.2 VARIOUS FINANCIAL INSTRUMENTS / TERMINOLOGY

Foreign currency bonds - are issued by companies in a currency different from their home
country's currency, like Delhi International Airport Limited issuing USD bonds in February
2020. Emerging market companies often issue bonds in USD or stable currencies due to
lower interest rates, but this exposes them to foreign currency risk. Equity Share Issued by
companies to raise money, Equity shares represent the form of fractional ownership in the
company. Investors in these shares bear the risk and enjoy the rewards of ownership.
Debenture / bonds / Notes: Governments and companies raise money by issuing bonds and
debentures at a fixed interest rate. The rate depends upon the credit risk of the company. A
debenture is a type of long-term debt not secured by any collateral. Types include: 1) Fully
Convertible: Converts bonds into shares as per decided terms. 2) Partly Convertible:
Converts partly into shares, with the remainder redeemed. 3) Non-Convertible: Pure debt
instruments without conversion. Short-term debt instruments are used to raise debt for
periods not exceeding one year Examples: T-bills, Commercial Papers
External bonds / Masala Bonds, also known as **Euro bonds**, are issued in a currency
different from the country of issuance. **Masala bonds**, denominated in Indian rupees
(INR), are issued outside India. First issued by the International Finance Corporation in
November 2014 and listed on the London Stock Exchange
Warrants are options granting investors the right to purchase the issuer company's shares
at a predetermined price at the maturity.
Indices - In the stock market, indices are statistical measures that track the performance of
a group of selected stocks.- Market indices track market movements using select shares,
often weighted by market capitalization. Examples in India include Nifty 50, S&P BSE Sensex,
and MSEI's SX40.- Indices can be broad like Nifty 500 or specific like sector-based indices
(e.g., banking, IT).- They help compare stock returns with other assets, serve as benchmarks,
reflect economic performance, show real-time sentiments, and support index-based
financial products like funds and derivatives
Mutual fund units - Investment pools that gather money from investors to invest in a
portfolio reflecting shared investment goals. Units and NAV: Each investor owns units in the
fund, and their value is determined by the Net Asset Value (NAV), which changes based on
the fund's portfolio value. Open-ended vs. Close-ended: Open ended schemes allow
investors to buy/sell units anytime without a fixed maturity, linked to NAV prices.
Preference Shares are shares of a company's stock with dividends that are paid out to
shareholders before common stock dividends are issued. No voting rights. It has both debt
and equity-like characteristics. Types: Varieties include cumulative (unpaid dividends carry
forward), non-cumulative (unpaid dividends lapse), convertible (partly or fully), etc.
Exchange Traded Funds (ETF): Pooled investment vehicle tracking indexes, commodities, or
asset [Link] and traded in demat form on stock exchanges, reflecting real-time price
[Link] diversification benefits, real-time trading, and lower expenses due to passive
management
Indian Depository Receipts (IDR) ,(GDR), (ADR)
Depository Receipts (DRs): Represent foreign company shares traded in local markets in
local currency. Issuance Process: The Bank receives equity shares, places them in a
custodian account, and issues DRs to overseas investors. Sponsored vs. Unsponsored DRs:
Sponsored listed on the country's exchanges, and unsponsored traded in OTC markets with
fewer regulations. Two-Way Fungibility: DRs can be converted to local shares and vice
versa, subject to the country's regulations. IDRs: Indian companies issue IDRs, regulated by
SEBI, with specific guidelines like fund limit, and one-year lock-in, for resident Indian
investors. Types of DRs: ADRs in the US, IDRs in India, HKDRs in Hong Kong, and GDRs
traded in multiple countries. Investor Benefits: Wider investor base for issuing company,
global investment opportunities for investors, no voting rights for DR holders currently
under SEBI consideration.
Commodities - Commodities are uniform goods, like gold bars, that are interchangeable. For
instance, a bar of gold is a commodity, but a piece of gold jewelry isn't, as preferences vary.
They're categorized as hard (mined resources like metals and crude oil) or soft (grown
products like grains).- Investing in commodities can hedge against inflation, protecting the
investment's value. Yet, due to storage costs, many aren't ideal investments. 1. Precious
metals: like gold and silver are considered investments that preserve the value of money
over time. They have minimal storage costs. 2. Commodity ETFs: is an exchange-traded fund
that pools investments in physical commodities. Investors buy units of the fund, and its
value closely tracks the underlying commodity prices. Since storage is managed by the fund,
investors have no storage responsibilities. 3. Managed futures contract: involve
buying/selling assets at a set price on a future date, allowing investors to profit from price
changes without owning the product. Managed futures are portfolios of futures contracts
managed by professionals, enabling investors to access commodities without owning them
directly. 4. Warehouse receipts: is a document proving ownership of goods stored in a
warehouse. Many of these receipts are negotiable, allowing the transfer of ownership of the
goods by transferring the receipts themselves.
REITs / InvITs :- Stands for Real Estate Investment Trusts (REITs) and Infrastructure
Investment Trusts (InvITs). REITs: Investors pool money to invest in real estate properties
and earn dividends from rents or sales. InvITs: Investors pool funds for infrastructure
projects like roads or power plants, earning returns from tolls or lease income.
Foreign Currency Convertible Bonds (FCCBs) - A FCCB is a type of convertible bond issued in
a currency different than the issuer's domestic currency. Convertibility and Payments:
Convertible to equity, often optionally, with interest and principal repayments in foreign
currency. Post-conversion dividends paid in Indian Rupees, placing currency risk on
investors. Governed by RBI guidelines under the Foreign Exchange Management Act
(FEMA), Equity & Convertible Linked Debentures ( ELD / CLD ) Equity-linked debentures
(ELDs) are floating rate debt instruments whose interest relies on the returns of the
underlying equity asset such as S&P Sensex, individual stocks, Nifty 50, or any customized
basket of individual stocks.- Similarly, CLDs are floating-rate debt instruments whose
interest relies on the returns of the underlying commodity asset
Mortgage backed securities ( MBS )/Asset Backed Securities ( ABS ) - A MBS is a type of
asset-backed security (an 'instrument') that is secured by a mortgage or collection of
mortgages.- The mortgages are sold to a group of individuals (investment banks) that
securitizes or packages, the loans together into a security that investors can buy

2.3 STRUCTURE OF SECURITIES MARKET

1. Primary Market Also known as the new issue market, where issuers raise capital by
offering fresh securities to investors. 2. Secondary Market enables the trading of already-
issued securities, allowing investors to buy or sell existing investments. Provides liquidity.
PRIMARY MARKETS
Methods of Issue of Securities: 1. Initial Public Offer (IPO): First sale of shares to the public
by a company to raise equity capital. 2. Follow-on Public Offer (FPO): Additional issuance of
shares by a listed company to the public. 3. Private Placement: Issuing shares to a limited
set of investors, limited to 50 individuals under the Companies Act. 4. Qualified Institutional
Placements (QIPs) Private placement of shares by a listed company to Qualified Institutional
Buyers (QIBs). 5. Preferential Issue: Offering shares to a selected group without a public
issue or rights/bonus issue. 6. Rights and Bonus Issues: Providing existing shareholders the
right to buy more shares (rights) or issuing free shares (bonus). 7. Onshore & Offshore
Offerings: Raising capital within or outside the domestic market. 8. Offer for Sale (OFS): Sale
of existing shares by shareholders, not leading to an increase in company capital. 9. Sweat
Equity: Issuing shares to employees, promoters, or technocrats as a reward for their
contribution. 10. Employee Stock Option Scheme (ESOPs): Granting employees the option to
buy company shares at a predetermined price after a vesting period.

SECONDARY MARKET
1. OTC - Here, trades are negotiated directly between multiple counterparties, settling
securities directly among them.
2. Exchange Regulated Markets - Securities trading takes place via exchanges & settlements
are guaranteed by clearing corporation, acting as counterparty for buyers & sellers.
Clearing and Settlement: Post-trading activities involve ascertaining buyer/seller obligations
(clearing) and settling these obligations by delivering shares or paying money (settlement).
Risk Management: In OTC, counterparties manage credit risk; in exchange-traded markets,
clearing corporations mitigate default risk by imposing margins like Initial, Peak, and mark
to-market (MTM) margins based on potential losses.

2.4 VARIOUS MARKET PARTICIPANTS AND THEIR ACTIVITES

MARKET INTERMEDIARIES
RETAIL INVESTORS are individual investors who trade securities for personal accounts. HNIs
and UHNIs are high-capacity individual investors. The RBI permits NRIs, PIOs, and QFIs to
directly invest in Indian companies under the Automatic Route.
PROXY ADVISORY SERVICES FIRM advise investors on voting matters in companies, assisting
them in making informed decisions about their rights in shareholder meetings or public
offers. They help investors analyse proposals and suggest how to vote, benefiting those who
may not track all company announcements or fully evaluate every proposal themselves.
Institutional investors often rely on proxy advisors for guidance on voting matters.
INSTITUTIONAL PARTICIPANTS
2.5 KINDS OF TRANSACTIONS
1. Cash, Tom, and Spot Trades/Transactions
Cash trades settle on same trading day (T+0) in financial markets, although they are less
common as most contracts settle between two to three days from trade date. Tom trades
settle on the day after trading day (T+1) and are seen in certain transactions within Foreign
Exchange Market (FX market). Spot trades settle on the spot date, typically two business
days after trade date (T+2). Equity markets in India often offer spot trades.
2. Forward contracts are agreements between two parties to buy or sell an asset in the
future at a fixed price set at the contract's initiation. These OTC contracts, such as a farmer
selling wheat to a miller at a pre decided price six months ahead, are customizable in terms
of quantity, quality, settlement mode (cash or delivery), and payment conditions.
3. Futures are exchange-traded forward contracts standardized in terms of quantities,
quality, and delivery terms, traded on stock exchanges with settlement guarantees by
clearing corporations. Subject to strict margin requirements, futures are available for
various assets like equities, commodities, currencies, and interest rates.
4. Options are contracts offering the right, not obligation, to buy (Call) or sell (Put) an
underlying asset at a predetermined price by a specified date. Buyers pay a premium for this
right, while sellers receive the premium but have an obligation if the buyer exercises their
right. These contracts can be traded in both Over The Counter (OTC) and Exchange Traded
Markets. Example: You buy a Call option on the Nifty index at a strike price of 16,000
expiring in a month, paying a premium of ₹200 when the Nifty is at 15,800. If at expiry, the
Nifty is above 16,200, your option is profitable, allowing you to buy Nifty at 16,000.
Otherwise, if the Nifty is below 16,000, the option expires worthless, and you lose the
premium paid
5. Swaps - A swap in the financial markets is a derivative contract made between two
parties to exchange cash flows in the future according to a pre-arranged formula. Swaps
help market participants manage risks associated with volatile interest rates, currency rates,
and commodity prices. Example: Two companies, Company A and Company B, agree to an
interest rate swap. Company A has a fixed-rate loan while Company B has a floating-rate
loan. They agree to exchange interest payments to manage their risks. Company A pays a
fixed rate, while Company B pays a variable rate based on an agreed benchmark. This swap
helps both companies hedge against interest rate fluctuations
6. Trading, Hedging, Arbitrage, Pledging of Shares:
Trading involves buying or selling assets in anticipation of short-term gains, leveraging on
market changes and can lead to magnified profits or losses. Hedging refers to taking a
position in financial instruments to counteract potential losses from another position,
limiting both gains and losses. Arbitrage is the simultaneous buying and selling of assets in
different markets to profit from price discrepancies, which in an efficient market, tend to be
short-lived. Pledging of shares involves using securities as collateral to obtain a loan, with
the securities held in a dematerialized account but blocked from other transactions until the
loan obligations are fulfilled.
DEMATERIALISATION AND REMATERIALISATION OF SECURITIES
Dematerialization: the process of converting physical securities into electronic or book
entry forms. Securities lose their distinctive numbers and individual identification in demat
form. SEBI mandates companies to allow investors the choice of holding shares in
dematerialized form during public issues.
Rematerialization: the reverse process of dematerialization. Here, securities held
electronically in book-entry form are converted back into physical certificates on an
investor's request. The securities are allotted distinctive numbers when materialized.
 Chapter 3 - TERMINOLGIES IN EQUITY AND DEBT MARKET
When investors want to invest or companies want to raise capital they broadly have 2 options

3.1 TERMINOLOGIES IN EQUITY MARKET

Face Value is the value of share when it started. This value gets locked and one finds this
value in share certificates of the company irrespective of what is its book value or market
value. Face value only changes when there is stock split or stock consolidation.
Book value of equity is the worth of Equity Capital in Company's balance sheet. It is the net
worth of company. Book value of Equity = Total assets - Total liabilities. Book value of each
item is not affected by its Market value or Fair value.
Market Value can be sought as worth of company assigned by Market Participants. The
value which market assigns to company based on various factors like - performance,
sentiments, future expectations, liquidity, etc of company's equity.
REPLACEMENT VALUE - Numerical value can be derived by measuring Market Value of Total
Assets. Today's Cost of setting up Duplicate company, similar - structure, assets, moats, etc.
INTRINSIC VALUE - Present Value of share's future benefits to investor. Numerous ways to
calculate and very subjective after all it is an estimated number. Common method is
Discounted cash flow method. Equity investing is an art and science of identifying and
exploiting inefficiencies while considering both Qualitative & Quantitative factors".

ENTERPRISE VALUE - Overall value of the company. If one were to buy the whole company
it would have to buy its Equity and Debt. EV = Value of common equity + value of non-
controlling interest + Value of preferred capital + Debt – cash, cash equivalents and financial
investments. All the values would be market value.
MARKET CAPITALISATION = Market value of shares * No of outstanding shares. Company’s
Market value= ₹ 200; outstanding shares= 1L then Market Cap = 200*1,00,000 = ₹2 Cr.
Categorisation – Larger the Market Cap of the company more mature it is and enjoy more
liquidity because all investors are keen on investing. 1. Large Cap - Largest companies by
Market Cap, Blue Chip companies, Generally top 50-100 companies. 2. Mid Cap - next
largest to Blue chip companies by market cap, generally next 200-500 companies. 3. Small
Cap - Rest all the remaining companies.
EARNINGS - Historical, Trailing, Forward - Returns earned by the company through their
operation; Earning = Revenue – Cost. Historical - Previous year earnings, Trailing - Earning of
last 4 Quarter, Forward- Future Projected earnings.
EARNING PER SHARE - profit earned on per share basis

P/E RATIO = Market price per share/ Earnings per share. It tells us how much are we paying
for per rupee of earning. One of the common tools in valuation. p/e ratio is based on trailing
earning + anticipated earning. If trailing earnings per share =25 ; stock price = 100 p/e =
100/25 = 4. If anticipated earning per share = 32; stock price= 100 p/e = 100/32= 3.125. If
only p/e is given, trailing p/e = 4, forecasted p/e= 3.125 we can say we expect an increase in
future income. Used in relative valuation too. If walnut co & almond co. operating in same
business walnut p/e : 12, almond p/e: 15, market is paying higher price for Almond co.
P/S RATIO = Price per share/sales per share. p/s ratio = market cap/annual sales. Measures
price for per rupee of sale. A relative valuation metric often used when companies are going
through negative earnings period. If orange co. has p/s : 2.5 & watermelon co. has p/s ratio
3.8 people are paying higher price for watermelon co.
DIVIDEND PER SHARE - Company usually declare dividend on per share basis. Usually
measured in terms of percentage of Face value. FV = 15; Dividend = 3; Dividend is 20%
(3/15). Multiples help us compare companies with its peer irrespective of their size or
numbers in absolute terms
DIFFERENTIAL VOTING RIGHTS DVR - Share with no voting rights, when companies want to
raise capital but doesn't want to lose decision making this is issued
PRICE TO BOOK VALUE P/BV = Price Per Share/book value of share, P/BV = market cap/book
value of equity, Book value per share = (Equity capital + reserves and surplus)/no of
outstanding shares. Equity capital = 15 lakh, Reserve&surplus = 40 Lakhs, outstanding shares
= 5 lakh, Market price per shar = ₹33 then, BVPS = (15 LAKH EQ CAP+ 40 LAKH R&S )/5 lakh
no of out shares= 11, P/ BV = 33(MP)/11(BVPS) = 3. It is a popular relative valuation metric
and often used where P/E is not reliable. Used to measure how much premium or discount
company is trading to its book value. Generally a p/bv less than 1 is undervalued showing
company is trading even less than its balance sheet net worth; but not always, there could
be various reasons behind poor market performance. Only reliable where company doesn't
have high intangible asset.

