16.1 – The follies of DCF Analysis
In this concluding chapter, we will discuss a few important topics that could significantly impact how you make your investment decisions. We learned about the intrinsic value calculation using the Discounted Cash Flow (DCF) analysis in the previous chapter. The DCF method is probably one of the most reliable methods available to evaluate a company’s stock’s intrinsic value. However, the DCF method has its fair share of drawbacks which you need to be aware of. The DCF model is only as good as the assumptions which are fed to it. If the assumptions used are incorrect, the fair value and stock price computation could be skewed.
- DCF requires us to forecast – To begin with, the DCF model requires us to predict the future cash flow and the business cycles. This is a challenge, let alone for a fundamental analyst and the top management of the company.
- Highly sensitive to the Terminal Growth rate – The DCF model is susceptible to the terminal growth rate. A small change in the terminal growth rate would lead to a large difference in the final output, i.e. the per-share value. For instance, in the ARBL case, we have assumed 3.5% as the terminal growth rate. At 3.5%, the share price is Rs.368/- but if we change this to 4.0% (an increase of 50 basis points), the share price will change to Rs.394/-
- Constant Updates – Once the model is built, the analyst needs to constantly modify and align the model with new data (quarterly and yearly data) that comes in. Both the inputs and the assumptions of the DCF model needs to be updated regularly.
- Long term focus – DCF is heavily focused on long term investing, and thus it does not offer anything to investors who have a short term focus. (i.e. 1-year investment horizon)
The DCF model may also make you miss out on unusual opportunities as the model is based on certain rigid parameters.
Having stated the above, the only way to overcome the drawbacks of the DCF Model is by being as conservative as possible while making the assumptions. Some guidelines for the conservative assumptions are –
- FCF (Free Cash Flow) growth rate – The rate at which you grow the FCF year on year has to be around 20%. Companies can barely sustain growing their free cash flow beyond 20%. If a company is young and belongs to the high growth sector, then probably a little under 20% is justified, but no company deserves an FCF growth rate of over 20%
- Some years – This is a bit tricky, while longer the duration, the better it is. At the same time, longer the duration, there would be more room for errors. I generally prefer to use a 10 year 2 stage DCF approach
- 2 stage DCF valuation – It is always good to split the DCF analysis into 2 stages, as demonstrated in the previous chapter’s ARBL example. As discussed, In stage 1, I would grow the FCF at a certain rate, and in stage 2, I would grow the FCF at a rate lower than the one used in stage 1
- Terminal Growth Rate – As I mentioned earlier, the DCF model is susceptible to terminal growth. The simple thumb rule here – keep it as low as possible. I personally prefer to keep it around 4% and never beyond it.
16.2 – Margin of Safety
Now, despite making some conservative assumptions, things could still go wrong. How do you insulate yourself against that? This is where the concept of ‘Margin of Safety’ would arrive. The margin of safety thought process was popularized by Benjamin Graham in his seminal book titled “Intelligent Investor”. The ‘margin of safety’ suggests that an investor should buy stocks only when available at a discount to the estimated intrinsic value calculation. Following the Margin of Safety does not imply successful investments but would provide a buffer for calculation errors.
Here is how I exercise the ‘Margin of Safety’ principle in my own investment practice. Consider Amara Raja Batteries Limited; the intrinsic value estimate was around Rs.368/- per share. Further, we applied a 10% modelling error to create the intrinsic value band. The lower intrinsic value estimate was Rs.331/-. At Rs.331/- we are factoring in modelling errors. The Margin of Safety advocates us to discount the intrinsic value further. I usually like to discount the intrinsic value by another 30% at least.
But why should we discount it further? Aren’t we extra conservative, you may ask? Yes, but this is the only way you can insulate yourself from the bad assumptions and bad luck. Think about it, given all the fundamentals, if a stock looks attractive at Rs.100, then at Rs.70, you can be certain it is indeed a good bet! This is, in fact, what the savvy value investors always practice.
Going back to the case of ARBL –
- Intrinsic value is Rs.368/-
- Accounting for modelling errors @10%, the lower intrinsic band value is Rs.331/-
- Discounting it further by another 30%, to accommodate for the margin of safety, the intrinsic value would be around Rs.230/-
- At 230/- I would be a buyer in this stock with great conviction.
When quality stocks fall way below its intrinsic value, they get picked up by value investors. Hence when the margin of safety is at play, you should consider buying it as soon as you can. As a long term investor, sweet deals like this (as in a quality stock trading below its intrinsic value) should not be missed.
Also, remember good stocks will be available at great discounts, mostly in a bear market when people are extremely pessimistic about stocks. So make sure you have sufficient cash during bear markets to go shopping!
16.3 – When to sell?
Throughout the module, we have discussed buying stocks. But what about selling? When do we book profits? For instance, assume you bought ARBL at around Rs.250 per share. It is now trading close to Rs.730/- per share. This translates to an absolute return of 192%. A great return rate by any yardstick (considering the return is generated in over a year). So does that mean you actually sell out this stock and book a profit? Well, the decision to sell depends on the disruption in investible grade attributes.
Disruption in investible grade attributes – Remember, the decision to buy the stock does not stem from the stock trades’ price. Meaning, we do not buy ARBL just because it has declined by 15%. We buy ARBL only because it qualifies through the rigour of the“investible grade attributes”. Suppose a stock does not showcase investible grade attributes; we do not buy. Therefore going by that logic, we hold on to stocks as long as the investible grade attributes stay intact.
The company can continue to showcase the same attributes for years together. The point is, as long as the attributes are intact, we stay invested in the stock. Under these attributes, the stock price naturally increases, thereby creating wealth for you. The moment these attributes shows signs of crumbling down, one can consider selling the stock.
16.4 – How many stocks in the portfolio?
The number of stocks that you need to own in your portfolio is often debated. While holding many stocks helps you diversify risk, others say holding far fewer helps you take concentrated bets, which can potentially reap great rewards. Here is what some of the legendary investors have advised when it comes to the number of stocks in your portfolio –
Seth Klarman – 10 to 15 stocks
Warren Buffet – 5 to 10 stocks
Ben Graham – 10 to 30 stocks
John Keynes – 2 to 3 stocks
I have about 13 stocks in my own personal portfolio, and at no point, I would be comfortable owning beyond 15 stocks. While it is hard to comment on the minimum number of stocks, I believe there is no point in owning a large number of stocks in your portfolio. When I say large, I have a figure of over 20 in my mind.