3.2 TERMINOLOGIES IN DEBT MARKET

- Debt securities issued by company when they don't want dilution of ownership, Debt
investors lends capital to company for a specified time period and specified fixed interest
income, Debt securities investments done through exchange or OTC based on availability.
FACE VALUE - Amount of debt being borrowed by the company or invested by initial debt
holders also called nominal value or par value.
COUPON RATE - Rate of interest on Debt, can be annual/semi-annual/quarterly etc.
Presented as a % of face value, absolute interest received is FV x coupon rate%, irrespective
of market value.
HOLDING PERIOD RETURN - Not necessary one should hold bond till maturity or buy at
initiation, buy and sell can be done anytime if one finds counter-party either on exchange or
OTC. Return earned for time period bond was hold, is Holding period return. If an investor
purchases a bond at Rs. 104, earns Rs. 8 as coupon, which he reinvests at 7% for a period of
1 year, and finally sells the bond at Rs. 110 after 1 year then his HPR would be: HPR = [(8) +
(8 * 7%) + (110-104)]/ 104 = 14.00%. HPR is single period return and not annualised return.
CURRENT YEILD - Return earned on bond based on current market price. If bond pays 7 rs
coupon annually, Face value 100, Market price 94,, then current yield = 7/94 = 7.45%
MATURITY & REDEMPTION - Time period for which bond will exist, as agreed on initiation.
Maturity can be as short as 30 days (T-bills) or even 30 years or more. Each bond had expiry
date or maturity date after that it cease to exist and on that day face value should be
returned back + coupons if any due!, this final step is Redemption of bond
YEILD TO MATURITY (YTM) is the total return expected on a bond if it is held until it
matures. It considers the bond's interest income and potential capital gain or loss, assuming
the bond is held until maturity. Ex: Imagine you buy a bond with a face value of $1,000, an
annual coupon payment of $60, and you purchase it for $950. If the bond has 5 years until
maturity, the YTM will capture the total return, considering both coupon payments and the
potential change in the bond's market value.
DURATION - is a measure of a bond's sensitivity to changes in interest rates. It provides an
estimate of the bond's price volatility based on the timing and size of its cash flows. Ex:
Consider the same bond with a face value of $1,000, an annual coupon payment of $60, and
5 years to maturity. Duration helps you understand how much the bond's price will change
for a 1% change in interest rates. If the duration is 4 years, it implies that for every 1%
increase or decrease in interest rates, the bond's price would change by approximately 4%.
CONVEXITY is like adding a special adjustment to better understand how a bond's price will
change when interest rates move. While duration gives us a good basic idea, convexity fine-
tunes our prediction by considering the curve-like behavior of bond prices when interest
rates go up or down a lot. It's like adding a little extra magic to make our predictions more
accurate. EX: Continuing with the same bond, convexity takes into account the curvature in
the price-yield curve. Suppose the bond has a duration of 4 years and a convexity of 20. This
means that while duration helps estimate price changes, convexity recognises that the
relationship isn't perfectly linear. For a 1% change in interest rates, the bond's price may
change by the predicted amount from duration, but convexity adjusts this prediction to
reflect the curvature in the actual price-yield relationship.

3.3 TYPES OF BONDS

ZERO COUPON BONDS - bonds which do not have any coupon issues at discount to par, and
redeemed at par. Interest earned is the value difference between issue and redemption
price. Zero coupon bonds are more sensitive to change in interest rates( high duration) than
a coupon paying bond as these bond return solely depend on price taking a flight to par
value and any change in rates affect the price of bond more severely when ZCB have long
maturity and issued at heavy discount termed as Deep Discount!
CONVERTIBLE BONDS - Bonds which have a compulsion or option to covert into equity fully
or partially later on. It includes Date & price of conversion, no of shares per debenture.
Once conversion done, particular amt debt is removed from balance sheet and added to
equity. Advantage to issuer - lower coupon payment and no principal payment if conversion
successful. Disadvantage to issuer - dilution of EPS as equity increases. Adv to investor - debt
+ equity benefit, enjoy coupon at start and if share appreciates later on convert and enjoy
equity gains.
FLOATING RATE BONDS - Issued at par, redeemed at par but don't have a fixed coupon rate.
Each period coupon payment is adjusted based on benchmark rate, due to this variability of
coupon bond price less sensitive to change in interest rate. These bonds can also have a max
or min limit of coupon rates, restrictions called cap & floor. Inverse floater: if benchmark
rate goes up, coupon rate goes down.
PRINCIPAL PROTECTED NOTES - if investors hold till maturity their Principal will be
protected and have very low chance of default. Part of investment parked side to return
principal at end of maturity, rest invested in commodities derivatives to earn high returns
INFLATION PROTECTED SECURITIES - Returns being matched to inflation, fixed % return on
adjusted principal based on inflation. If coupon payment 4% FV 100, inflation 6% coupon =
4% *(100*(1+6%) = ₹4.24 new principal= 100*(1+6%) = ₹106. Another type where principal
is fixed but interest rates linked to inflation. FV 100, inflation 8%, coupon = 100* 8% = 8 rs
FV remains same – 100
FOREIGN CURRENCY BONDS - Bonds issued by a company in a currency different than that
of local currency. Indian company issues bond in USD and pays coupon in USD, currency risk
borne by the issuer
EXTERNAL BOND - issuing bond in foreign country in a currency which is different from
issued country's currency. Company raising USD from UK market, here currency risk borne
by investor masala bonds also external bonds.
PERPECTUAL BOND - do not have any maturity company have no obligation to retire the
bond, can be called or bought back as per company discretion

Chapter 4 - FUNDAMENTALS OF RESEARCH

4.1 WHAT IS INVESTING?
Investing in market means a long term holding of an asset to make a good return. The
valuable things which you own and generates cash/ money/ wealth. Investing is like , " Paise
se Paisa Banta hai. " but not always because it contains RISK also. Kisi bhi cheez mai jab
aapko pocket se Paisa Lagta hai whether it is for starting your own business , buying/
investing and many more things which fall under , " Paise se Paisa Banta hai" category, it has
the following outcomes. 1. You will loose your entire principal amount 2. You will loose
SOME money from principal and get the remainings. 3. You will get your Principal amount
back (breakeven) 4. You will get some profit or even huge profits. Therefore ,studying and
analysing your stocks in investing to ensure safety is a must.

Investing is different from trading & speculative activities. Investing: For long time (5-15+
years ) Trading: For short time (Intraday kind of ) Speculative activities: Buying selling
because of your emotions or prediction or you have heard over news. Trader earns profit by
the difference in prices for a specific stock. # There is no news in the market for ABC stock. #
Still ABC stock prices are continuously moving # This is because some traders wants to buy
that stock at different levels and, # Some traders wants to sell that stock at different levels.
Hence a trader earns profit by this spread of prices between buyers and sellers. Also it
doesn't affect the value of that stock.

Investing focuses on Assets value to increase over a period. 2 ways to increase the value of
the asset. 1. By generating high CASH FLOW without increase in risk - # Comapny k pass
kitna Paisa aa raha hai and kitna Paisa ka raha( cash ka flow ), # other way, company kitna
Paisa generate kar Rahi hai and kitna Paisa kharcha kar raha hai 2. Risk decrease without
any decrease in Cash Flow - # Like bad mgmt, heavy debt, etc. Investment is a complicated
task. You have to analyse the company properly in which you wish to invest. Analysis can be
done of 1. broad asset class 2. individual stock

ACTIVE INVESTING - It involves buying or selling of stocks with constant evaluation and
tracking of portfolio. • Investors sell stocks where stocks are overvalued. ( Market Price >
Fair Price ) • Investors buy stocks where stocks are undervalued. ( Market Price < Fair Price )
• Fair price = Real worth ( actual mai stock ki kimat kitni hai ) • Market price = Price decided
by the market forces such as demand and supply. It is not the actual value. It's the price at
which people are willing to buy / sell the stock. • Active investing requires a lot of efforts. •
Here the transaction size / number is greater compared to passive investing.. • Objective
here is to earn more return than broader asset class

PASSIVE INVESTING - It involves investing in the stocks / securities which are part of Index,
it is called as Indexing strategy. • Objective is to earn the return of the asset class • Their
analysis is limited to broader asset class • Passive investing requires less effort • Transaction
size is less here

4.2 ROLE OF RESEARCH IN INVESTING ACADEMY

Annual Report (AR) of a company - Treasure of info here, but AR info must be carefully
checked (info in AR is not always adequate), because AR is published once a year, the info
becomes out-dated. Also info about economy is not covered in depth in AR. Therefore,
fundamental research analyst spend good amount of time in researching about economy,
industry, competitors and gaining reports from other firms. They also visit company's office,
communicate with customers, dealers, suppliers to give more accurate data. Note: Research
analyst should not be involved in Insider Trading. Price sensitive info about company which
can potentially fluctuate the share price of the company if made public. Research analyst
should avoid leaking this type of info to general public
Then what is MOSAIC ANALYSIS? • When analyst collect different info from different source
and the impact of any individual data from the collected info is negligible but if you combine
them all, it can create a significant impact. • Mosaic analysis is accepted. Eg : CEO talking
about some unpublished news/ info about some unpublished news/ info about the
company ❌ Insider Trading/ leaking of unpublished data. Employee talking about heavy
workload in office ✅ Not an insider trading data. Analyst must be careful to distinguish
between Mosaic Info and Insider Trading Info.

4.3. TECHNICAL ANALYSIS

It is based on the assumption that price discounts everything. • All the info that affect the
share like company fundamentals and etc are reflected in its stock price. • Technicians /
Chartists use price trends to forecast the direction and magnitude of stock price
movements. • They study historical market data and observe pattern based on price and
volume. • 3 main elements of technical analysis to understand price behaviour. History of
Past prices (history repeats itself), the Volume of trading (higher the vol, higher the chances
of price movement), Time duration is also a factor that influences prices (time is money)
• Technical analysis includes study of trends, support and resistance and past price
movements. • Technical analysis converts Price And Volume into charts like

• Charts are used to identify price trends, reversal, buying or selling point.
• Short terms investors heavily rely on technical signals because fundamentals rarely
changes price movement in short term.

4.4 FUNDAMENTAL ANALYSIS

It's focused on long term investing • Fair price plays an important role (as discussed earlier
about undervalued and overvalued stock) • Profits in investment not only comes from good
investment but also making the investment at right price. • These things also contradicts
EFFICIENT MARKET HYPOTHESIS (EMH). It states that share price reflect / certain all
information and excess returns to beats the market are near to impossible. • Fundamental
analysis includes the following questions: How macroeconomic trend impacts the industry?
How is the competition within the industry? Comparison of your company with peers. Is it
doing good or bad? What is the cost structure of the company & how it impacts profit under
different business environment? It's an aggregation of all types of cost that makes the
company's overall expenses. How strong is the financial position of the company? Is it
strong enough to withstand any crisis? What are the capabilities of management? Are they
executing right strategy for growth while avoiding any risk? Whether the right governance is
present or not that act in the best interest of the shareholders. All the above Qs can be put
within 3 subtopic: Economic/Industry/Company Analysis

4.5. QUANTITATIVE RESEARCH

Fundamental Analysis = Quantitative + Qualitative. But, Some analysts use quantitative
approach only for equity analysis using econometric analysis. Quantitative analyst looks for
financial and operational (like sales , revenue, gross profit margins, net profit margins, etc)
metric of the company. These metric can either be used independently or together with
other metrics. Time series (Analysing data over a period of time) and Regression
(Technique that relates dependent variable to one or more independent variable) of
historical data helps to determine future earnings. Quantitative analyst use complex
econometric approaches to refine their results. It uses economic theory combines with
maths and stats to quantify economic event. But pure econometric approaches is not ideal
in fundamental analysis as frequent changes in accounting standards and business models
makes data less useful in current market. Therefore quantitative research is not often used
for fundamentals.

4.6. BEHAVIOURAL APPROACHES TO EQUITY INVESTING

• Behavioural biases such as herd mentality, fear, greed, overconfidence ,etc prevent
investors from making profit. • Decision influenced by behavioural biases often leads to
bad/wrong choices
CHAPTER 5 ECONOMIC ANALYSIS
Economics: The core fundamental of economics is human action, behaviour, choices of
human & how we interact with each other to benefit ourselves as well as the society.
Tradeoffs is the cost of making one decision over another Let's understand the micro and
macro economics now

5.1. BASIC PRINCIPLES OF MICRO ECONOMICS

• It deals with the behaviour of individuals making decision about goods & services. • And
how economy is impacted by the behaviour of the individual consumers & producers. • It's
philosophy is that the prices & production of goods & services depends on consumer
demand. • It deals with Theory of Firm - for maximising profits, firms / individuals uses
different strategies.

5.2. BASIC PRINCIPLES OF MACRO ECONOMICS

• It deals with the overall economy including consumers, producers, businesses & govt
behaviour. • The factors include unemployment rate, GDP, Inflation, saving , investment
rates, etc. • These are affected by changes in public policies.

Decision of government = Fiscal policy & Action of Central Bank = Monetary Policy

5.3. INTRODUCTION TO VARIOUS MACROECONOMIC VARIABLES

• Government in Central Bank always want economic stability & high growth but economics
has its cycle of BOOMS & BUSTS. • Economics is a broad subject , so read about it from
additional sources as we are sticking to the Exam course only.
5.3.1. NATIONAL INCOME has a total market value of goods & services produced by a
country / nation
Use of NATIONAL ECONOMIC STATISTICS
1. Levels of economic welfare & growth - Reveals the overall performance of the country.
It includes per capital incomes which is more accurate measure of standard of living in a
country. High per capital income ➡ High Standard of living & vice – versa. 2. Distribution of
incomes among constituents of the economy - Different Methods of calculating national
income provides various insights of distribution of national incomes. Ex: Product method
shoes the service sector as the primary contributor to GDP with 60% contribution. 3.
Support to Fiscal & Monetary Policies - It helps policy makers to make correct decisions. It
acts as a valuable guide to them.
5.3.2. SAVINGS AND INVESTMENT - • Savings is not = Investment • Savings needs to be
channelised into productive avenues called investments. • Government focus on converting
savings into investments for economic growth

5.3.3. INFLATION - • Increase in price of goods & services which leads to decrease in
purchasing power over a course of times is called as inflation. • It is measured in 2 ways : ✅ .
Wholesale price Index (WPI) ✅ . Consumer Price Index (CPI)
• Interest and Inflation: When inflation is high, then RBI hikes interest rates to control high
inflation and, when inflation is low, then RBI Cuts down the interest rates.
5.3.4. UNEMPLOYMENT RATE - If unemployment rate = high, it shows slowdown in the
economy & vice – Versa
5.3.5. FDI & FPI

5.3.6. FISCAL POLICIES & ITS IMPACT ON ECONOMY - It determines the government
revenues and expenses plans and also the spending and taxation plan. It is an important
aspect because the change in fiscal policy impacts the overall economy. Fiscal deficit:
expenditure > Revenue. High fiscal rate + High borrowing results in high interest rates
which is dangerous. Current account balance = Receipts – Payments, Account Surplus:
Receipts > Payments. Account deficit: Receipts < Payments. High current account deficit
(CAD) causes Nations currency to weaken. Capital inflows in the form of FDI and portfolio
inflows balance the CAD and protect currency.
Government tries to balance between its inflow and outflow based on its actions, fiscal
policy is categorised as 1. Neutral fiscal policy - government income and expenditure are in
balance, no major changes in fiscal policy. 2. Expansionary Fiscal Policy - government
spending > income, it is used during recessions slow moving economy. 3. Contractionary
Fiscal Policy - government spending < income, It is used for debt repayment or asset buying.
5.3.7 MONETARY POLICIES AND THEIR IMPACT ON ECONOMY - It is controlled by the
Central Bank. It deals with money supply, inflation, interest rates for economic growth and
price stability. Expansionary Monetary Policy: - Increase money supply, Decrease Interest
rates which result in pushing the economy up. Contractionary Monetary Policy - Reduction/
slow increase in Money supply, Increase in Interest rates result in cooling down the heated
economy. Central bank controls - Repo Rate: Rate at which Central Bank (RBI) gives money/
loan to other commercial bank. Reverse Repo Rate: Rate at which other commercial banks
give money/loan to the central bank (RBI). Cash Reserve Ratio (CRR) - The amount of money
commercial banks needs to deposit in the central bank without gaining any interest is called
Cash Reserve. In percentage, it is called Cash Reserve Ratio. It takes minimum (%) of total
deposit. (This is done because banks apna sara cash loan k form mein customer ko na Dede
because of interest gains) Statutory Liquidity Ratio (SLR) - Minimum % of total deposits
which commercial banks have to hold in form of cash equivalents like gold & gov securities.
5.3.8. INTERNATIONAL TRADE, EXCHANGE RATE AND TRADE DEFICIT - It refers to the total
trade of country with all other countries. • Balance of Payment shows the transaction of a
country with rest of the world. It is divided into 2 accounts: Current account (transaction
like import / export ) Capital account ( transaction of capital flow like FDI, FII, etc ) • If
imports > exports, then current account deficit. • If imports < exports, then current account
surplus. • Both current and capital (surplus / deficit ) together makes the balance of
payment number of a country. • If current account is deficit then we need capital account is
surplus or reduce foreign currency reserves. • Exchange rates refer to the value of one unit
of a currency wrt other currencies.
5.3.9. GLOBALISATION - It is the ability of the individual or firm to produce & sell goods
anywhere in the world.
5.4 ROLE OF ECONOMIC ANALYSIS IN FUNDAMENTAL ANALYSIS - Fundamental focus area
is on how much the business is likely to grow or shrink in future. • Economic analysis focus
on the factors affecting external environment to understand the direction of economy f its
impact on businesses. • GDP growth, monetary & fiscal policies, interest rates, inflation and
other factors helps in economic analysis

5.5 SECULAR, CYCLICAL & SEASONAL TRENDS

5.5.1. SECULAR TREND - It is the long term change occurring in economy. • Caused by
change in tech, culture, demography or consumer preference. Ex: Digitalisation of office
results in increase in spending on digital products & paper per consumption decreases.
5.5.2. CYCLICAL TRENDS - Temporary trends that reverses over a period of time.

COMMODITY CYCLE - Commodity usually follows economic cycles. • During expansions,

prices increase of commodity. During recessions, prices decrease of commodity. • Some
times commodity cycle also behave independently from economic cycle. • When
commodity prices then production capacity and at some point when too many suppliers
increase capacity, gradually prices of commodity come down and thus cycle goes on
INVENTORY CYCLE - Short time cycles within commodity cycles. • It occurs from changes /
adjustments made in the inventories level made by suppliers and customers. • This causes
price fluctuations. • Inventory cycle helps in understanding the demand and prices for a
public input / output
ECONOMIC CYCLE - It refers to the process where an economy expands and contracts
repeatedly. The length of the phase are unpredictable. Economic cycle helps in getting the
info about sales, volume and prices.
5.5.3. SEASONAL TRENDS - Highly predictable fluctuations in production as well as in
consumption. • Eg : Agriculture contribution in GDP is high during harvest period. • Analyst
use seasonally adjusted growth rate or YOY consumption growth comparison to understand
the trend.

. 5.6. SOURCES OF INFORMATION FOR ECONOMIC ANALYSIS

• Government Websites. • Websites of regulators like RBI, SBI, Ministry of Finance (MOF),
etc. • Published economic research report. • Economic Survey.

CHAPTER 6 - INDUSTRY ANALYSIS

6.1. ROLE OF INDUSTRY ANALYSIS IN FUNDAMENTAL ANALYSIS
• Economic analysis helps us predict if businesses will grow or decline in future. • Industry
analysis looks at how different industries are affected by current economic conditions. •
Analysts study how companies in market may react and impact industry's prospects. Key
questions include • This analysis guides us in making informed decisions about a company's
potential growth or challenges in dynamic business landscape
6.2. CHALLENGES IN DEFINING THE INDUSTRY
Initial step in industry analysis is defining company's operating industry. Despite standard
systems like NIC in India or GICS/NAICS in the US, industry definitions may not fully capture
the essence of the industry.

.6.3. UNDERSTANDING INDUSTRY CYCLICALITY

Understanding Economic Cycles: - Economic cycles impact businesses differently. Some
industries are more affected than others.
6.4. MARKET SIZING AND TREND ANALYSIS
UNDERSTANDING INDUSTRY GROWTH

KEY ANALYSIS FACTORS - Assessing the potential vs. current market size is crucial in
industry study. Current market size measurement is complex, especially with unorganized
players or private companies lacking public information. Past trend analysis helps
understand industry evolution and secular trends aiding in growth predictions. Market sizing
often requires assumptions due to limited information availability.
MARKET SIZING APPROACHES
6.5. SECULAR TRENDS
Secular trends are like big, long-lasting changes in how things are made or what people buy.
For example, digital cameras came changed how we take photos, making traditional film
cameras less popular
DRIVING FACTORS – 1. Technological Advancement: Significant changes in how things are
made or used. e.g advanced farming techniques using tractors impacting traditional
methods. 2. Change in Income Levels: Economic growth leading to shifts in consumer
spending. In India, with rising incomes, e.g purchasing high-end smartphones instead of
budget-friendly. 3. Demographic Changes: Alterations in the age or composition of a
population influencing consumer choices. In India, the youth-dominated demographic may
lead to increased demand for trendy fashion and tech gadgets. 4. Culture, Tastes, and
Preferences: Evolving preferences and cultural influences shaping consumer behavior. For
instance, the growing popularity of plant-based diets reflects changing food preferences
influenced by global health trends. 5. Changes in Regulation or Government Policy:
Modifications in rules impacting industries. In India, environmental regulations promoting
sustainable practices may lead to increased demand for eco-friendly products and services.
6.5.1 VALUE MIGRATION - Due to secular trends value migration happens. Value migration
occurs when something makes one entity way better for a long time. The entity that gets
better sees more success and increased shareholder value, Others lose out in this shift. This
shift can happen between geographics, different businesses, or even among competitors in
the same industry. Ex: maybe through diagram. • people always bought groceries from local
stores. • Then, online grocery service came, making shopping easier. • More people started
using it, making it successful. • The local stores lost customers, but the online service
gained, showing value migration. 1. Geographic Migration: Shift of value between countries
due to secular trends. For example, advancements in renewable energy technologies
boosted Scandinavian nations' value in the energy sector, surpassing traditional oil-
producing regions. 2. Cross-Industry Migration: One industry gains, and another loses. Take
the rise of e-commerce, causing a decline in traditional brick-and-mortar retail and boosting
online retail giants like Amazon. 3. Migration Across Value Chain: Industries at different
ends of the value chain gain or lose. Consider the rise of electric vehicles impacting
traditional automakers but elevating companies involved in battery manufacturing. 4.
Migration Across Companies in the Same Industry: Disruptions create new advantages or
remove existing ones. Think about the surge in streaming services affecting traditional cable
TV companies, leading to a shift in value towards companies like Netflix. 5. Investment
Insights: Recognizing value migration helps analysts identify investment opportunities early
and exit declining businesses. For instance, anticipating the growth of sustainable
technologies can guide investors towards renewable energy stocks.
6.6. UNDERSTANDING THE INDUSTRY LANDSCAPE
Industry landscaping involves studying competitors, customers, suppliers, regulators, and
emerging technologies to grasp how they interact.
6.6.1 PORTER FORCES – 1. Horizontal Forces: Threat of Substitutes: Potential alternatives
impacting industry viability. Threat of New Entrants: New competitors entering the market.
Threat of Established Rivals: Intensity of competition among existing players. 2. Vertical
Forces: Bargaining Power of Suppliers: Influence of input providers. Bargaining Power of
Buyers: Influence of customers.
INDUSTRY RIVALS - • Many competitors, undifferentiated products, aggressive pricing. •
High competition leads to frequent low revenues and profitability phases. • Innovation and
brand-building crucial for sustained success • Price-sensitive subscribers easily shift to
lower-priced offerings from competitors. • Ex: food delivery industry - Zomato swiggy, etc
THREAT OF SUBSTITUTES - • High when substitutes offer equal or better experiences. •
Industry's ability to foresee changes and adapt defines success. • As technology evolves
existing products become irrelevant due to innovations. cheaper and more efficient
substitutes pose a higher threat to traditional businesses. • The rise of e-learning platforms
in India, Byju's & Unacademy, posed a significant threat to traditional classroom education.
BARGAINING POWER OF BUYERS - • High when many sellers offer similar products, giving
buyer choices. • Strengthens if products/services lack differentiation. • Increases with the
presence of close substitutes and low switching costs for customers. • Government buyers,
due to their size and influence, can have significant bargaining power. • In the Indian online
travel agency (OTA) sector, buyers wield substantial power. With multiple OTAs like
MakeMyTrip, Cleartrip, and Goibibo offering similar services, customers can easily compare
and switch platforms based on discounts and incentives.
BARGAINING POWER OF SUPPLIERS - • Limited suppliers with many buyers. • Strong
supplier bargaining power in regulated industries • Limited or no threat of substitutes. •
High switching costs for customers. • Ex: IRCTC is monopoly in online ticket booking
BARRIERS TO ENTRY ( THREAT OF NEW ENTRANTS ) - • High barriers create attractive
industries for investors. • Licensing, patents, capital requirements act as entry barriers. •
High entry barriers result in pricing power. • Example: Hindustan Aeronautics Limited (HAL)
faces formidable entry barriers in the defense aviation industry
6.6.2. PESTEL ( POLITICAL, ECONOMIC, SOCIO CULTURAL, TECH, LEGAL, ENVIRONMENTAL -
PESTLE analysis helps businesses make informed strategic decisions by evaluating external
factors crucial for success in different countries. Evaluating the impact and criticality of each
factor is crucial for businesses. 1. Political Factors: Governance stability, lack of corruption,
freedom of press, ease of doing business are key considerations for investor. 2. Economic
Factors: GDP growth, inflation rates, balance of payments, exchange rate stability influence
investment attractiveness. 3. Socio-Cultural Factors: Demographics, education, health,
social values impact consumer choices and business opportunities. 4. Technological Factors:
Technology-driven societies attract investors; availability of tech-savvy population is crucial.
5. Legal Factors: Consistent legal frameworks, transparency, and enforcement of laws
provide comfort to businesses and investors. 6. Environmental Factors: Policies on pollution
control, waste disposal, and environmental protection impact business operations.
6.6.3 BOSTON CONSULTING GROUP ANALYSIS (BCG) - assesses business segments on a
portfolio basis, considering market growth and cash generation.
Stars: High-growth segments with a significant market share, generating increasing cash
over time. Cash Cows: Segments with low growth but steady cash generation, requiring
minimal investment to maintain market share. e.g HUL, ITC Question Marks: Fast-growing
segments with low market share, needing strategic investments to increase share and
potentially become cash cows. Dogs: Segments with slow growth, intense competition, and
low cash generation.
6.6.4 INDUSTRY ANALYSIS : STRUCTURE, CONDUCT, PERFORMANCE (SCP) MODEL - The
SCP (Structure, Conduct, Performance) model provides a comprehensive framework for
understanding industries. Starting with an exploration of industry structure, it delves into
competitive intensity, player domination, and the balance between organised and
unorganised entities. Conduct analysis then scrutinises business behaviour, considering
factors like cyclicality, skill demands, and technological impact. Finally, performance analysis
assesses financial outcomes, with a focus on industries that generate high returns, offering
long-term wealth creation potential for shareholders and owners. Structure Analysis: •
Examines competitive intensity, market concentration, and relationships among players. •
Factors include the number of players, dominance, organised vs. unorganised presence, and
threat from substitutes. • Considers possibilities for backward/forward integration. Conduct
Analysis: • Industry behaviour, influenced by structure, impacts pricing and innovation. •
Conduct varies based on cyclical nature, skill requirements, talent availability, and
technology impact. • Takes into account seasonal or round-the-year business and global
factors. Performance Analysis: • Evaluates financial outcomes for investors/owners based
on industry structure and conduct. • Focuses on key financial ratios, emphasising businesses
with high return on capital/ equity. • Identifies these businesses as long-term wealth
creators for shareholders.