16.5 – Final Conclusion
Over the last 16 chapters, we have learnt and discussed several topics related to the markets and fundamental analysis. Perhaps it is now the right time to wrap up and leave you with a few last points that I think are worth remembering –
- Be reasonable – Markets are volatile; it is the nature of the beast. However, if you have the patience to stay put, markets can reward you fairly well. When I say “reward you fairly well”, I have a CAGR of about 15-18% in mind. I personally think this is a fairly decent and realistic expectation. Please don’t be swayed by abnormal returns like 50- 100% in the short term; even if it is achievable, it may not be sustainable
- Long term approach – I have discussed this topic in chapter 2 to why investors need to have a long term approach. Remember, money compounds faster the longer you stay invested
- Look for investible grade attributes – Look for stocks that display investible grade attributes and stay invested in them as long as these attributes last. Book profits when you think the company no longer has these attributes
- Respect Qualitative Research – Character is more important than numbers. Always look at investing in companies whose promoters exhibit good character
- Cut the noise and apply the checklist – No matter how much the analyst on TV/newspaper brags about a certain company, doesn’t fall prey to it. You have a checklist; apply the same to see if it makes any sense
- Respect the margin of safety – As this literally works like a safety net against bad luck
- IPO’s – Avoid buying into IPOs. IPOs are usually overpriced. However, if you were compelled to buy into an IPO, then analyze the IPO in the same 3 stage equity research methodology
- Continued Learning – Understanding markets requires a lifetime effort. Always look at learning new things and exploring your knowledge base.
I want to leave you with 4 book recommendations that will help you develop a great investment mindset.
- The Essays of Warren Buffet: Lessons for Investors & Managers
- The Little Book that Beats the Market – By Joel Greenblatt
- The Little Book of Valuations – By Aswath Damodaran
- The Little Book that Builds Wealth – By Pat Dorsey
So friends, with these points, I would like to close this module on Fundamental Analysis. I hope you enjoyed reading this as much as I enjoyed writing it.
Sir,
Great job. Thank you for such a detailed information. Awaiting for other modules also.
Thank you.
Thanks.We are starting the module on Futures Trading, material should start flowing in soon. So stay tuned.
hey karthik thanks a lot for this education from zerodha it is very helpful.
btw what this symbol meaning ^ in CAGR
CAGR is Compounded Annual growth rate, check section 6.7 – https://zerodha.com/varsity/chapter/the-stock-markets/
Hi Labhansh,
^ symbols means ‘to the power’. i.e. 2^3 means 2*2*2.
Thanks,
Ujjwal
Yes.
Great job!!!! Fantastic content…….It was a delight reading this……I hope to put it in practice to build long term wealth…Thank you
Thanks Prashant! – it feels worth the effort, your comment made my day 🙂
Thanks for putting up such a detailed document. I plan to follow this process to do a stock check of my present portfolio. I am sure its a long process, especially i am a novice, but will be worth it.
I’m sure it will be worth it, Rekha. Good luck!
Dear Karthik,
At the outset, thanks a lot for sharing set of “Wonderful & Excellent” chapters for Long Time Investors like us… Really appreciate & keep Great going….
Thanks. Over time hope to have some really good content in Varsity.
Good work! Apart from the books you recommended, is there any book for fundamental analysis that you consider the best? Thanks!
Thanks :). These are some really good books. I would also suggest “One up on Wall street” by Peter Lynch.
Really wonderful .But I feel rather bookish and exhausting and at the end may find most blue chips over priced.Only at bear market bottom may one be able to buy reasonably priced shares. May be P/E ratio and comparing with peers can help.
Retail investors may not find it practicable and buying in declines and in parts ‘quality’ stocks may be more possible.
But then what is quality!
Kindly note I enjoyed reading and really touched by your covering financial management in a few pages.
Thank you so much 🙂
If you could kindly highlight why you thought it was bookish it would help. In fact one of the objectives of Varsity was to make sure the content is not bookish and in fact be very practical. So your suggestions will really help us deliver better content. Thanks.
A great initative from Team Zerodha. Picking Original AR and explaining it through out with example is what made this a winner. People from Non Financial Background can easily understand.
Hope Zerodha will have Screeners Introduced soon on similar lines which will help the investing Community.
Thanks Team Zerodha.
Thanks Chetan. The idea is to keep it as practical and actionable as possible 🙂
Hello,
I’m pursuing MBA finance. How can i become equity research analyst? I would like to concentrate on fundamental analysis. what are the important topics i should cover?
Thanks!
A through understanding of FA and a CFA from CFA Institute (USA) will brighten your chances of becoming an Equity Analyst.
Thanks for uploading the lessons. Walking us through an example was really helpful. I plan to analyze few stocks based on these lessons in next few days.
I was wondering, wouldn’t institutional investor be the first to do fundamental analysis of a company? And by the time a retail investor start evaluating a stock, wouldn’t a good company will already get overpriced by institutional investors by then?
Ajit – The institutional investors have a major disadvantage. Their size! Contrary to the popular belief, by the time they identify a stock to invest, it may actually be a bit late. I have seen this happening over and over again in the markets. Would suggest you read this book ‘One up on Wall Street’ by Peter Lynch. In the book Peter Lynch clearly discusses how advantageous it is to be a retain investor in terms of spotting good investing opportunities.
Thanks Karthik
Does volume have a role to play in buying decision of a stock? In other words should we bother analyzing the fundamentals of a company whose volumes are relatively small?
FA is a different thought process all together. The focus in only on business, corporate governance, sustainable moats, and numbers. Everything else is secondary. If you look at quality stocks that have generated wealth to shareholders they were all undervalued and lacked market interest before they really too off. Which also means in the initial days volumes were really low in these counters. So I suggest you stay focused on the business and leave aside volumes and other other such parameters.
Thanks for the clarification. Appreciate your help.
Most welcome 🙂
Sir, if you can translate it in hindi or hinglish(mix of hindi & english), it is also very useful to north & middle state indians.
This may not be possible at the moment as we have limited resources available. But surely sometime in the future this should be possible.
Sir,
When is the next module going to be uploaded ??
Quite soon, we are working on it. Sometime in mid Jan, at least few chapters should be up.
tremendous job sir … now lets conquer future and options market 😛
Thanks. Working on F&O module..
Hi Karthik,
I happened to come across this. You have done an excellent job here by explaining Fundamental Analysis in the most pratical manner., worth implementing. Looking forward to make some long term ‘wealth-creating’ investments using these. 🙂
Once again., appreciating the wonderful effort from your side.
Regards,
Mukesh
Thanks Mukesh. In fact the idea behind Varsity is to ensure we focus on the practicality of the subject. If the content is not actionable, then it will be just another portal giving gyan 🙂
Sir,
I want to know about funtur trading and next module is going to come only in mid jan.
Please suggest me somebook which i can go through before that
Just wait for few more days Raman, few chapters from Futures will be up.
Thanks a lot.I cannot belive its FREE…& so much information is available.
Since inception ZERODHA always have something innovative to offer.