6.7. KEY INDUSTRY DRIVERS AND INDUSTRY KPIs

In industry analysis, key performance indicators (KPIs) tailored to each industry help us in
measuring the performance of industry or peers among industry, metrics suitable for one
may not apply to others. Analysts rely on industry companies and their annual reports to
identify key performance indicators (KPIs). OTHER FACTORS ON WHICH KPI CAN BE
DECIDED.
6.7.1. UNIT PRICING - Unit of pricing essentially refers to what a company considers as unit
while pricing a product.
6.7.2. KEY CONSTRAINING FACTOR - Industry constraints, which broadly fall into demand,
supply, and regulatory categories. Industry-specific challenges, such as limited market size
or capacity constraints, directly impact a company's performance. Analysts should focus on
KPIs aligned with these constraints. 1. Airlines and Transportation: • Unit Pricing: Revenue
derived from the quantity of passengers or cargo transported and the distance covered. •
Constraints: Capacity significantly influences service provision. • KPIs: A. Passenger/Cargo
Kilometer B. Price per Passenger/Cargo Kilometer C. Capacity and Utilization
Rate/Occupancy Rate. 2. Automobiles and Capital Goods: • Unit Pricing: Quantity of goods
sold • Constraint: sales constrained by capacity. • KPIs: A. Volume and Volume Growth B.
Average Realizations and Their Growth C. Capacity and Capacity Utilization Rate. 3.
Commercial Banks and NBFCs: • Unit Pricing: Value of loans, with interest rates as the
price. • Constraints: Dependence on deposits, regulatory capital, and liquid assets. • KPIs: A.
Net Interest Margin B. Capital Adequacy Ratios C. NPA Ratio, Growth Rates in Deposits and
Loans. 4. Consumer Goods: • Unit Pricing: Quantity of goods sold. • KPIs: A. Volume and Its
Growth B. Average Price and Its Growth. 5. IT Services/BPO/KPO: • Unit Pricing: Number of
headcount per project per month. • Constraints: Availability of skilled workforce. • KPIs: A.
Average No. of FTEs Billed B. Average Revenue per FTE C. Bench Strength and Attrition
Rates. 6. Media: • Unit Pricing: Print space, airtime, or online views/clicks. • Constraints:
Limited space for advertisements. • KPIs: A. Readership/Viewership B. Average Ad
Realization per Unit C. Content Acquisition Cost. 7. Retail: • Unit Pricing: Various, depending
on product types. • Constraints: Growth tied to expanding store network. • KPIs: A. Number
of Stores B. Same Stores' Sales Growth.

6.8. REGULATORY ENVIRONMENT AND FRAMEWORK

Understanding industry regulations is crucial as even minor changes can significantly affect
businesses. for e.g - the telecom companies after environmental changes
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6.9. TAXATION
6.9.1. DIRECT TAXES - Direct taxes are borne and paid by the same person. Income tax in
India, where individuals and businesses pay a percentage of their profits. Adjustments:Tax
laws may encourage or discourage certain practices. For instance, India promotes research
by allowing companies to claim 1.5 times the expenditure on scientific research. Corporate
Income Taxes in India: Income Tax:30% (25% for turnover below Rs 400 crores), Minimum
Alternate Tax (MAT):18.5% of book profits. if income tax is lower than 18.5% of book profit,
the extra tax paid can be claimed in future by MAT credits. Surcharge: Additional tax on
income tax/MAT, not shared with state governments. Cess: Additional levy for specific
purposes like health and education.
6.9.2. INDIRECT TAXES - indirect taxes are paid by one person but collected from another.
Example: GST is charged on the sale of goods or services, collected by the seller, but borne
by the end consumer. 1. Rates: GST rates vary from 0% to 28% for different goods and
services. 2. Excise Duty: Tax on production; removed for most goods with the introduction
of GST, but still applied on liquor, petrol, and diesel. 3. Value Added Tax (VAT): State-level
tax on the sale of products, applicable to liquor, petrol, and diesel. 4. Customs Duty: Tax on
imported products; rates vary based on the imported product.
6.9.3. OTHER TAXES - 1. Road Tax: Lifetime tax paid upfront by purchasers of new
automobiles, impacting automobile sales and related industries. 2. Stamp Duty: Paid during
the registration of documents, affecting real estate and investment firms. 3. Security
Transaction Tax (STT): Paid during the sale of securities, discouraging short-term trading
and impacting stock traders and broking firms.

6.10. SOURCES OF INFORMATION FOR INDUSTRY ANALYSIS

There are several sources of information on industry. Some of them are stated below: •
Industry reports from various sources - industry journals and media reports • Annual
Reports of companies in the Industry – 'Management Discussion and Analysis' section •
Associations/Trade Bodies publications • Relevant ministry website/publications.

CHAPTER 7 - COMPANY ANALYSIS - BUSINESS & GOVERNANCE

7.1. ROLE OF COMPANY ANALYSIS IN FUNDAMENTAL RESEARCH
A company's success depends upon macroeconomic, industry-specific factors, and its
company-specific factors. Key considerations while analyzing a company: • Define and
analyze the business model, Identify competitive advantages • Evaluate the capability to
exploit opportunities and manage threats. Analyze management and determine their vision
for short-term performance and long-term goals. • Ensure the company has a governance
structure prioritizing the company and shareholder's interests.

7.2. UNDERSTAND BUSINESS AND BUSINESS MODELS

The starting point of qualitative research on any business has to be questions such as: •
What does the company do and how does it do? • Who are the customers and why do
customers buy those products and services? • How does the company serve these
customers? Each sector has distinct evaluation parameters; eg: footfalls and same-store
sales are vital for retail, while banking relies on metrics like Net Interest Income (NII)/Net
Interest Margin (NIM). Each company operates uniquely. The efficiency in producing and
delivering products or services varies across businesses and significantly affects their
financial performance.

7.3. PRICING POWER AND SUSTAINABILITY OF THIS POWER

• Pricing power refers to a company's ability to determine and charge the price of its
products independently. It is important for the profit sustainability and growth of a
company. • Competition intensity in the industry, the price elasticity of the product, and
the level of commoditization of the product affects pricing power. • Company-specific
factors like leadership status, brand affinity, and cost efficiency help sustain pricing power.
7.4. COMPETITIVE ADVANTAGE / POINTS OF DIFFERENTIATION OVER THE COMPETITORS
The differentiating factors for a company compared to its competitors can be categorized
into three areas: 1) Differentiation in product features: • Incorporating better features and
improving the quality or functionality of the product creates a unique value proposition and
attracts more customers. • Strong R&D and constant introduction of new products and
innovations help in differentiation. 2) Competitive pricing: • A competitive strategy is
pricing their products attractively, particularly when products seem similar to customers. •
Lower prices attract customers but sustaining low prices is difficult. 3) Better execution: •
Companies that communicate better with their customers or execute a better sales strategy
can do better than their competitors.

7.5. SWOT ANALYSIS

SWOT analysis helps evaluate business fundamentals by focusing on strengths, weaknesses,
opportunities, and threats. Analysts use SWOT by first finding strengths and weaknesses,
then looking at opportunities and threats. This order fits well for external observers like
equity analysts. Strengths are the internal advantages that give a company a competitive
edge. • The strengths include a strong financial position, valuable intellectual properties, a
diverse customer base, cost-effectiveness, high margins, support from a parent company,
and a proven track record. Apple AirPods are tiny, wireless earbuds. • They have great
sound quality and work well with Apple devices like iPhones and iPads. Weakness refers to
internal issues that make the company vulnerable to external events. • Weaknesses include
a weak financial position, high fixed costs, low margins, heavy customer concentration, legal
cases diverting focus, and insufficient experience in executing strategies. AirPods can be
expensive, and not everyone can afford them. • They might not work as well with non-Apple
devices, like Android phones. Opportunities are the external factors or situations that can
be advantageous for a company's growth. • These opportunities include market trends,
technological advancements, changing consumer preferences, industry developments, new
partnerships, etc. Apple can make even better AirPods with new features, like longer battery
life. • They can make AirPods in different colors or designs to make them more fun. Threats
are external challenges that can negatively impact a company's performance. • Threats can
include market competition, economic downturns, regulatory changes, technological
disruptions, shifting consumer preferences, etc. Other companies make wireless earbuds
too, and they might have similar features. • If something better than AirPods comes along,
people might stop buying them. • Sometimes, people worry about radiation from wireless
devices like AirPods.

7.6. QUALITY OF MANAGEMENT & GOVERNANCE STRUCTURE

Analysts should scrutinize the qualifications of independent directors since companies often
appoint individuals with personal ties rather than relevant expertise. Evaluating their
qualifications, experiences, attendance, and contributions is important.
A) Evaluating Management Competency: Analyzing the capabilities of top leaders of a
company like the CEO, CFO, and others is tough for analysts. Analysts can ask the following
questions to analyze management capabilities: 1) Does the top management have relevant
educational qualifications and experience? 2) Do they have a track record of successful
performance and provide a long-term vision? 3) Can they execute current strategies
effectively and ensure regulatory compliance? B) Evaluating Corporate Governance: •
Corporate governance is like a set of rules that a company follows to make sure all the
stakeholders are treated fairly. In India, SEBI's Clause 49 sets basic rules that companies
must meet to run things properly. Strong governance helps prevent agency risks. • Analysts
evaluate corporate governance by analyzing board compositions, the separation of roles
between Chairman and CEO, nomination committees, auditor fees, audit committee
composition, related party transactions, and independent director remuneration. C)
Promoter holdings: • Promoters are individuals involved in a company's initial founding or
controlling shareholders. • Promoters are likely to have a higher level of control over the
management. This increases the likelihood of management acting in the best interest of
shareholders. • Promoters often pledge shares to raise funds, a usual practice not directly
tied to governance concerns.

7.7. RISK IN THE BUSINESS

• Every business has risks involved from its operations to execution. These risks can be
known or unknown. • Analysts should focus on evaluating these risks in various business
dimensions. • Promoters who claim there are no risks might need more awareness about
potential problems. Avoiding such promoters is important.

7.8. HISTORY OF CREDIT RATING

• Credit ratings evaluate a borrower's ability to repay debts and are provided by credit
rating agencies for short and long-term debts. • Checking a company's past credit ratings
tells us how well its management responded to external feedback and tackled important
issues highlighted by credit rating agencies.

7.9. ESG FRAMEWORK FOR COMPANY ANALYSIS

• The ESG (Environment, Social, Governance) framework evaluates companies based on
their environmental impact, social initiatives, and governance standards. • It helps investors
prioritize sustainability and ethical practices alongside financial returns. • Companies with
lower environmental impact, positive social contributions, and strong governance rank
higher. • The framework offers financial benefits like reduced regulatory risks, increased
brand value, cost savings, and lower capital costs. • SEBI's proposed regulations aim to
enhance ESG disclosures among listed entities, providing investors with better information.
• Overall, the ESG framework serves as a guideline for investors to assess a company's
sustainability, ethical practices, and long-term viability beyond just financial metrics.

7.10. SOURCES OF INFORMATION FOR ANALYSIS

• Annual/Quarterly reports, Conference call transcripts, and Investor presentations •
Management interviews • Ministry of Corporate Affairs website • Research reports from
credit rating agencies and other sources • Print media reports • Discussions with suppliers,
vendors, consumers, and competitors • BRSR Report for ESG disclosures.

CHAPTER 8 - COMPANY ANALYSIS - FINANCIAL ANALYSIS

INTRODUCTION TO FINANCIAL STATEMENTS
As per IndAS1, financial statements of listed companies need to includes: Balance Sheet,
Profit and Loss Account Statement, Statement of changes in shareholder's equity, Cash
flow statement, Detailed Notes. Companies have to provide comparable information for at
least one prior period. 1. Standalone financial statements represent financial performance
of an individual company without considering the financials of its subsidiaries or related
entities. 2. Consolidated financial statements have a combined financial performance group
of entities incorporating the financials of the parent company and its subsidiaries.
BALANCE SHEET is a financial statement that shows a company's financial position at a
particular point in time. • The balance sheet follows the fundamental accounting equation:
Assets = Liabilities + Shareholder's Equity • It shows the company's financial health,
liquidity, solvency, and ability to meet its short-term and long-term debt. BALANCE SHEET
ITEMS - ASSETS: • Assets are the B/S items that are expected to provide future benefits. •
Two types: 1) Non-Current Assets: - Noncurrent assets are a company's long-term
investments that have a useful life of more than one year. Ex: Property, Plant, and
Equipment (PPE), under-construction assets, goodwill from business acquisitions, intangible
assets like copyrights and patents, joint venture investments, and long-term financial assets.
2. Current Assets: • Current assets are resources used for daily operations and expenses
and can be convertible to cash within a year. • Ex: Inventory which is goods for sale or
production, Cash and cash equivalents, Receivables from the sale of goods, other current
such as prepaid expenses, and short term investments.
LIABILITIES: • A liability is a financial obligation or debt that a company owes to others. •
Two types: 1) Non-Current Liabilities: • Noncurrent liabilities are a company's long-term
debt that has been fulfilled after one year. • A. Long-Term Debt: Debt repayable after a year
including loans and bonds. B. Lease liability: Amount owed from leasing assets over a year.
C. Derivative instruments: Derivative contract losses that are settled after a year. D. Other
non-current liabilities: Obligations that do not fall into the other categories. 2) Current
Liabilities: • Current liabilities are a company's financial obligations or debts that must be
paid within a year. • A. Payables: Owed to suppliers for goods/services. B. Short-term debt:
Repayable within a year. C. Short-term provisions: Expected within a year. D. Current
portion of long-term liability: Long-term debt due in a year. E. Deferred revenue: Earned
but not received revenue. F. Advanced from customers: Prepayments by customers. G.
Unpaid & accrued expenses: Incurred but unpaid expenses.
EQUITY • Equity is the ownership stake held by shareholders after deducting all the
liabilities from total assets. • Equity = Assets - Liability • Components of Equity: Share
capital: Face value of the company's issued shares. Share premium: Amount paid over share
face value. Retained earnings: Total undistributed company earnings. General reserve:
reserved funds for future use. Capital and revaluation reserve: Surplus from asset value
increase, not for dividends. Minority interest: Subsidiary equity owned by non-parent
shareholders, seen in consolidated statements only.
BALANCE SHEET METRIC - The balance sheet may not reflect true value of assets due to
accounting conventions. Analysts need to calculate additional following metrics: 1) Total
Debt: • Total debt = Long-term debt + Current portion of long-term debt + Short-term debt
+ Financial lease obligations + Accrued interest. 2) Working Capital: • Represents funds
available for day-to-day operations. • WC= Current Assets - Current Liabilities. 3) Core
Working Capital: • It is an adjusted working capital calculated using assets & liabilities from
core operations only. • Core WC = Inventory + Trade Receivables - Trade Payables.
PROFIT & LOSS ACCOUNT (P/L) - • The Profit and Loss (P/L) statements provide a company's
financial performance within a specific period. • In India, the format is prescribed by the
Companies Act, 2013 under Schedule III. However, under IndAS 1, it should include other
comprehensive income. P/L LINE ITEMS: 1) Revenue: Revenue is the income earned from
selling goods and services from core operations or related sources. 2) Other income: Other
income covers non-operating earnings like investment returns or asset sales. 3) Expenses:
Expenses include operational costs like employee expenses, depreciation and amortization,
raw materials costs, finance costs, stock-in-trade purchases, and changes in finished goods
inventory. 4) Income from equity-accounted entities: This refers to the company's share of
profit of an entity which is accounted under the equity method. 5) Exceptional items / non-
recurring items: These are unusual income or expenses not part of regular business
operations, like losses due to natural disasters or one-time regulatory fees. 6) Tax: Tax
expenses in an Indian company include Current tax, Minimum Alternate Tax (MAT), and
Deferred tax. 7) Minority interest: This refers to the amount of profits of a subsidiary
company that belongs to external shareholders of the subsidiary. 8) Earnings per share
(EPS): EPS is the net income divided by the average number of outstanding shares. There
are two types of EPS Basic EPS and Diluted EPS. 9) Other comprehensive income (OCI):
Income or expenses that are excluded from the profit and loss account. KEY METRIC FROM
P/L : 1) Gross Profit: It is calculated by reducing the cost of goods sold from revenue and
refers to the surplus that a company can use to meet its fixed expenses. 2) Earnings Before
Interest Tax Depreciation and Amortization (EBITDA): It measures a company's earnings
from its core operations before considering the impact of interest expenses, taxes,
depreciation, and amortization. 3) Earnings Before Interest and Taxes (EBIT): It reflects a
company's profitability from its core operations by excluding the impact of interest expense
and income tax from its earnings. 4) Adjusted profit after tax: It represents the company's
net profit adjusted for exceptional or non-recurring items. 5) Effective tax rate: It is the
actual rate of tax a company pays on its taxable income.
STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY - It tracks how a company's
ownership has changed over time due to various transactions such as share issuances,
dividends, and profits.
BASICS OF CASH FLOW - Cash flow refers to the movement of money into and out of a
business. 1. Operating cash flows: Day-to-day cash from business activities. 2. Investing
cash flows: Cash from buying/selling assets. 3. Financing cash flows: Cash from
raising/paying off capital or debts.
NOTES TO ACCOUNTS - It provides details of the accounting policies used by the company
and additional information about the items reported in financial statements. Few things to
look for in notes to accounts: 1. Accounting policies: Details how a company treats items in
financial statements. 2. Contingent liabilities: Potential liabilities arising from uncertain
future events. 3. Off-Balance Sheet Items: Assets or liabilities not on the balance sheet, like
operating leases or derivative contracts.
IMPORTANT POINTS TO KEEP IN MIND WHILE LOOKING AT FINANCIALS • Understanding
terminology makes numbers more understandable. • Numbers can be manipulated with
assumptions or creative accounting. • Changes in accounting periods can confuse
comparisons. • One-off items can significantly impact profits, altering analysis. • Consistent
performance over time is ideal for investors.
READING AUDIT REPORTS TO UNDERSTAND THE QUALITY OF ACCOUNTING • Auditors
verify accuracy but can't guarantee it due to high transaction volume. • They assess control
systems and adherence to accounting standards. • Reports can be clean (no issues),
disclaimer (missing info), or qualified (lack of accuracy). • Analysts must check the auditor's
report for concerns while reviewing financial statements.
FINANCIAL STATEMENT ANALYSIS USING RATIOS - Commonly used ratios:
1) Profitability Ratios - A. EBITDA MARGINS: • This ratio is useful in finding out profitability
of the company purely based on its operations and direct costs. • EBITDA Margin =
EBITDA / Net Sales. B. PAT MARGINS: • Measures a company's ability to convert sales into
profits after accounting for all expenses and taxes. • PAT Margin = PAT/ Net Sales.
2) Return Ratios – A. RETURN ON EQUITY (ROE): • Measures company's efficiency in
generating profits from shareholders' equity. • ROE = PAT/ Net-worth (Networth = Equity
Capital + Reserves & Surplus). B. RETURN ON CAPITAL EMPLOYED (ROCE): • Measures a
company's profitability & efficiency in utilizing its capital. • ROCE = EBIT/ Capital Employed
(Capital Employed = Total Assets – Current Liabilities or Total Equity + Total Debt).
3) Leverage Ratios – A. DEBT TO EQUITY (D/E RATIO): • measures a company's leverage by
comparing its total debt to its shareholders' equity. • D/E Ratio = Long-Term Debt / Net-
worth INTEREST. B. COVERAGE RATIO: • measures a company's ability to pay interest from
its earnings. • ICR = EBIT / Interest Expense.
4) Liquidity Ratios – A. CURRENT RATIO: • measures the company's liquidity. • Current
Ratio = Current Assets / Current Liabilities. B. QUICK RATIO: • assesses a company's ability
to cover short-term liabilities with its most liquid assets, excluding inventory. • Quick Ratio
= (Current Assets – Inventories) / current liabilities.
5) Efficiency Ratios: A. ACCOUNTS RECEIVABLE TURNOVER :• This indicates how fast a
company converts its sales into cash. • Accounts Receivable Turnover = Revenue /
Accounts Receivable. B. ACCOUNTS PAYABLE TURNOVER: • This indicates how much of a
company's purchases are on credit.. Accounts Payable Turnover = Purchases / Accounts
Payable. C. ASSET TURNOVER: • This indicates how many times the assets are put to use to
generate revenues for the business. Asset Turnover = Net Sales / Total Assets. D.
INVENTORY TURNOVER: • This ratio gives the number of times inventory is rolled over by a
company. Inventory Turnover = Sales / Inventory.
DUPONT ANALYSIS - It is a financial technique that spits a company's return on equity (ROE)
into various components to understand its drivers of profitability.

FORECASTING USING RATIO ANALYSIS - • Analyzing ratios helps understand financial

metrics' behavior and forecast the future but past performance doesn't guarantee future
results. • Analysts need to adjust forecasts based on changing scenarios.
PEER COMPARISIONS - Peer comparison assesses a company's financials against its industry
rivals. • Ratios like profit margins, asset turnover, and leverage are used. • It aids investors
in gauging a company's performance and spotting investment chances.
OTHER ASPECTS TO STUDY FROM FINANCIAL REPORTS - • Equity History: Analyze fund-
raising, impact on shareholder value, and dilution via equity models. • Dividend & Earnings:
Check dividend policy, profit distribution, yield, and stability for investment insight •
Corporate Actions: Track dividends, bonuses, splits, and rights issues affecting share prices.
• Insider Trades: Monitor insider buying/selling; insider buying often signals future profits.

CHAPTER 9 - CORPORATE ACTIONS

9.1 PHILOSOPHY OF CORPORATE ACTIONS
• A business has a lot of activities but apart from some of that have direct implications for
its stakeholders. • A public company has to protect the right of minority investors. • All
companies need to follow the requirements for their corporate actions prescribed by these
regulations. • All the corporate actions and benefit are applicable to all investors who
appear in the register of member. • To determine the eligible investors, company
announces a record date or book closure period. • Corporate actions are protected/
regulated by the following provisions: 1. Provisions of the Companies Act, 2013. 2. Relevant
regulations of SEBI. 3. Terms of the listing agreement entered into with the stock exchange.
9.2 DIVIDEND
• Post tax profit belong to the shareholders. • Returning profit to the shareholders in equal
proportion is called as Dividend. Usually companies do both: - Retain for investment (+),
Declaring a dividend. • If company declare dividend during the financial year , then it's
called as " Interim Dividend”. If company declare dividend at the end the financial year ,
then it's called as " Final Dividend". • Historic dividend tracks record of a company may be
seen from Payout Ratio (Company apne total profits se kitna hissa shareholders ko
distribute kar Rahi hai). Payout ratio = Dividend Per Share (DPS)/ Earning Per Share (EPS). •
Entire dividend is taxable in the hands of shareholders. Company deducts 10% tax on
dividend income > ₹5000 under Section 194 of the IT Act. • SEBI mandated that the dividend
declaration should be in the rupees per share basis as against previous practice of declaring
dividend as a percentage of face value.

• Example : 50% dividend declared by 2 companies "A" & "B" (for face value ). A's face value
= ₹2 B's f ace value = ₹ 10 50% of ₹2 = ₹1 = Dividend by A 50% of ₹10 = ₹5 = Dividend by B E
This method creates confusion in investors. Therefore it is now required to declare dividend
as :—-Company A declared dividend of ₹1 per share &-Company B declared dividend of ₹5
per share.

9.3 RIGHT ISSUES

• When a company needs additional money , it has 2 choices : 1. DEBT (but interest dena
padega , so this is cancelled) 2. Equity (we are doing this) to raise money from existing
shareholders by issuing fresh share for investors. • So in case of fresh issue the holding of
existing shareholders gets diluted. • Ex: If a company has 10 lakh shares of ₹10 - Issues &
Paid up capital = ₹10 Lakh * 10 = 1 crore. In this case if a person holds 1lakh share then his
holding is 10% of 10 lakh. If a company issues another 10 Lakh fresh shares, then No of
shareholders = 10 lakh (previous) + 10 lakh (new) = 20 lakh Issued & Paid Up capital = 20
lakh * 10 = 2 crore. But after fresh issue the same investor holding becomes 5% of 20 lakh
(I.e ., 1 lakh).
HOLDING GET DILUTED:. • To prevent this, companies require to raise money by first
offering its existing shareholders & they only it can issue fresh shares and this is called as
right issue. • Subscribing to right issue is a choice & not compulsion. • One can also transfer
their right to another person for consideration or without consideration this is called
renunciation of rights. • Shares under right issues are generally offered at a discounted
price to the Current Makret Price. • No of discounter share & shareholder can buy depends
on the number of shares held by him / her. • Ex: Company issues 1 for 2 right issues at a
discounted price, So if an investor has 10 shares, the he can buy 5 more shares at
discounted price. • Companies allow applying for additional shares also because some
shareholders neither apply for right issue nor transfer it. • Right issue must follow all SEBI's
regulations. • Record date shall be fixed to determine the eligibility of rights. • The
company must issue a letter of offering giving details of the issue. The draft letter must be
filled with SEBI. • An abridged letter of offer must be given to investors, 3 days before
opening of the issue. • A right issue is open for a period of 15 days (min) and 30 days
(max).
9.4 BONUS SHARES
• Also known as Equity Dividend alternative of cash dividend. • These are issued to the
existing shareholders without consideration from them. • No change in the value of
investor’s holdings. It is to influence the psychology of investors without any economic
impact. • Reserves lying in the books of the company gets transferred to another head I.e.,
paid up/ subscribed capital. Bonus is given from free reserves. • 1:3 bonus represents for
every 3 existing / holding share, the investor gets 1 bonus share (3 ke badle 1). • Company
can't issue bonus: 1. From revaluation of assets. 2. If it's defaulted on interest payment or
principal on any debt security. • Issuance of bonds is termed as Capitalization of reserves. •
No economic changes from bonus impacts the earning per share , book value per share,
market price per share etc ( per share data) immediate deteriorates. • No negative impact
to the shareholder. • Eg : 1:1 Bonus

9.5. STOCK SPLIT

• In this, the face value of shares is reduced in a defined ratio. • 1:5 means splitting of 1
share into 5 shares. But the face value of share will also go down to 1/5th of the original
face value. • Example

• No change in companies share capital. • It is done when share prices of a company in the
secondary market becomes very high or unaffordable for many investors. • No economic
benefit from the split, it is also a book entry only. • It influence the psychology of investors
but per share data like EPS, BVPS, etc immediately deteriorates. • No negative impact on
shareholders. • Ex: 1 : 10 stock split
9.6 SHARE CONSOLIDATION
• Reverse of stock split. • 5 : 1 , means consolidation of 5 shares into 1 shares. • Face value
will increase but the No of outstanding share decrease • example : 5 : 1

• It is done when share price of a company in the secondary market is very low. • It affects
the perception of investors as a bad stock. • No economic benefit from consolidation , it is
also a book entry. • It influences the psychology of investors but per share data like earning
per share, book value per share, market price per share, etc immediately improves. • No
positive impact on shareholders. • Example : 5 : 1 consolidation

• No change in Investment amount

9.7 MERGER & ACQUISITIONS

• These actions results in change in the ownership structure of the involved companies. •
In merger, acquirer buy up the shares of the target & is absorbed into the acquiring
company. Both the companies will work together as a single entity (jointly). Ex:
Vodaphone , Idea . • In acquisitions or takeover, the acquirer buys all or a substaincial
portion of stock of target company. Acquirer becomes the decision maker for the target
company. • In consolidation, companies combine together to form a new company & the
merged companies cease to exit. • Reasons for M&A 1. Synergy: As each company have
different strengths when combined may result in great economic benefits. 2. Results in
Increased revenue & market share. 3. Companies in different geographical area give
competitive advantage (diversification). 4. Taxation: Profitability company acquires a loss
making company for tax saving. • In these corporate actions , the shareholding pattern may
change and public shareholders can exit from the company. • These corporate actions need
to follow SEBI rules.

9.8 DEMERGER / SPIN OFF

• In this, a company divides into different separate companies. • The shareholders receive
shares in the new company in proportion to their shares held in the parent company. • Ex:
In April 2018, Adani Enterprises spun off its renewable energy business info as Adani Green
Energy Limited.

9.9 SCHEME OF ARRANGEMENT

• When companies fail to fulfil its commitment to its creditors (from whom the company
has borrowed the money) or fail to redeem preference shareholders (company is not been
able to generate profits) then under this situation , company and the creditors or
performance shareholder may enter into a scheme of arrangement to solve the issue.
(preference shareholders are shareholders with no voting rights & no right to participate in
management but the rate of dividend is fixed) • It is a court monitored settlement process.
It involves reorganisation of share capital of the company. • Existing shareholders can give
up their part of ownership in favour of creditors or consolidation or division of class of
shares. • It is sought by the company or its creditors / members & shall approach National
company Law Tribunal (NCLT) for the same, under section 230 of Companies Act, 2013.

9.10 LOAN RESTRUCTURING

• When a company is not been able to pay off its debt due to any situation like financial
distress then they can restructure the debt by modifying one or more terms of loans. • This
includes loan amount, rate of interest, mode of repayments, etc. • It is advantageous as
borrower is given a way to repay the loan & not be declared defaulter. • And the lender
gets the loan amount that would otherwise have to be written off as a bad debt. • For loan
restructuring, current and future financial position of the company must be analysed to
create a plan to generate revenue to meet the financial needs.

9.11 BUYBACK OF SHARES

• If company has excess cash, then it can be used to : Expand business, Reduce liabilities,
Distribute to shareholders • Distribution to shareholder can be done with Dividend or
buyback. • BUYBACK means shareholder can sell their stocks back to the business /
company itself. • It enhances the Earning Per share ( EPS) & Book Value Per share (BVPS). •
Motives of BUYBACK - Gives boost to the stock which is seem as undervalued. Lack of
profitable investment opportunities for excess cash. It boost the confidence for the business
and act as defence against a takeover. To reduce the number of shares (equity). It reduces
promoters holding being diluted on account of say ESOPs. • BUYBACK is done only with the
available reserves & surplus. Company should not have defaulted on its payment of
interest or principal for a BUYBACK. • BUYBACK can be done using the tender method
(offering existing shareholder on proportionate basis) through book building or stock
exchange or from lot trader. • It results in reduction of outstanding shares, no change in
P/L, increased EPS, higher dividend.