Looking forward for F&O MODULES & ZERODHA Pi………and lot more
Thank You again.
Thanks Nikhil. Did you read this post which explains why we have kept this free? We are working on F&O module, parts of it should be out soon. Stay tuned 🙂
These chapters are well written, with a proper examples, when and where required. The language used, or the approach used while writing these chapters is more friendly, such that we are immediately able to connect ourselves with it. I would like to thank you(KARTHIK RANGAPPA) for writing these chapters, and to zerodha (the team and Mr. Nitin Kamath) for taking such initiative for us.
Reading these chapters helped me a lot in understanding the basics of the share market, which includes overview of the market, technical analysis, and fundamental analysis, similarly I understood how the companies are formed, which parameters are important to rank or scale the company, and how one (CEO, managers) should look after his or her company such that their investors shall not worry much.
Thanks again for the initiative.
And I hope we will soon be reading the remaining chapters.
Thanks for the kind word 🙂 Please stay tuned on Varsity, lot of good content planned.
Sir, Great Job, educating house wife`s like me on Investing. Is it require to put Stop loss for the stocks selected for long term Investing.
Thanks. Stoploss is mainly from the perspective of validating the moats based on which you have invested. In other words, as long as your investment reasons are valid you continue to stay invested, else you exit.
Hi Karthik,
Great Job….You have given excellent information on fundamental analysis …heart fully i am thanking u for this effort..Waiting for Option Module.
Good to know you liked the module. Options module has started, you can check the same here – http://zerodha.com/varsity/module/option-theory/
Yes I found it. karthik i clearly understood fundamental analysis was helpful for long term investments.And I Knew technical analysis was for short term trading in this we were using Chart patterns , candlestick patterns and technical indicators. Can U plz suggest me , Should we use all are these patterns are needed or any one of them(i.e., charts/candlesticks/indicators) is enough for short term trading.
I would suggest you master candlesticks, that is more than sufficient for a clean and elegant trading set ups.
Too Good. Highly enlightening.
But I am not convinced with max 15 stocks in portfolio. Is the only reason against more is that you will not have time to track it?
Well the returns and risk go hand in hand. Higher the risk you take higher is the possibility of a good return. When you have 1 stock in your portfolio you are taking maximum risk…therefore maximum return. However when you 5 you are spreading your risk and therefore lowering your risk. De-risking is good, and I personally believe a 12 – 15 stock diversified portfolio is fair. Higher the number of stocks, you are not only re-riskinng a lot, but like you said managing and tracking them also becomes an issue.
Sir what is overweight, underweight & netural? Will this come in next chapter
Overweight = when you highly bullish on the stock and you purchase more of the stock in your portfolio
Underweight = When you are not so bullish (note this is different from being bearish) but still believe you are reluctant to sell it
Neutral = When you neither feel bullish or bearish about the stock
Please provide PDF download option for this module as well
Very soon, we are working it. Thanks for your patience 🙂
Thank you 🙂
Very well written, nicely structured article without using too many financial jargon. I wish you have would have little more detailed the discussion on ideal portfolio in terms of number of stocks / sectors, diversification need, max % of fund in a particular stock etc. However overall an excellent job. Please make the articles available in a single pdf document, if feasible.
Thats a nice topic Abhijit! Thanks for the suggestion, maybe I will take this topic up – Stock selection and portfolio management!
Excellent article, thoroughly enjoyed reading. Fundamental analysis of a financial companies (Banks, NBFC) is completely different from manufacturing or other services company. Will appreciate if you write a module on basics of analysing financial sector explaining terms like NII, GNPA, NPA, CASA etc. Thanks.
I’ll be honest – analyzing financial companies such as banks and insurance is not an easy task..will need time to simply the topic and present it here.
Fantastic lessons . Your works making me feel i am learning something day by day. Thank you so much .
Keep going, keep learning…this is the only way you improve your odds! Good luck.
IN the chart given . The arrow points Piercing pattern,But the volume is low ,i.e, below prev 10 days average. But the stock price went up. why is that? .
TA patterns are not a guarantee for price movements!
i have so many doubts regarding some charts . i hope you dont mind me asking ,it here.Thank you.
Please go ahead.
in the below image. the pattern is bearish engulf.what does adx,macd,bolinger,rsi indicate ????….wether to buy or sell ?? .
Please check the indicators chapter for explanation.
i have gone through the indicators chapter. For example. if the rsi is 0-30 (over sold) & 70-100 (overbought)..what to do when its inbetween 30-70 . like 35,45,60 . in what way these numbers useful?.
Nope…these numbers suggest you do nothing 🙂
Can i call the below pattern as bullish harami,cause prev is uptrend….. or is it spining top/double bottom ??…
I would look at it as spinning top/double bottom.
does those two yellow arrows point double bottom?.
Yes, it does.
can i call the last three candle as 3 white soldiers.? i hope the prev trend is up.
Yes..
is the last 3 candles form evening star?. sorry to disturb you with more pics. thank you .
Not really, for an evening star the 3rd candle should have a length (range) greater than the 1st candle (P1), which is missing here.
So if the rsi shows 35 or 45 or 50,it means nothing ,so no use of rsi at those readings. thanks a lot for your reply.they help me to understand more .
Yes…RSI between 30 to 70 is of no use.
The image which i showed you previously (3 white soldiers).It was supposed to go up today as it was bullish. but today it went down. The volume was ok,And i hope the indicators where also fine. why it went down today?…i have attached the pattern image and the indicators image.Thank u .
Like I said, none of the patterns guarantee any price movement. Patterns only increase the probability but its certainly not a guarantee.
Indicators image
1. you have advised to look for prior trend. how long should we consider for this. For example,if p1 & p2 forms bullish engulf.can i look for downtrend of 5days or 14days or ???…..which would be sufficient to analyse this.
2. First we check 3 to 4 days for a recognizable pattern,then we go to other steps.But u have Given a lookback period of 6months to 1year. And upto two year while analysing S&R.
For rsi look back period is 14days ..etc
then where to use this lookback period of 6 months to 1year ?..
Thank u for your valuable replys
Minimum 5-8 trading session amounting to at least 5% decline (in case of bullish patterns) or 5% increase (in case of bearish patterns).
In case of RSI its just about getting a perspective.
hello sir if i have to purchase amibroker then after i also want to data i.e. which EPS is more than 20 in both NSE & BSE which data feed is suitable for me
Amibroker gives you price and volume data. Fundamental data is not available. For Fundamental data, I would suggest you check out capitaline.
if i purchase amibroker, then i want to find out the list of companies which EPS is higher than 20 and PE is less than 10 in BSE and NSE both. so which data provider is useful to me. which data provided provide NSE & BSE both data. whenever i know GLOBAL DATA FEED only provide NSE(F&O) not NSE (CASH) & BSE. So any other data provider which can i use in amibroker who provide NSE & BSE (F&O & CASH BOTH) Please guide me sir……….. thanks
As I said, for fundamental data check out capitaline.
the intrinsic value of torrent pharma is 529- 646 . But it is currently priced at 1200. But the p/e ratio is 11 which may be considered good and the company is doing well . But the price is considered over priced according to calculations . Is it a good option to buy it now or look for another option ? Is a software that can calculate the intrinsic values ?