9.12 DELISTING AND RELISTING OF SHARES

• Delisting - Permanent removal of shares of a company from being listed on stock
exchange. • 2 types of delisting: 1. Compulsory delisting: When company fail to follow the
rules & regulations of the listing agreement. 2. Voluntary Delisting: The company itself
chooses to get delisted and go private. • Motives - Regulatory reporting complexities &
compliance overhead to M&A. Freedom to execute other strategies for business. •
According to SEBI, promoter group has to provide exit to all shareholders, they should invite
bid to acquire through reverse book building process. • Promoter need to specify flood price
and shareholder specify the selling price. Promoters can accept, reject or negotiate /
counter offer to the public. • In voluntary delisting promoter must have holdings of more
than 90%. At least 25% of shareholders should participate in reverse book building process.
• After delisting if shares are still held by public then also they have the right to sell their
share to promoters. Promoters can buy those shares at exit price within 1 year.
• Relisting - Listing of share after delisitng is called as relisitng. A company can resist: 5 years
after voluntary delisting & 10 years after compulsory delisitng.

9.13 SHARE SWAP

• Exchange one set of shares with another is share swap. • It is used during M&A. •
Acquiring company uses stock as cash to purchase the business. • Acquired company
receives amount of shares from the acquiring company. • Before swaps, both the
companies must accurately value their companies for a fair swap ratio.

CHAPTER 10 - VALUATION PRINCIPLES

10.1 WHAT IS THE DIFFERENCE BETWEEN PRICE & VALUE
Price is the market-set cost of an asset, influenced by market dynamics and emotions.
Value, on the other hand, is the intrinsic worth determined by fundamental factors
Valuation of an asset is a nuanced process due to the lack of a precise formula. The
uncertainties in input factors may lead to subjective values.

10.2 WHY VALUATION IS REQUIRED

• Buying or selling a business for investment purposes. • Facilitating mergers and
acquisitions. • Establishing a general sense of a business's value for owners. • Ensuring fair
treatment of stakeholders in equity swap situations.
10.3 SOURCES OF VALUE IN BUSINESS
• Warren Buffet identifies earnings and assets as the sole contributors to a business's
value. • Financial and real assets generate cash flows through periodic earnings and final
inflows upon sale. • Bonds produce earnings via coupons and generate one-time cash
flows upon redemption or sale. • Equities yield earnings in the form of dividends and offer
one-time cash flows upon sale. • Real estate provides rental income and appreciates in
capital value upon sale.

10.4 APPROACHES TO VALUATION

1. COST BASED VALUATION - Imagine you have the option to either buy a ready-made item
or build it from scratch. Cost based valuation gives you that amount. Not the go-to choice
for regular stock investors who don't want to run the business. It's more for one planning to
stick around for the long run.
2. CASHFLOW BASED VALUATION - This method assesses an asset's value by examining the
cash it produces. Investors estimate its worth by discounting the future cash flows at a rate
reflecting the expected return. A. Risk Neutral Valuation: Adjusting cash flows at a risk-free
rate, commonly used in valuing insurance companies. B. Real World Valuation: Discounting
cash flow at risk-free rate plus a suitable risk premium to address cash flow uncertainties.
3. SELLING PRICE BASED VALUATION (RELATIVE VALUATION) - Valuing an asset based on
the prices of similar assets, utilising metrics like P/E, P/B, EV/EBITDA.

10.5 DISCOUNTED CASH FLOW MODEL FOR BUSINESS VALUATION

The underlying principle is the time value of money, recognising that a rupee today is worth
more than the same rupee in the future due to factors like inflation and opportunity cost.
Cash Flows (CF): Future cash inflows and outflows generated by the investment. Discount
Rate (r): Represents the cost of capital or required rate of return. Terminal Value (TV): An
estimate of the investment's value at the end of the projected period. The DCF formula is a
sum of the present values of all projected cash flows and the terminal value discounted to
the present.

Example:

STEPS
• Estimate the future cash flows the investment is expected to generate. • Determine an
appropriate discount rate, often the cost of capital or a required rate of return. • Calculate
Present Value: Discount each future cash flow and the terminal value to its present value
using the chosen discount rate. • Sum Up: Add up all the present values to obtain the DCF
value. Conceptually, discounted cash flow (DCF) approach to valuation is the most
appropriate approach for valuations when three things are known with certainty: • Stream
of future cash flows • Timings of these cash flows, and • Expected rate of return by the
investors (called discount rate). There are three different approaches to DCF models.
A. DIVIDEND DISCOUNT MODEL: • DDM values a company by calculating the present value
of its future dividends, discounted at the cost of capital. • Best suited for mature companies
in stable industries that consistently pay significant dividends. • Unlike bonds, stocks have
indefinite life, and dividends aren't contractually guaranteed. • Requires estimates and
assumptions due to the non-contractual nature of dividends. Gordon Growth Model
(Perpetual Growth Model) Formula: - Evaluates the value of a dividend-paying company
with perpetual, constant growth in dividends. or Calculates the fair value of company
shares based on its expected future dividends, accounting for perpetual growth. Formula:
P =D1/k−g, P -Fair value of shares. D1 - Expected dividend at the end of the year. k - Cost of
equity. g - Constant growth rate of dividends. Example Calculation:

B. FREE CASH FLOW TO EQUITY: FCFE is introduced to address limitations of DDM, allowing
valuation for companies not paying dividends. • FCFE models suit high-growth phase
companies, yet assuming a constant growth rate may be inaccurate if it's exceptionally high
and unsustainable. • For companies experiencing extraordinary growth, a two-stage
valuation is suggested. This involves evaluating the present value of FCFE during the high-
growth phase and the perpetual FCFE stream post this period, termed as the terminal value.
• Executing a two-stage valuation requires determining the high-growth phase's duration,
estimating FCFE for each period, and applying the Gordon growth model. It's crucial to note
that the terminal value requires additional discounting to its present value.
C. FREE CASH FLOW TO FIRM - FCFF model is introduced due to challenges in estimating net
borrowings in FCFE models, especially for companies without clear debt policies. FORMULA:
EBIT × (1-Tax rate) + Depreciation − Increase (Decrease) in working capital − Capital
Expenditure + Non-cash charges. CALCULATION: • similar to FCFE model in FCFF model,
Future cash flow to Firmare discounted at rate- weighted average cost of capital • WACC is
used for FCFF valuation, reflecting both debt and equity costs. Cost of equity is calculated
using CAPM. • Terminal value often uses the perpetual growth model or considers the
expected sale value of the business.

10.6 RELATIVE VALUATION

• Relative valuation is a method to assess a business's value by comparing its price to
relevant financial metrics like earnings and assets. • Relative valuation aims to gauge if a
business is priced attractively or expensively in comparison to its peers or industry
benchmarks. • Analysts use this approach to make buy, sell, or hold recommendations by
evaluating what investors pay (price) against what they receive in terms of earnings and
assets.

10.7.1 PRICE TO DIVIDEND YEILD - Dividend Yield is a measure comparing a company's

annual dividends to its current stock price. Formula → Dividend Yield = Div Per Share /
Current Stock Price • Investors evaluate a stock's Dividend Yield against the broader market
or industry to assess its competitiveness. • Income-focused investors, a higher Dividend
Yield indicates a better potential for generating income OR means stock price is lucrative. •
Low Dividend Yield might signal risk that stock is trading at high prices.

10.7.2 PRICE TO EARNING RATIO (P/E) - • P/E Ratio, or Price-to-Earnings Ratio, is calculated
by dividing the current stock price by the Earnings Per Share (EPS). • It signifies the amount
an investor invests to gain 1 unit of profit and can be based on historical or forward-
looking EPS. • A higher P/E compared to peers and the market suggests an expensive
stock, while a lower P/E may indicate an undervalued stock. • Companies with high growth
potential may have a premium P/E, and vice versa. Analysts should factor in future earnings
estimates and assess the appropriate period of reference for EPS.
10.7.3 PEG RATIO - • PEG Ratio helps investors assess if a stock is overvalued, undervalued,
or priced just right by factoring in the expected growth in earnings. • Growth adjusted Price
to Earnings Ratio = [Current Price of Stock / Earnings Per Share] / Growth rate. • A PEG ratio
less than 1 suggests that the stock might be undervalued, while a ratio greater than 1
could indicate overvaluation. • If two companies have the same P/E ratio but different
growth outlooks, the PEG ratio provides a more nuanced view. For instance, if Company A
has a P/E of 12 and is expected to grow at 10%, its PEG ratio is 12/10=1.2. Meanwhile,
Company B with a P/E of 12 and a growth rate of 15% has a PEG ratio of 12/15=0.8. In this
scenario, Company B appears more attractively priced when considering growth. • The
concept was introduced by investor Peter Lynch, emphasizing the need for caution as high
growth may not be sustained indefinitely.

10.7.4 EV/EBITDA - • EV/EBITDA is suitable when assessing a company from the viewpoint
of an acquirer or as a potential acquisition target. • Both EV/EBIT and EV/EBITDA are
neutral to a company's capital structure, providing a fair comparison. • In capital-intensive
industries, EV/EBITDA is preferable due to potential discrepancies arising from historical
asset costs and depreciation methods. • Since it accounts for the entire capital structure,
EV/EBITDA is less impacted by variations in the company's debt and equity mix.

10.7.5 EV/SALES - • In situations of negative or extremely low profits, traditional multiples

like PE or EV/ EBITDA may yield disproportionately high values, making them less
meaningful. • EV/Sales provides a more meaningful metric in cases of loss-making
companies, considering sales can never be negative. • Appropriate for companies expected
to turn profitable and sustain profitability in the future. Not recommended for companies
with no foreseeable turnaround. • Suitable for companies recently breaking even where
traditional profit metrics may be significantly lower than long-term potential. ASSET
BASED VALUATION METRIC - While the previous section focused on comparing what's paid
and received in terms of earnings, this section shifts the focus to assets on the balance
sheet. Unlike earnings-based valuation that considers the future cash flows a business
generates, asset-based valuation looks at the inherent value of the assets themselves.

10.8.1 PRICE / BOOK VALUE - • Indicates how much an investor needs to invest to gain
ownership interest in a company. • Calculated as Market Capitalization divided by Balance
Sheet Value of Equity or Price per Share divided by Book Value per Share. • Preferred for
valuing financial sector companies due to the reliability of book value numbers, especially
when monetary assets dominate. • In capital-intensive and technology sectors, historical
cost accounting and intangible assets may limit the effectiveness of this ratio. • Lower
Price/Book (P/B) ratios generally indicate more attractive valuations, but companies with
higher Return on Equity (ROE) might command a premium. • Preferably compared against
industry averages for a more contextual assessment of a company's valuation.
10.8.2 EV / CAPITAL EMPLOYED - • EV = Value of Equity + Value of Debt – cash and cash
equivalents. EV to Capital Employed ratio is defined as: EV to Capital Employed ratio =
Enterprise Value Capital Employed (Total Equity + Total Debt) • This ratio provides insight
into how the market values the company relative to the total capital invested. • Investors
use this ratio, along with ROCE, to assess whether the return on invested capital meets their
expectations.

10.8.3 NET ASSET VALUE APPROACH - • NAV of equity is the market value of an entity's
assets minus its liabilities. • Unlike book value, NAV uses market values, not book values,
for assets. • It can represent the total equity's current value or be divided by outstanding
shares for NAV per share. • Common in asset-intensive industries like Real Estate, Shipping,
and Aviation. OTHER METRIC: • Analysts choose ratios based on industry dynamics and
specific business situations. • Incorporates non-financial metrics for a more comprehensive
understanding. • Offers targeted insights in scenarios where traditional financial metrics
may not be reflective. • Life Insurance Sector: Price/EV for assessing life insurers'
embedded value. Compares market price to the embedded value, representing the present
value of expected net future cash flows from current policies. • NBFC Valuation: Price/ABV
considered for a more comprehensive evaluation. Compares market price to the adjusted
book value, considering fair values of assets and liabilities, including off-balance-sheet
items. • Operational Assessment: EV/Capacity used when traditional financial metrics may
not capture a company's potential value accurately. Appropriate for start-ups or
companies undergoing special situations.

10.9 RELATIVE VALUATION TRADING & TRANSACTION MULTIPLES

• An intuitive approach comparing an asset's value to similar assets in the market, akin to
how we assess real estate prices based on comparable properties. • Reflects the current
market sentiment, hence emphasises the importance of using parameters like maximum,
minimum, and average for a balanced assessment. • Comparables can be derived from
stock market data (Trading Multiples) or similar transactions (Transaction Multiples),
providing different perspectives on valuation.

10.10 SUM OF THR PARTS VALUATION

• SOTP Valuation is applied to conglomerates with diverse business verticals, such as ITC or
L&T, where each business is treated as a separate entity for valuation. • Each business
under the conglomerate is valued independently, considering earnings and assets as in
traditional valuation methods, allowing for a more nuanced and accurate valuation. • The
values of individual businesses are then summed up, providing an aggregate valuation for
the entire conglomerate.

10.11 NEW AGE BUSINESS VALUATION

• Valuing new-age businesses like E-commerce or tech firms (WhatsApp, Zomato, Facebook)
poses challenges due to unconventional metrics and evolving market dynamics. • New-age
economy introduces unconventional metrics like, page reviews, footfall, ARPU (Average
Revenue Per User), and user base, creating a unique language for valuation. • Despite the
unconventional metrics, the ultimate expectation remains profitability. Warren Buffett's
principle emphasizes that these businesses should translate metrics into profits over time.

10.12 OBJECTIVES OF VALUATION

• Despite intricate quantitative models, valuation lacks precision. The complexity of models
may create a false impression of accuracy, but it doesn't guarantee a precise estimate of
value. • Valuation is not static; it dynamically responds to shifts in business circumstances.
Dramatic changes in the business environment can lead to significant alterations in
valuation.

10.13 SOME IMPORTANT CONSIDERATIONS IN THE CONTEXT OF BUSINESS VALUATION

• If earning power of a business is high, book value (BV) of shares could be less important.
But, if earning power of business is low, BV becomes very important. • As equity/share
reflects part ownership in a business, to value share, we need to value entire business. • EV
and not the market capitalization is the true value of the firm for private owner. • PE for a
leveraged firm may be deceptive – look at debt levels in the business. • Look at the
consolidate numbers and not just the standalone numbers. • Focus on ROE and not EPS –
EPS does not account for retained earnings. • Leverage improves ROE but excessive
leverage is risky. • Differentiate between ROCE and ROE – ROCE reflects the true return on
capital. ROE could be manipulated by high leverage. • ROCE and ROE should be closely
knit. Any wide variation should trigger investigations.

CHAPTER 11 - FUNDAMENTALS OF RISK AND RETURNS

11.1 CONCEPT OF INVESTMENT & RETURN ON INVESTMENT
• Investment means buying an asset or item that will generate some money or appreciate
in future. • Expectation from investments are to earn returns (profits), to get back the
principal amount in the worst case • Evaluation of Investments can be done based on: 1.
Level of return. 2. Volatility in Return 3. Nature of return: Periodic or capital appreciation. •
Returns must be calculated on capital invested & not in money/profit terms. • Return on
Capital / Investment % (ROI) = Net Profit / Investment * 100. • A higher ROI is better for
investors.

11.2 CALCULATION OF SIMPLE, ANNUALISED AND COMPOUNDED RETURNS

• Calculation of return helps in: 1. Deciding the correct investment product for high returns.
2. Comparison of different investments. 3. Evolution of performance of investment relative
to benchmark. • Investment returns can be in the form of: 1. Periodic payouts like interest,
dividend & rent. 2. Appreciation in the value of investment. • ROI is the return earned over
a particular period. • Ex: Investor purchased 150 shares of XYZ ltd at Rs.25 & commission to
broker = Rs.20. Now, Shares sold at Rs.30 & Commission to broker = Rs. 20 Also, Investor
received dividend = Rs 1/share. Total Cost (No of share * Price) + Brokerage = (150 * 25) +20
=Rs. 3770. Total Sales (No of share * Price) - Brokerage = (150 * 25) - 20 =Rs. 4480.
Simple Returns = Total Returns (Current Value) - Total Cost (Original Value) / Total cost
(Original Value). So for total returns = Dividend + Total Sales = (150*1) +4480 = Rs 4630 I
Simple Return =(4630 - 3770)/3770 = 0.23 Simple return (%) = 0.23% * 100 = 23% • Simple
return is also called Single Period Return or Absolute Return.. And this does not consider
the period over which the return was earned. • But Annualised Returns are calculated over
a uniform period i.e., one year. • Annualised Return = (Absolute Return / No of months or
days of investment). 12 months / 365 days. • For the previous example, suppose
investment duration = 15 months then, Annualised Return = ( 23% / 15 )* 12 = 18.4%, but
annualised return does not consider the time value of money (the value of money at
present > value of money in future) • The above problem is resolved using CAGR. • CAGR
assumes that investment returns can be reinvested to earn more returns. • So, for the
previous example if the investment time is 5 years i.e., n = 5 then,

Note: • In this example, we have ignored the time factor of the dividend which would
increase the CAGR by some points if we consider it. • CAGR is the smoothest rate of return.
CAGR is the accepted standard measure of ROI except for returns of less than 1 year period.
CAGR FOR MULTIPLE CASH FLOWS: Let's take an example to understand this 1. Investor
buys hares on 31 July 2011 for Rs.150. 2. Receives dividend of Rs. 5 on 31/10/2011. 3.
Receives dividend of Rs. 6 on 31/10/2012. 4. Receives dividend of Rs. 4 on 31/10/2013. 5.
Sold the share at Rs.165 on 15/01/2014. This cannot be solved using direct CAGR formula or
multiple cash flows we use XIRR function in Excel.
11.3 RISK IN INVESTMENT
• You all have heard of "Investments are subject to market risk." • The more high return
expectations attract more risk also. • Example: Banks Fixed Deposit (FD) = Low risk, Low
Reward/ Return Equity = High Risk, High Reward/ return. • The nature and extent of risk also
depend on type of investor. Example: A retired investor may invest in low-risk products
regardless of returns to fulfil his expenses and avoid loss of capital from high-risk
investments. • Some common risks in investment are:
1. Inflation risk - • Increase in the prices of goods and services over a period of time is
called inflation. • It is also called as purchasing power risk as it arises from a decline in the
value of cash due to the falling purchasing power of money. • Inflation risk declines the
purchasing power of money. • Inflation risk is highest in fixed return instruments like
bonds, FDs and debentures. And it is fairly less risky for equity shares. • Example : a) For
bonds, Bond coupon = 8% Inflation = 7% Rate of return = 1% If inflation shoots up then,
Bond Coupon = 9% Inflation = 10% Rate of return = -1% b) In case of equity shares, if
inflation shoots up then, businesses will increase the selling price of their products which
results in good profits in nominal terms & reflects as higher stock prices. Ex: Hyperinflation
in Venezuela from 2016 onwards resulted in Bonds investment becomes worthless but on
the other hand, Caracas Stock Exchange increased over 1000 in the same duration.
2. Interest rate risk - • Interest rate is inversely proportional to Bond Price. • When interest
rate increases then, Bond prices fall. And when, Interest rates fall then, Bond prices rise. •
Interest rates & Bond prices have an inverse relationship. • Ex: Investors invest in a 5-year
bond at Rs.100 on an 8% annual interest rate. After 1 year RBI cut policy interest rates, and
now a 5-year bond is issued at a 7.5% rate. So for maximum returns, investors buy the old
bonds at 8% and avoid new bonds at 7.5%. This will increase the market price of old bonds.
The price will rise up to a level at which the IRR of cash flows from old bonds is about 7.5% •
The opposite will happen if RBI increases the policy rates. • Bond investments are volatile
due to interest rate fluctuations. This risk also extends to debt funds. • Interest rate risk on
equity: When the Interest rate increases then, equity prices fall. Because of lesser
borrowing which results in lesser flow of funds, and vice versa.
3. Business Risk - • This is caused by the factors that affect the operations of the company.
• That's why it is also called Operating Risk. • Ex: Fluctuations in cost of raw materials,
employee costs, competitive peers and their products, marketing and distribution costs etc.
• Diversification is an efficient way to handle this risk.
4. Market Risk - • Loss of value in an investment because of unfavourable price
movements in the markets is called as market risk. • Ex: a) Interest Rate Risk - Interest rate
rise Bond Price fall (As it reduces cash flows from existing bonds) b) Currency Risk -
Appreciation in currency reduces the earnings of export-oriented companies. • Market risk
affects these investments where transactions happen at current applicable prices like
equity, bonds, gold, real estate and others. • Investments such as deposits and small saving
schemes are not marketable securities, thus they have no market risk but they also do not
gain in value.
5. Credit Risk - • When a borrower fails to repay the loan which results in financial loss to
the lender is called a credit risk. • It is also known as default risk. • Debt instruments are
subject to default risk. However sovereign governments do not have default risk with local
currency borrowing as the government can raise funds by taxation or by printing more
currency. • SEBI has standardised the symbols used by credit rating agencies. • AAA,A1
symbols indicate the highest creditworthiness while "D" represents default status. •
Lower credit rating, Higher credit risk and higher interest rate Higher credit rating, lower
credit risk and lower interest rate. • A diversified portfolio of bonds reduces default risk.
6. Liquidity risk - • It refers to the absence of a buyer or seller in an investment. • An
investor may not be able to buy or sell his investment at desired prices. • Ex:-Corporate
bonds in India are not liquid(especially for retailers). Even if there is a buyer, the price may
be lower due to a lack of liquidity.-Investment in real estate is also subject to liquidity risk. •
Some investments have a lack in a period during which investors cannot exit the investment.
• Ex: SVG (Sovereign Gold Bond) as of 17 July 2020 has a difference of around 2% between
best bid & best ask price. The quality of trade is also very low.
7. Call Risk - • It is specific to bond issues and refers to the possibility that a bond issuer/
debt security will be called prior to its maturity. • This generally occurs when interest rates
are falling and to save money companies redeem higher coupon bonds issues and replace
them with lower coupon bonds.
8. Reinvestment Risk - • It occurs when income from an investment may not be able to earn
the same interest as an original interest rate. • Reinvestment rates can be high or low
depending on the levels of interest rates If the interest rate is high, then reinvestment risk is
low and vice versa.
9. Political Risk - • As the government has the power to change laws which affect business
directly or indirectly, there is always a political risk for business if there is an unfavourable
action taken by the government. • Change of government is also a political risk.
10. Country Risk - • When a country fails to deliver its financial commitments or defaults on
its obligation, this affects the overall economy and market of that country. • No investor
wants to invest in a bust/failed/poor economy. As we have discussed different types of
Investment risk, can be categorised: a) Systematic risk: • Risks whose impact is felt across
investment categories and it cannot be diversified. • Therefore, it is also called non
diversifiable risks. • It is caused by changes in government policies, external factors, wars or
natural calamities which affect the whole economy or market. • Ex: Inflation risk, exchange
rate risk, interest rate risk and reinvestment risk. b)Unsystematic Risk: • It is specific to
individual securities or small classes of investments and, hence can be diversified. • That's
why it is also called diversifiable risk. • Ex: Credit risk, Business risk and liquidity risk. • All
the investments have a component of both systematic and unsystematic risk. Ex: 1. Ashima
invests in bond issues. It has 2 risks: credit risk (unsystematic risk) and interest rate
risk(systematic risk) 2. Ajay invests in infra shares. It has 2 risks: Business risk (unsystematic
risk) and market risk(systematic risk).

11.4 MEASURING RISK

• Before measuring the risk, it is necessary to understand these 3 ways in which risks are
defined:
1. Measure of uncertainty: • It's the very common way to define risk that of uncertainty and
unpredictability. • It is calculated as the standard deviation of the returns of the assets:

2. Measure of sensitivity: • It measures risk based on the sensitivity of asset prices to

various risk factors. • Some of the risk measures for certain assets are: a) Beta: Measures
the sensitivity of stock performance to overall market performance. It is used mostly for
equities. b) Duration: Measures sensitivities of bond price to small changes in interest rate.
c) Delta: Measures sensitivity of an option price for a small change in underlying asset price.
3. Measure of loss: • It is defined as the amount of loss one may experience. • Value at risk
(VAR) is a commonly used probability-based risk metric. • It measures the maximum loss
one may suffer on a particular level of confidence. • Ex: If the VAR (%) of a portfolio is 12%,
it indicates that there is 1% probability that loss would exceed 12%.

11.5 CONCEPT OF MARKET RISK (BETA)

• Beta is a measure of systematic risk, it measures the volatility of the investment relative
to the market (index). • Beta = 1. Security prices move with the market, Beta < 1, security
price will be less volatile than the market, Beta > 1, security price will be more volatile than
the market • Example: If a stock beta is 1.2, then it is theoretically 20% more volatile than
the market both on up and down moves. • CAPM uses beta and expected market returns
to calculate the expected return of an asset. • However, many value investors don't pay
attention to Beta. • Value investor Seth Klarman criticises the idea of using a single number
(i.e., beta) to describe the risk in a security. He emphasizes that past price volatility is an
unreliable indicator of future investment performance. You can read the whole paragraph
here:

11.6 SENSITIVITY ANALYSIS TO ASSUMPTIONS

• Security analysis involves using different kinds of financial models for valuation. • This also
includes some assumptions for future aspects of business. • So for a proper and accurate
output, the input must be based on calculations and if required, then with proper
assumptions after researching, collecting and evaluating information. • Example: In the DCF
model, discounting rate is a primary input • Sensitivity analysis looks at multiple scenarios
for discounting rate and the impact on final value. • In general, best worst and most likely
scenarios are taken into consideration.
11.7 CONCEPT OF MARGIN OF SAFETY
• The margin of safety term is popularised by Mr. Benjamin Graham and his followers
notably Mr. Warren Buffet. • It refers to the difference between value and prices, securities
are bought at a price below their intrinsic value. • The higher the difference between price
and value, the higher the margin of safety. • It provides room for error or safety with
minimal downside risk but doesn't guarantee a successful investment. • Also determining
intrinsic value ("true" worth) is highly subjective. There is no standard for how wise the
margin should be in margin of safety.

11.8 COMPARISON OF EQUITY AND BOND RETURNS

Bonds - • The bond return comes from coupon income and some gains in value as a result
of the interest rate decline. • Less risky than equity means low returns. • The primary risk in
bond investment is the default risk. The higher the credit risk, greater the interest that the
investor will receive.
Equity - • Equity returns come from appreciation in the value of the investment. Dividend
is also a component. • More risky than bonds means high returns. • Share value is always
influenced by the performance of the company and external economic factors that impact
the business. • Warren Buffet stated, If rate of return on stocks > Rate of return on bonds:
Buy Stocks, If rate of return on bonds > Rate of return on stocks: Buy Bonds.

11.9 CALCULATING RISK ADJUSTED RETURN

• It may not be appropriate to compare one high-risk strategy/ portfolio with another
strategy with absolute returns. • Therefore, it is appropriate to use risk-adjusted return
measures which are as follows:
1. Jensens Alpha - • Alpha refers to the excess return earned on an investment compared
to its benchmark. It doesn't measure level of risk. • Whereas, Jensens' alpha refers to the
excess return earned by a portfolio over and above the cost of equity that is calculated using
CAPM and it also factors risk. • It is calculated as: Jensens Alpha = return on portfolio - (Rf +
Beta *Market Risk premium) • Higher the Jensens Aplha, the between it is.
2. Sharpe Ratio - • It measures the risk premium earned per unit of standard deviation. It is
most widely used for measuring risk-adjusted returns. • It is calculated as: Sharpe Ratio =
(Return on portfolio - Risk-free rate)/ standard deviation • The higher the shape ratio, the
better it is.
3. Treynor Ratio - • It measures the risk premium earned per unit of Beta. • The higher the
ratio, the better it is. • It is calculated as: Treynor Ratio = (Return on portfolio - Risk free
rate)/ Beta.

11.10 BASIC BEHAVIOURAL BIASES INFLUENCING INVESTMENTS

• According to conventional finance theory, human beings strive to maximise their wealth
but their emotions and psychology influence their decisions. • Graham sir also stated in his
book "The Intelligent Investor", those markets are more psychological and less logical. •
Behavioural Finance = Behavioural & Psychological Theory + Conventional Economics and
Finance. • Simon Savage, a hedge fund manager stated that behavioural bases are inherent
and by acknowledging these biases one can build a defence mechanism to avoid these
vulnerabilities. Main behavioural biases are as:
1. Loss Aversion Bias: • Pain of loss is twice as strong as the pleasure of gain • It refers to
the tendency to avoid losses and then the fear of loss leads to inaction • Avoiding riskier
asset classes like equity, and holding a losing position in the hope of recovery are types of
this bias.
2. Confirmation Bias: • It is also called as my side bias, it is the tendency to prove one's own
decision right every time. • For example: When a trader buys a stock for a reason and that
reason doesn't work then he tries to make up more reasons for owning the position
3. Ownership Bias: • It reflects the tendency to place higher value on position as things
owned by us appear most valuable to us. • It is also known as the endowment effect.
4. Gamblers fallacy - • Investing by predictions based on the past without research and tend
to believe that if something happens more frequently than normal will happen less
frequently in future and vice versa.(presumably as a means of balancing nature)
5. Winners curse - • Tendency to win every time even after overpaying for the asset
6. Herd Mentality - • It is an outcome of uncertainty and a belief that others have better
information which results in following others' investment decisions. • Most of the
individuals don't go against the crowd. Economist John Maynard Keynes said, It is better for
the reputation to fail conventionally than to succeed unconventionally" in this context.
7. Anchoring -• It is the human tendency to rely heavily on the 1st piece of information. •
New information is ignored and investors hold on to that 1st information only that may no
longer be relevant.
8. Projection Bias - • It occurs when we incorrectly assume that our current needs will be
same as our future needs. • As a result, we make decisions based on how we feel right now
instead of how we might feel in future.

11.11 SOME PEARLS OF WISDOM FROM INVESTMENT GURUS

• Stock Market contains bull & bear cycles. Bulls = When buyers are strong & Bears = When
sellers are strong • Bull market happens when businesses are expanding & growing,
demand for their products & services grow which results in more profits. • But unrealistic
expansion in prices tends to correct itself also. This leads a way to bear market when stock
prices fall and correct. • Bear market leads to stress for several businesses as they face
lower demand for their products & services which results in less or no profit or even
losses. • And when prices fell below intrinsic values creating attractive valuations, buyers
again start coming into that stock. • This way Bull & Bear cycle maintains the discipline of
the market. Here are some other pearls of wisdom from some of these great masters: 1.
Benjamin Graham: "To achieve satisfactory investment results is easier than most people
realize; to achieve superior results is harder than it looks." 2. Charlie Munger:
"Understanding how to be a good investor makes you a better business manager and vice
versa." 3. David Dreman: "Psychology is probably the most important factor in the market –
and one that is least understood." 4. John Tempelton: "Invest at the point of maximum
pessimism. 5. Peter Lynch: "Go for a business that any idiot can run – because sooner or
later, any idiot is probably going to run it." 6. Walter Schloss: "If you can't find good value
investing positions, park your money in cash." 7. Warren Buffett: "Rule No.1 is never lose
money. Rule No.2 is never forget rule number one."