Pretty much every stock is over valued . So how do we predict which stock to buy ?
With the recent correction in the market, I’m certain there are quite a few stocks with attractive valuations.
PE and DCF valuations are two different valuation techniques. However, as you may have observed, the 2 stage DCF has many input variables, any slight variation can lead to erroneous output. I’d suggest you double check all these input variables.
I’m not sure about any s/w that does these calculations.
Hello sir ,
I’d like to know as to how a bonus stock issue as in case of Infosys affects the intrinsic value of the stock ?
Explained here – http://zerodha.com/varsity/chapter/key-events-and-their-impact-on-markets/
According to ratio calculations Pageind stock looks expensive.
P/BV-40
P/E-60
P/S-10
I bought it
around 11700 now it has fallen more.
So according to qualitative aspects I should hold it or is it overpriced and sell it?
This is a highly subjective discussion – what I find as inexpensive can be expensive for you and vice versa. Given this, I would not be happy to buy Page at such valuations.
Once again, thanks for the modules Karthik!
I would like to know usually how many days a company takes to release their annual report after they have made an announcement of the financials? for eg. this year, Infosys has announced its financial results on 15th April, usually how many days after that the company takes to release the Annual Report?
Depends on the company, usually by May you should get it.
Thanks!
The intrinsic value of a share is fixed through-out the financial year, as it is based on number in the annual report?
The intrinsic value can be re assessed every time the quarterly numbers are published.
Market Guru,
If intrinsic value is almost double compare to current market price and other ratios are OK is it a good time to invest in such stock for long term horizon ?
Yes, it does. However, make sure you know the sector and business model really well.
Hello Karthik,
It’s Chad again.. I finished reading the entire series and I am feeling much much more empowered than before. As I had also said in my previous comments, I cannot thank you enough for your single handed effort.
And as I had said, here is my consolidated list of questions on all chapters. I have tried to find most of the questions in the comments first but I may have missed any. In that case, please point me there.
So,
1. How does it affect the P/L statement and cash flow statement when an asset is written off?
2. When the business is export based, how to take rupee depreciation into consideration?
3. When the parent company is Indian and all its subsidiaries are overseas, even then the stand alone results do not matter?
4. Isn’t lower the inventory the better? Is there any ratio of inventory to revenue which justifies it?
5. Shouldn’t inflation be taken into consideration while calculating average FCF or for that matter any YoY average values?
6. How to determine discounting rate? Is the discount rate same as inflation or is it the opportunity cost for other safe investment means? Does it vary across industry/sector?
7. When do dividends matter while calculating FCF or making DCF? (In the days when price is much more than the face value and where dividends are offered on face value, generally cash flows from dividends are meagre. But sometimes, small and medium core companies with large promotor holding try to offer dividends making it a function of number of shares and not the actual profit. How to take that into account?)
8. While calculating FCF why to consider only OCF? Why not cash flow from investing activities too? What if the net cash flow is negative for years? How to calculate FCF then?
I am immensely grateful for your time which you might take out to answer these questions.
Sincere Regards,
Chad
I’m glad you liked the contents Chad. Here you go, in the same sequence –
1) When an asset is written off the direct impact would be on depreciation value, which would decrease in P&L, and therefore increase the bottom line. In cashflow, depreciation is added back to net profits to get the cash flow from operations….so since the value would reduce, the CF from operations would go down a tad bit.
2) Usually, companies dealing in forex would hedge their currency exposure so minimize the impact of currency fluctuation.
3) Nope, always stick to consolidated
4) Lower inventory can be tricky – isit low because there is demand for the products, therefore company is not pushing, or isit low because its getting sold like hot cakes? Obviously, the latter is desirable. Inventory number of days and inventory turnover ratio will help you answer these questions.
5) We bring back FCF to present value by discounting, this takes care of inflation
6) Varies across industries….and across the size of a company. For example for a company like infy, i’d be happy to take 10-11% discounting rate…but for a smaller company, I would expect a higher return. The rate that you consider comes from your personal valuation experience.
7) Dividends do not play a role in DCF calculation
8) For any company cash flow from operations is what matters – after all this is what they are supposed to do i.e make money by running a profitable operations. Cash flow from other activities are incidental to the business and cannot be forecasted. Hence we stay conservative and take only the cashflow from operations. If the net cash flow is negative, then it just means that the company is operationally weak…you should not even considered investing in such companies unless you believe the turnover is around the corner.
Good luck, and happy investing!
This is amazing Karthik. Thanks a lot for taking your time out once again. BTW, I researched one of the references you had quoted (Prof. Dr. Aswath Damodaran) and I found on his website some very valuable data which can help determine the complex unknown factors such as industry wide discounting rate or overall cost of capital required for DCF modelling.
I hope it might be useful to other fellow investors as well visiting this site.
http://people.stern.nyu.edu/adamodar/New_Home_Page/datacurrent.html
Thanks and Regards,
Chad
Great! AD is a genius when it comes to business valuation, you need a lifetime and more to learn things from him 🙂
Karthik, Great writing all the way, thanks for sharing, but for the first question, a write off of the asset will have a negative impact on the same periods P&L no? as it is a debit on the expense side. So I don’t know how bottom line is going to crease just because there is no depreciation ? Please comment
Not really – write off is quite common when the asset ages and cannot be depreciated further. Won’t really impact the P&L.
Thank you Karthik. I was more referring to your earlier answer to Chad ” When an asset is written off the direct impact would be on depreciation value, which would decrease in P&L, and therefore increase the bottom line.”. I think you are right that it will increase bottom line from the next fiscal year, but for the current year it will create a big dent if it is an active asset, so bottom line will decrease. May be it is just me, on how I read your answer, never mind. Wonderfully written articles, continue your good work.
On the contrary, why would the company risk writing off an active asset? They would probably do this repay debt. Not a good sign at all.
Sir i have thoroughly completed both TA and FA modules. Now i am confused as to which approach to take towards investing? TA or FA?
If its investing what you intend to do, then it has to be based on FA.
Sir which will be better in the beginning, trading or investing?
I’d start with investing !
Hi Karthik,
May God bless you and Zerodha team, i have never expected, in life time, i would be able calculate intrinsic value for a company by this understanding.