11.12 MEASURING LIQUIDITY OF EQUITY SHARES

• One main objective of stock exchanges is to provide liquidity i.e. ease of buying and
selling • It can be achieved when there are large number of buyers and sellers for a
particular stock. • Liquidity can be measured by: 1. Stock Turnover Ratio: • Calculated by
dividing the number of shares traded during a given period by the number of outstanding
free float shares (number of shares held by non promoters). • Mostly, the time frame is of 1
Year for this. 2. Traded value turnover ratio: • Calculated by dividing the traded value of the
shares by the market capitalisation of the company.

CHAPTER 12 - QUALITIES OF A GOOD RESEARCH REPORT

12.1 QUALITIES OF GOOD RESEARCH REPORT
To excel as a research analyst, it's not about having exclusive data because more or less
everyone has the same information i.e annual reports, quarterly reports etc. but about how
you communicate insights; a well-crafted presentation is as vital as the analysis. Writing
research reports is a creative process where analysts take complex numbers and turn them
into clear insights. While there's no one-size-fits-all answer, there are some basic rules to
make a great report- Clarity of Idea, Simplicity of delivery, Presenting the argument
clearly, Narrative structure, Create customised reports according to the reader type.
Writing a good research report - Planning, Drafting and Editing: • The report covers
essential aspects such as company analysis, peer comparison, shareholding details,
strengths, concerns, industry overview, financial indicators, and overall financials. • It's
important to plan how to approach each section and set deadlines, maintaining discipline,
especially during busy times like quarterly results season.

Reports often go unnoticed post-results season due to factors like: Unnecessary details,
Long sentences, Complex language, Inconsistent views, No proper structure.
Rating Convention - • Analysts use rating conventions like "buy," "overweight," "hold,"
"underweight," and "sell" to convey their views on a stock's expected returns. •
Recommendations indicate the analyst's outlook on a security's performance relative to the
market or peer group, with varying definitions among research agencies. • Additional terms
like 'accumulate,' 'reduce,' 'outperformer,' 'performer,' and 'underperformer' signal
expectations related to stock performance triggers. • Ratings such as 'overweight,' 'equal
weight,' and 'underweight' describe a stock or sector's performance compared to the
market. • It's crucial to fully understand the analyst's message within the recommendation
before taking any action.

12.2 CHECKLIST BASED APPROACH TO RESEARCH REPORTS

• In a world with too much information, it's important to make decisions consistently,
especially when information is conflicting. • Analysts can use checklists, like pilots do for
safety, to be more systematic and consistent in their research and decisions. Simple rule:
Being organised and disciplined often pays off in the world of investing. Advantages of
Checklist • Checklists serve as a reliable tool to prevent oversights, minimizing the chances
of lazy mistakes or shortcuts while ensuring disciplined and intentional actions. • By
providing a systematic approach, checklists contribute to objective decision-making based
on facts, promoting a thorough and methodical analysis. • Additionally, they create a
documented trail of decisions, offering the opportunity for modification and correction
over time, which is valuable for continuous improvement and learning. In a popular book
"The Checklist Manifesto", author, Dr. Atul Gawande makes a distinction between errors of
ignorance (mistakes made out of ignorance), and errors of ineptitude (mistakes made
because of incorrect use of knowledge). He argues that errors of second type can be
avoided to a large extent by following a checklist approach to literally everything in life." -
Example from the book.

12.3 A SAMPLE CHECKLIST FOR INVESTMENT RESEARCH REPORT

 CHAPTER 13 - LEGAL AND REGULATORY ENVIRONMENT
13.1 REGULATORY INFRASTRUCTURE IN FINANCIAL MARKET
1) Ministry of Finance - The Ministry of Finance manages taxation, financial legislation,
capital markets, and the national budget. It has five departments: • Department of
Economic Affairs: Focuses on India's economic policies, including fiscal and monetary
policies, capital market operations, and annual Union Budget preparation. • Department of
Expenditure: Manages the government's expenses, financial rules, Central Government
employees' service conditions, state financial aid, and borrowings •
Department of Revenue - Handles Direct and Indirect Taxes through statutory boards -
CBDT for direct taxes and CBEC for indirect taxes. • Department of Financial Services: Deals
with banking, insurance, financial services by government and private entities, pension
reforms, etc. • Department of Disinvestment: Responsible for the systematic approach to
disinvestment and privatization of public sector undertakings and managing the proceeds
from these sales.
2) Ministry of Corporate Affairs • The Ministry of Corporate Affairs in India administers laws
like the Companies Act and allied regulations to regulate the corporate sector's functioning.
• It oversees the registration of companies, ensuring their compliance with laws. • It's also
in charge of implementing the Competition Act 2002, replacing the MRTP Act, and
supervising professional bodies like ICAI, ICSI, and ICWAI.
3) Reserve Bank of India - The (RBI) is the country's central bank, responsible for
administering monetary policy. Its key goal is to manage the money supply for economic
growth without causing rapid inflation. Its main functions include: • Monetary Policy:
Controls money supply to balance economic growth and inflation. • Financial Regulator:
Oversees banks, protecting depositors and promoting stability. • Foreign Exchange
Manager: Facilitates trade and manages the currency market. • Currency Issuer: Prints and
manages circulation of rupees. • Development Promoter: Supports national goals like
financial inclusion. • Banker to Banks & Government: Handles government finances and
interbank transactions.
4) Securities and Exchange Board of India SEBI is India's securities market regulator,
established by an Act of Parliament in 1992. Its primary aim is to protect investors' interests
and regulate and develop the securities market. The main functions of SEBI are: 1.
Protecting investors and promoting market development. 2. Regulating stock exchanges,
brokers, and intermediaries. 3. Enforcing regulations against insider trading and unfair
practices. 4. Regulating takeovers, and acquisitions, and investigating market entities. 5.
Conducting inspections and inquiries in the securities market. SEBI also regulates India's
commodities markets. It also oversees forward and futures trading in commodities,
monitoring trading conditions. SEBI sets regulations for trading limits, price volatility control,
risk management, and contract delivery.
5) Insurance Regulatory and Development Authority of India (IRDAI) • IRDAI oversees
India's insurance sector under the IRDA Act, of 1999. It licenses insurance companies, sets
capital requirements, and ensures policies protect the interests of policyholders. • IRDAI
regulates insurance product terms, distribution, and commissions, and supervises the Tariff
Advisory Committee for general insurance rates. Additionally, it defines investment
guidelines for insurance company funds.
6. Pension Fund Regulatory and Development Authority (PFRDA) • PFRDA regulates India's
pension sector under the PFRDA Act, 2013. • It promotes old age income security,
safeguards pension fund subscribers' interests, and designs the National Pension System
(NPS). • PFRDA registers fund managers, custodians, record-keeping agencies, and trustee
banks for NPS. Its role involves fostering pension market growth, suggesting relevant
legislation, and handling other delegated functions.
7) Insolvency and Bankruptcy Board of India (IBBI) • IBBI, created under the Insolvency and
Bankruptcy Code 2016, regulates insolvency proceedings and professionals. It oversees
insolvency entities, professionals, and agencies. • IBBI formulates and enforces rules for
corporate and individual insolvency resolution, liquidation, and bankruptcy.

13.2 IMPORTANT REGULATION IN THE INDIAN SECURITY MARKET

Several Acts, Regulations, and By-laws govern the Indian Securities markets. Some of the
relevant ones are described below:
1) Securities Contracts (Regulation) Act, 1956 - This act gives SEBI ultimate control over the
Indian securities market: Regulates everything: instruments, intermediaries, issuers, and
investors, Prevents bad practices: controls trading and transactions. Powers
include: approving exchanges, enforcing rules, and even shutting down exchanges if
needed.
2) Securities and Exchange Board of India Act, 1992 - The SEBI Act of 1992 formed SEBI to
protect investors and oversee the securities market. • SEBI oversees stock exchanges,
securities markets, and intermediaries such as brokers and mutual funds. • It prohibits
fraud, advocates investor education, controls insider trading, and mandates disclosure. •
SEBI performs inspections, audits, and inquiries, delegates responsibilities, imposes fees,
and enforces penalties for compliance.
3) Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,
2015 - Regulations on insider trading under the SEBI Act, of 1992 define insiders and
sensitive information. • An insider includes those connected with a company; sensitive data
involves financial results, mergers, or managerial changes. • The rules prohibit insiders from
sharing such info except for lawful purposes. Insiders cannot trade in securities with
sensitive information. Disclosures of trading activities are mandatory. • Organisations
appoint compliance officers to oversee fair disclosure and prevent insider trading. They
implement "Chinese Wall" policies to segregate sensitive information areas from public
areas, ensuring no unauthorized communication occurs.
4) SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Markets) -Regulation, 2003 (amended in 2007, 2012 and 2013) • SEBI's regulations prevent
fraudulent and unfair practices in the securities market under the SEBI Act, 1992. •
Examples include deliberate misrepresentation, suggesting false facts, hiding information
knowingly, and making false promises. • The regulations aim to maintain integrity and
fairness in securities trading and protect investors.
5) Securities and Exchange Board of India (Research Analyst) Regulations, 2014 (amended
in December 2016) - focus on ensuring fairness, transparency, and reliability in securities
research to aid investors in making informed decisions. Regulation 3: Application for
Certification - • Individuals or entities acting as research analysts must obtain certification
from SEBI to continue their roles. Regulation 4: Research Report Issuance from Overseas -•
Persons outside India issuing research reports on listed securities must have an agreement
with a registered research analyst. Regulation 5: Providing Further Information -• SEBI may
request additional information from applicants and may require their representation.
Regulation 6: Criteria for Certification - • SEBI considers various aspects, including
qualifications, capital adequacy, fit and proper criteria, infrastructure, and regulatory
history. Regulation 7: Qualification Requirements - • Specifies minimum educational
qualifications or professional experience needed for research analysts and partners.
Regulation 8: Capital Adequacy -• Specifies net tangible assets or net worth requirements
based on the nature of the research analyst entity. Regulation 9: Grant of Registration
Certificate - • SEBI grants a certificate of registration upon satisfying the conditions specified
in Regulation 6. Regulation 10: Validity of Certificate -• The certificate remains valid unless
suspended or cancelled by SEBI. Regulation 11: Renewal of Certificate - • Outlines the
renewal process for previously registered research analysts. Regulation 12: Procedure for
Refusal of Registration -• Details the process if SEBI rejects an application, requiring
immediate cessation of research analyst activities upon rejection.
6) Insolvency and Bankruptcy Code (IBC) • The Insolvency and Bankruptcy Code (2016)
allows creditors or the company itself to file for insolvency against a company owing more
than Rs.1,00,000. • An interim resolution professional (IRP) manages affairs once
proceedings begin. • The 180-day resolution period can result in restructuring or liquidation,
with creditors overseeing the process.

13.3 CODE OF CONDUCT FOR RESEARCH ANALYST

Code of conduct as defined in the Third Schedule of Research Analyst Regulations: 1.
Honesty and Good Faith 2. Diligence in analysis 3. Addressing conflicts of interest 4.
Prohibition of insider trading or front-running 5. Maintaining confidentiality until report
publication 6. Upholding high professional standards 7. Compliance with regulatory
requirements 8. Senior management's responsibility for conduct and procedures.

13.4 MANAGEMENT OF CONFLICTS OF INTEREST & DISCLOSURE REQUIREMENT FOR RA

Regulation 15: Establishing internal policies and procedures • Requires internal policies to
address conflicts of interest, ensure unbiased research, and prevent market manipulation.
Regulation 16: Limitations on trading by research analysts • Monitors personal trading
activities of analysts, prohibits trading in recommended securities around report publication
and restricts dealing in reviewed securities contrary to recommendations. Regulation 17:
Compensation of Research Analysts • Bars compensation based on banking services
mandates an independent review of analysts' compensation and restricts analysts' control
by banking service employees. Regulation 18: Limitations on publication of research
report, public appearance and conduct of business, etc. • Restrictions on publishing reports
or making public appearances about companies involved in offerings, along with limitations
on trading and business activities. Regulation 19: Disclosures in Research Reports •
Mandates disclosures in research reports concerning conflicts of interest, compensation,
relationships with subject companies, and other material information. Regulation 20:
Contents of the Research Report • Ensures factual and clear information in research reports
and defines rating systems and their basis. Regulation 21: Recommendations in Public
Media • Requires disclosure of registration status and financial interest when making public
recommendations. Regulation 22: Distribution of Research Reports • Prohibits the selective
distribution of research reports and mandates review and disclosure of third-party reports.
Regulation 23: Additional Disclosures by Proxy Adviser • Imposes requirements and
disclosures specific to proxy advisers. Regulation 24: General Responsibility • Enforces an
arm's length relationship between research activities and others, compliance with the Code
of Conduct, and reporting to the Board. Regulation 25: Maintenance of records • Mandates
maintenance and preservation of records, including reports and public appearances.
Regulation 26: Appointment of compliance officer • Requires appointment of a compliance
officer responsible for monitoring regulatory compliance. Regulation 32: Liability for action
in case of default • Sets out consequences for research analysts or entities for breaking the
rules, providing false information, not cooperating with investigations, failing to address
complaints, and following actions as per the Act or SEBI Regulations, 2008.

13.5 EXCHANGE SURVEILLANCE MECHANISM: GSM & ASM

Stock exchanges help trade securities fairly. However, some traders may use unfair
practices. To keep the market honest and protect investors, SEBI and exchanges use
surveillance. They watch stocks based on set rules and put restrictions to prevent unfair
actions.
1) Graded Surveillance Measures (GSM): • Targeted at securities with low market
capitalization or net worth. • Criteria for inclusion: Companies with net worth ≤ Rs 10 crores
and net fixed assets ≤ Rs 25 crores, trading at negative PE or PE 2x benchmark index. •
Monitoring by Exchanges and SEBI. • Imposed restrictions: Trade for trade category,
surveillance deposit, reduced price band, increased margin requirement, freezing of upside
price. • Criteria exceptions: Not applicable to suspended securities, PSU securities, index
constituents, recent IPOs, derivatives-traded securities, those with institutional holdings, or
undergoing mergers/demergers.
2. Additional Surveillance Measures (ASM): • Identifies securities based on price and
volume variations. • Factors considered: Price variation in past months, closing prices over
different time frames, client concentration, and volume variation. • Criteria exceptions: Not
applicable to GSM-listed securities, trade for trade segment, derivatives-available securities,
and public sector units. • The applicable margin was raised to 80%; further restrictions were
based on additional criteria. • Periodic review; removal from ASM if no longer meeting
shortlisting criteria.