Regards,
MSP
Very happy to know that 🙂
sir how can we calculate intrinsic value of a commodity company
Like any other company! You will have to dig deep into the business model and make a fair assessment on all the variables involved in revenues, expenses, working capital etc.
hey nice work
would u write book on fundamental of commodity and forex or
can u suggest me some books??
It is a vast area, depends on what you are looking for.
I want to know about forex fundamentals Do u have any plan to write on these topics? Any book
Check this – http://zerodha.com/varsity/module/commodities-currency-and-interest-rate-futures/
hi karthik am fresher here
i enjoy it so much simple and easy to learn
in real life am also steel trader am gain so much knowledge here
Happy to know that 🙂
Good luck and happy reading!
Hi sir,
Recently i read varsity module of Fundamental Analysis part.
I am very much impressed the way you guys have developed it…its just awesome…special credits to you Karthik Sir.
My request is to send me the excel sheet that author claims to have made for the Fundamental Analysis purpose.
At the end of DCF chapter (5.2 module), Author claims that he has made a excel with formulas so that we can download it and use it for practice. but i could not find the excel sheet there sir.
Kind request to reply.
thx
Thanks for the kind words Amit. I plan to have a module on Financial Modelling soon, this will cover all the formulas and more.
Thanks for relentless efforts to educate beginners.
Thanks Karthik and your team.
Its really amazing material
Welcome 🙂
really useful article sir…thanks….do the companies consider same method while giving bonus shares or in stock split? when company split the share does it match undervalue( or right value) of that stock with that price ? isnt it good buy opportunity if other conditions(financial,P/L ) are okay?
No, corporate action has nothing to do with valuation.
could you suggest some best stock screeners other than stockscreener.in?
Have you seen Ratestar? It is equally good stuff.
First of all thanks for material.
Even though I got insight in calculating intrinsic value. How can I create myself my financial ratios numbers? Like GPM > 20% RoE > 25% etc.
These are simple formulas which you can apply on stocks. Alternatively, you could use something like Ratestar or morning star to look at the ratios.
wHAT MY QUESTION IS THAT?
IN chapter 12 of FA 12.4 IN THE TABLE YOU written GPM> 20% ROE>25% ? how did you come up with these conclusions ? Are these numbers of these ratios preferred safe investment like that? if so why?
I mean why did n’t YOU choose as ROE > 19% GPM > 15%? thats my question
I do not have any problem in calculating these ratios.
These are my own preferences and yes, these are considered kind of satisfactory.
Reading this module was very satisfying. Concepts explained in simple manner. This is my third module. Keep the good work going. One question. We didn’t cover one of the popular valuation ratio – PEG. According to you how important is it.
Thanks for the kind words, Harish.
There are way too many financial ratios, all of which helps us develop insights. Thought it was practically impossible to cover all of them 🙂
when would you launch financial modelling course?
Maybe after the current module on Risk is over.
Dear Sir
I am okay with the growth concept which can be arrived at by using CAGR .
But how did you estimate the required rate of return ?
I have read about the CAPM model to predict the required rate.
All the factors in CAPM i.e RF , Beta can be however known .
Can you please give a real life situation of calculating Market risk premium , thereby Required rate of return?
Thanks in advance
I tend to keep the model conservative, where the cost of capital (WACC) is higher and the growth rate is lower. There is no rigid number here…apply the numbers based on the company and the industry it belongs to.
Hi Karthik, From few days, I have been reading Economic times Markets Page, and I find stories of people who have become a millionaire by picking stocks early which then became a multibagger giving skyrocketing returns.
My question is how to pick a multi-bagger stock which is not on the radar of smart money yet. I mean, out of 4000 stocks listed on NSE there should be a system in place to evaluate and eliminate and come to a one or few names that could be further evaluated. Checking each and every stock does not seem to be a practical idea.
Also, One factor that was common was to identify a strong and dedicated management. Others were futuristic business, scalability, etc. The problems with these kinds of factors are: They are subjective, not easily translated to numbers.
Does this call for a new chapter for Varsity — Identifying Multi-baggers.
There are tools available that can simplify the task for you. Coincidentally, Smallcase launched screeners yesterday, check this post – https://zerodha.com/z-connect/tradezerodha/smallcase/introducing-screener-by-smallcase
Besides these tools, you need to develop an investment mind set and constantly evaluate business opportunities…this I guess is the first step towards identifying a multi-bagger.
Hi Sir,
If we invest it for long term, then we should be bothered about daily noice. But what is the percentage change which we should not consider for daily noice for small,mid and large cap ?
Thanks
No, you should not really be looking at daily prices if you are investing for long term.
But suppose some stocks declined by say 10% and somehow it is not trending in last one month, then in that condition what should we do ?
Maybe look for another trading opportunity 🙂
Hi Karthik,
It was really nice going through the module. The whole module was very basic and easy to understand. Keep up the good
work !. God bless you !
Glad to hear that, Prinkle 🙂
Happy learning!
How to calculate return of market indices Like nifty50, BSE Auto etc of particular financial year?
[Closing Price/Opening price] -1 expressed as a percentage.
Why bank nifty value is greater than nifty50 ?
https://www.google.com/finance?q=bank+nifty&ei=HQeCWeODHsyougT5sLcg
https://www.google.com/finance?q=nifty&ei=JgeCWejdDcyauQSl9oYY
They are two different indices!
I do know that they are different indices. My question is why nifty50 value is smaller than nifty bank. Nifty bank has 12 bank stocks and nifty50 has 51 stocks. How can the value of nifty50 has smaller value than niftybank considering the fact that usually more number of stocks included in an indice should have more value technically right?
Index is a portfolio. Banks have rallied very well over the years and so have their share prices. The effect of the increase in share price is captured very well on a portfolio of 12 stocks versus a portfolio of 51 stocks. In other words, a portfolio with a lesser number of stocks tends to out perform/underperform a portfolio with more number of stocks.
Hi As Per The Cash Flow Statement The Closing Bal Is 2928.63 But As Per The Balance Sheet It Is 2945.67, Why Is It So?
Ideally, the number should match, need to figure out why these are not matching. I’d suggest you go through the notes associated with the schedule as well.
Dear Karthik ,
Just did a study on Cochin Shipyard Ltd since its going to be listed in the market. Did a study of Annual Reports of CSL from Mar-12 to Mar-16 and as per the analysis the DCF price band buy level is coming around between Rs.98 to 80. In the mean while they have fixed the price band from Rs.422 – Rs.432/-
I will be sending the working file at your email id. Please do check it whether my calculations are right and come out with your opinion. For me I won’t buy the Cochin Shipyard Ltd IPO since its expensive. For me the buy price is between Rs.98 to 80.
Regards,
Sonjoe Joseph.
(There is no scope of file attachment here do reconsider it)
Sonjoe, I’m really sorry but I’m not sure if I can go through the excel sheet. However, my guess is that you may have not really taken a relevant growth rate for the cashflows. Please do double check all the variables.
Dear Karthik,
In the case of ARBL Example you have taken the maximum growth rate as 18% and minimum growth rate as 10%. Further u have told that if its a mature company then u will take the maximum growth rate as 15% and minimum growth rate as 10%. The company under consideration “Cochin Shipyard Ltd” has just released the IPO. While analyzing the annual report just got the following figures:-
1. CAGR Revenue Growth = 7%
2. CAGR PAT Growth = 10%
3. CAGR EPS Growth = 10%
4. CAGR G/P Margin = -2%
5 CAGR PAT Margin = 2%
6 CAGR ROE = -13%
Avg Free Cash Flow for the last 5 years = 175.80 Crore
As per the above figures for the calculation of DCF Model what should be the maximum and minimum growth rate? Among the 6 CAGR Growth rates above which one should i take for the maximum and minimum growth rate.
Do explain it me clearly.
Regards,
Sonjoe Joseph.
The growth rates are not so impressive (assuming the numbers are correct here). Anyway, when you assume forward looking rates (such as the growth rate), you will have to consider the business prospects of the company. For this, you will have to see what the management has to say…based on this, I’d would assign the growth rates.
Dear Karthik,
In the Cochin Shipyard Ltd Annual Report 2015-16 under “Management Discussion and Analysis Report” its said that ” The Indian Defense Shipbuilding market looked promising with the published reports indicating a growth of 10% CAGR in Navy outlay during the period 2000-2014. As per published report the estimated defense sector opportunity in shipbuilding in the next 10 years is above `4,00,000 crores”
So under this circumstances can i give a maximum growth rate is 10% and minimum growth rate as 5 % in which the share price good buy will be around Rs.61 to 50. Even if i give an extreme value say maximum growth grate 25% and minimum 15% then the buy price will be around Rs.149 to 122 which will be near to the present book value of Cochin Shipyard which is Rs.153. Even the sales per share is Rs.186/-
Just give me your opinion regarding the growth rates.
Regards,
Sonjoe Joseph
Yes, I think the growth rates are fine!
Dear Karthik,
So which growth rate i should take for the max and min growth rate? Is it 10 to 5 or 25 to 15. Well the company talks about 10% growth rate in which case the best buy price is Rs.61 to 50/-
Regards,
Sonjoe Joseph
I’d suggest you stick to 10% growth rate.
Hi Karthik,
in PDF fage no 11. you have caluclated ROE in two ways
1)ROE=Net profit margin X Asset turnover X Financial leverage
=25.9%
2)ROE=Net Profits/Avg share holders equity
=30.31%
The above results has different values. Which one we have to prefer while calculating the ROE.
Thanks in Advance
PDFs are not updated, Venkat. Anyway, I’d prefer to 2nd option.
as you said as company matures it doesn’t grow much so we take 3 to 4% growth after 10 years. For companies like TCS Infosys and other very good companies which are very old and as per your defination they are mature, what percentage of growth for initial 10 years we can take for these companies. how can we apply DCF model for analysis of INTRINSIC VALUE of these companies at present time.
Thanks
For a mature company, it makes sense to take the growth number around the inflation of the country.
Sir Can You Please Teach Us Another Valuation Model Like Dividend Discount Model Or Any Other Model That You Find Most Convenient After DCF Model.
Sure, but please do give me some time, will do this as soon as time permits.
Ya Please Take Ur Time, But Sir I Have A Another Question In My Mind. What If Instead Of Free Cash Flow We Take Net Profit For The Year & Discount Them Back 2 PV?
Hmm, you cannot do that. Businesses are valued on how much free cash they generate.
Hi What Actual Total Capital Employed Is? Is It Short Term + Long Term Liability? Or It Is The Entire Equity & Liability Side? Anotheer Question Is What Is Net Worth? How To Calculate It?
Capital employed = Eq + Debt.
Net worth Share holders equity plus reserves & surplus.
Hi Karthik,
May i know where can i download the stock valuation spreadsheet that was used for Amaraja Batteries example. Please let me know.
Thanks..
I think the excel is available in the previous chapter. Can you kindly check? Thanks.
Hi Karthik,
How can i do fundamental analysis in the middle of the year and what are the other methods available that could be used to buy shares for long term.
Yes, you can. You could look at the latest Annual reports, formulate your opinion on the business, check if the stock is valued correctly…and all this while tracking the latest quarterly results. So yeah, you can do FA anytime you wish.
I did a DCF valuation analysis for a financial services stock and the valuation is coming out to be 1300 while the stock price is 40. It can be noted that the FCF was only positive this year and negative the past two years. What do you think of such a scenario. Is it a legit valuation?
Nope, clearly something wrong here, Aviral. Also, please do not use this technique to value a bank of any BFSI company. It can give skewed results.
I have read most of your chapters and I wanted to thank you for your effort putting all this work together. Your hard work is highly appreciated. Honestly, you are one of the best I have seen at simplifying things in the stock market yet covering almost everything in details too. I am an aerospace and mechanical engineer but I have always had an interest in investment and stock so I have been looking back and forth for quick clear explanations of the stock market for beginners. I only bought and sold stocks 6 times when I was younger. Now as a grad student having more free time, I want to focus and spend more time on the market and you are helping me with the important early steps so THANK YOU Kathrik.
Thanks for the very kind words and encouragement, Jaafari 🙂
Happy learning and good luck!
Sir,
Can you please suggest some books that would help in understanding the economy and how its policies moves the stock market ?
There are quite a few good books on Macro Economics. Check this – https://www.amazon.in/MACRO-ECONOMICS-PRIMER-Loveleen-Gupta/dp/8193317297?_encoding=UTF8&ascsubtag=88d5605e-04db-43aa-b559-40d6b9d96e75&portal-device-attributes=desktop&tag=googinhydr18418-21&tag=googinkenshoo-21
Thanks a lot , Sir
Cheers!
Karthikji,
Apart from the ones mentioned in 16.1, what are other points a beginner should watch out for while doing a DCF analysis?
Well, DCF can get really complex and tricky. I’ve tried to keep it quite simple. Suggest you check out Ashwath Damodaran’s books on DCF and valuation.
Thanks for your reply Karthikji.
Will check the book.
Good luck!
Wow, great quality content Mr. Karthik. It must have taken an extraordinary effort to create this from scratch. Also, I really must appreciate that you respond to every comment made. I’ve recommended this course to all my friends.
This is just another reason why Zerodha stands out from the rest. #RESPECT
Thanks for the super kind words 🙂
Happy learning!
Thanks Very Much again for the useful content Karthik !!
I feel motivated to take up CFA after reading your modules.
Regarding CFA, is it sufficient if we are able to understand and reproduce content provided as part of reading sessions provided at https://www.cfainstitute.org
Alternately, if there is any better approach to target clearing CFA Level I, request to provide the same.
Kiran – If you plan to give CFA, I’d suggest you pick up the content from the CFA Institute. Use the content here as supplementary reading.
Hi Kartik,
In these days it’s difficult to find companies which can be compared with one another. For eg. A company may be manufacturing boilers and water treatment equipment. The second company maybe making boilers and air pollution control equipment. In these two companies how do we compare the financial ratios as their balance sheets and profit and loss account would include the other products they sell. I’m assuming that they both are strong competitors in the boiler manufacturing business.
How do we do this ?
This is where your skill of analyzing the industry comes into play. You will have to identify the near matching company to compare. Also, in a sense you are right – no two companies are similar.
Hi,
Thanks for making such a wonderful content, I was a novice in Investment and started reading your material. Initially I didn’t thought that I would be able to cover this whole module but I couldn’t resist myself to complete it as you made it so interesting by explaining with a live example of a prominent company by taking its Annual Report.
While also last few chapters were somewhat difficult to understand maybe due to my less exposure to technical Accounting details but somehow I was able to get the accent of it.
Thanks
Good luck, Rajat! Read it again, I’m sure you will get it 🙂
Finance is not too difficult after all 🙂
hello sir
sir when you add relative valuation method in vansity ?
thank you
Sometime soon, Gulshan. Right now the focus is on pair trading.
This is so great Sir. Reading your contents(particularly FA module) has made me really regret studying B.Sc instead of B.Com. The more I read about stocks and business valuation the more I realise how interesting Finance as a subject is.
Thank you so much for your hard work Sir.
I’m indebted to you.
P.S., I have a personal question Sir, Are you a Kannadiga?
I’m happy to note that, Ashish! Happy learning and Good luck!
Yes, I speak Kannada at home.
Thank You so much for writing this. Learnt lots of concepts. I value each & Every word written..
Please wish me the best, as i am really interested to become a full time investor.
Thank You Karthik
Warm Regards
Sai Kiran
Sai Kiran…i’m glad to know you liked the content here. Wishing you all the very best 🙂
Keep learning and stay profitable! Good luck.
Hi Karthik,
Its very good module help a lot in trading and investing. As you talked about financial modeling in previous chapters but haven’t uploaded it. so please share some insights about financial modeling as soon as possible.
Thank you!
Pawan, yes, financial modeling is something on the agenda. However, will put this module up next year, maybe after the current model on Trading Systems is done.
Thank you very much karthik.
The entire module is extremly helpful.
I am already recommending this series to all my friends.
Happy you liked it, Vignesh and thanks for recommending this your friends 🙂
Number of stocks in portfolio should not be more than 15-20, then why
1.) Mutual fund.
2.) Liquid fund.
3.) FII
These funds have more than 40 stocks, why they select so many ?
Well, I really cannot comment on their portfolio construction logic 🙂
Thanks for material.. I finished reading.. I understood partially.. I can understand thoroughly if i goes through second time.. Mean while kindly reply.. What is investible grade attribute means? (in simple terms… )
Hoping for reply..
Thank you
Investible grade refers to the criterion which qualifies an investment. Think of it as a checklist you need to run through before you make an investment in the stock.
Hello Karthik,
This is great stuff and the flow of concepts from chapter to chapter is simply exceptional. This is a great help for people like me who aren’t from financial background. I had always felt most of the books on fundamental analysis and valuation were theoretical and lengthy. These concepts definitely provides a firm ground from where one can further enhance his/her knowledge on investment fundamentals.
Thank you and Zerodha team for such a great initiative and to teach all these concepts for FREE !!
Happy to note that, Nirajan! Hope you will like all the other content we have on Varsity. Happy learning.
Karthik ji,
Thank you very much for giving so much informaiton about Fundamental studies as well as other topics, which you have covered. I would like to request you, if you can make vedio on each topics for prospective investors/beginners. I know it is realy a taugh task but beleive me your vedio will be an Bible for stock market (because listening creats more impression on mind rather then reading)..
Regards
Glad you liked the content, Goldar. We have few videos here – https://www.youtube.com/user/zerodhaonline
Sir Can You Please Explain What Is Loan Disbursements & Loan Outstanding?
Loan outstanding represents the debt the company owns. Loan disbursement is perhaps the loan expected to be given out.
Extremely good module with lots of experience and pratical knowledge filled in.
Hi Karthik,
Amazing Stuff you have here!
Doubt regarding “Shareholders’ Equity” calculation required in ROE:
The suggested formula of “Share Capital + Retained Earnings – Treasury Shares” is a bit tedious to find and calculate, especially finding retained earnings. Further, Investopedia gives the definition as “Total Assets – Total Liabilities”. But these two methods give different numbers most of the times. So which one to pick & how to get the SE in a convenient manner? For e.g., can we pick the “Shareholders Funds” or “Total Equity” or “Equity Attributable to Owners of the Company” or “Share Capital + Reserves & Surplus” or some other variation which can be directly picked from the balance sheet.
Thanks
Uday
I’d suggest you stick to “Shareholders Funds” or “Total Equity” or “Equity Attributable to Owners of the Company” or “Share Capital + Reserves & Surplus”.
Great job sir, i am very much Contented about the service that you are providing in this platform, now i am confident to be an investor . But Still little difficult to analyse the balance sheet of bank,.
It would be a nice if there is little about financial institutions.
Feroj, I’m glad to note that. Banks balance sheet is a little tricky. Will try and put up some material sometime soon. Thanks.
Hi Sir,
Can you please add a separate chapter on corporate governance which will cover topics like
1) what are corporate governance issues
2)All other things which are mentioned in corporate governance section of annual report
Because
when reading through corporate governance section of annual report it is very hard to interpret whether company has good corporate governance or not.
1) I’m not sure if I can do justice to this topic – in fact, I’d love to learn more about it myself
2) All the basic things that you can look at and analyze – I’ve discussed it already in the chapter.
With respect to market valuations, which tool or website would you suggest to analyze how fairly or expensive market indices are with respect to p/e, p/b, d/y, eps and others across Indian and global stock indices.Also, is there a module to walk me through such concepts for better analysis?
Thank you.
I’d look for the details published here – https://www.nseindia.com/products/content/equities/indices/historical_pepb.htm , I think this is quite straight forward, for example, a PE of 27 on Nifty is quite high according to me.
Sir, Is value investing also done with the same steps of fundamental analysis.?
Yes, you need to incorporate FA to value invest in the markets.
Sir,
Easy to comprehend and invaluable learning you have imparted through this module on Fundamental Analysis. Thanks!
Happy learning, Saurabh!
Hi,
Thanks for the detailed explantion, learning everything about stocks in here, it’s awesome. Could you explain the terminal growth rate! Why do you choose only 4 %or less? I assume growth rate used to calculate future value is the fixed deposite rate or bank interest, the minimum rate at which money is compounded in India. Isnt it?
Awaiting your answer.
Thanks,
Bhavani
The terminal growth rate is the rate at which you expect the free cash flow of the firm to grow perpetually. Perpetual because a company generating cash, logically can go on forever. However, the rate at which it will generate cash declines, hence the terminal growth rate is often set at low single digits, to roughly meet the inflation averages.
Is there a way to learn “How to use Zerodha Pi”?
You can look for these blogs and comments – https://zerodha.com/z-connect/index.php?s=pi , its a wealth of learning!
Thanks zerodha varsity team
Welcome!
Hi Sir,
1.As per technical analysis is “Markets discount everything ” -all known and unknown information in the public domain is reflected in the latest stock price.Then how come as per fundamental analysis the stock could be a undervalued stock.Won’t there be a reason for the stock price to be that low?
2.Why margin of safety is not calculated for upper intrinsic band value?Isn’t it that similar to intrinsic value band ,margin of safety can also be a band?
3.If the margin of safety is 30% and intrinsic value ban is +10% and -10% , then if we buy a stock at margin of safety price and sell above the upper intrinsic value band then its that almost all Fundamentally analyzed stock can give only 50% (30%+10%+10%)?
————
4.As per DCF Analysis,the cash-flow for the entire life span of the company is predicted and their present value is calculated and if that is the intrinsic value band,then how come a stock price can move above this level ? Because as per your statement ” One thing is clear at this stage, whatever is the cost of this machine, it cannot cost more than Rs.50,00,000/-. Think about it – Does it make sense to pay an entity a price which is more than the economic benefit it offers? ” and ” This also means, the value of all the future cash flows from the pizza machine in today’s terms is Rs. 32,80,842. So if George has to buy the pizza machine from Vishal, he has to ensure the price is Rs. 32,80,842 or lesser, but definitely not more than that and this is roughly how much the pizza machine should cost George.” in pizza example .
5.Does this above statement mean that when the price is above the intrinsic band value should we need to sell the stock? As all future cashflow (benefits) is factored in for this band and as by anyhow company can’t ripe more than this level , then why do you say to stay invested till “Disruption in investible grade attributes” !
6.How come stocks move out of the intrinsic band value (above and below)?Because no one will buy a product with more cost than that it is actually worth of and no one will leave the product when its at a cheap price.This implies that stock price should not move behind the IV band.But in reality it does move away away.How this is happening?
7.In a paper umbrella pattern, what is the percentage of upper shadow that is permissible to have?
8.How to identify primary and secondary trends?
9.As per your statement ” For example if you are considering a long trade based on candlesticks, then look at what the primary and secondary trend is suggesting. If the primary trend is bullish, then it would be a good sign, however if we are in the secondary trend (which is counter to the primary) then you may want to think twice as the immediate trend is counter to the long trade.” ,my question is that in TA the patterns we use are all trend reversal pattern,then how come the trade direction can be inline with the secondary trend?
1) This is true, however, the discount/premium is a short-term reaction, best suited for the trading position. The deep value discount you are talking about is fundamentally based and has a long-term implication.
2)The margin of safety is mainly from a buying perspective, hence you look at the lower levels.
3) Yes
4) Can you kindly elaborate your concern?
5) Yes, you can consider a breach above intrinsic value as a signal to sell
6) You are assuming that everyone values the market fairly, this is not true
7) less than 0.5%
8) Look at Dow theory
9) Not all are trend reversals.
Also, please dont mix questions from different topics in the same thread, this may create confusion to others reading for the first time.
Dear Karthik,
If a company falls under investable grade attributes. But promoters / promoter group share holding is less than 50%, what is your reading on it?
You can still go ahead, but watch out for very low promoter holdings like less than 25%.
Sir In My Final Year Of BBA I Have 2 Submit A Research Report Under The Guidance Of An Expert. Will You Please Be My Guide?
I Almost Prepared My Project On A Company. Just Need Some Guidance. I Promise It Will Take A Few Email Conversation.
Like I mentioned, I’m afraid I won’t be able to commit time for this. Apologies for that.
I’d love to, but unfortunately, time does not permit, Arghya. Good luck and all the very best!
Sir,
A company’s stock is trading at about 45% less than lower intrinsic value, but P/E is 33 times. Should I consider buying it?
Something seems out of place with this, Saurabh. You may want to double check the numbers again.
Checked the numbers again. Still the same figures.
Ok. I’ll check soon. Thanks.
Sir,
Did you checked.
Which is the stock?
Mold-Tek Packaging
Guess the PE is 26x. Not sure about in intrinsic value, need to run a quick DCF here.
The P/E is 33 times. As per DCF, lower intrinsic value is coming out to be 597/-. It’s current price is 45% less than lower intrinsic value. I am confused. Can you provide your impression?
Saurabh, I’d really need to look at the excle for this. Can you double check the 2 stage DCF growth rates? Including the discount rate used etc?
Kartik, here are the figures that I used in DCF:
1. FCF growth rate for first 5 years: 20%
2. FCF growth rate for first 5 years: 12%
3. Terminal growth rate: 3.5%
4. Discount rate: 7%
The terminal growth rate of 3.5% and a discount rate of 7% could be a bit generous. Can you try 3% and 9%?
Hi Sir,
1. what ever may be the investible grade attribute, IV band is the fare price for that stock considering(accounting) all the investible attribute and above that its over valued.So how does it make sense to hold on to a stock above the IV band since investible attribute is present.
2.What if the price of the stock is is trading at lower IV band level, but it does not have any sign of reaching margin of safety price.In that case can we buy at lower IV band price?
3.In the entire bull market run, does the value investor can’t do anything and remain quite ? Since a good stock would come to margin of safety level only during bear market.IF so what if the bull market last for many years together(more than 5-8 year) !!
4.what if we are buying the growth stock at a price little above IV band.Wont that stock growth since it has a good growth opportunity?Does this Valuation technique should be strictly followed for a growth stock also?
5.if a growing company is spending (investing) in capex (equipment,production units,etc ) largely, then that will produce more free cashflow in future right?Then in that case why do we subtract capex from operating cashflow for FCF calculation?
6.If we buy a stock exactly at IV band value today, does that mean that our money will just compound at particular % (say 5% ((18+10)/2-9%)incase of ARBL example) in future and we would get back our money with just 5% future value?
7.In Annual reports, numbers are differing.In 2015-16 annual report the number given as of march 31 2016 is differing with the 2016-17 annual report number given for march 31 2016 in .Why is this difference and which should be considered while calculation?
8.If DCF is the valuation technique to be used to find the fair value,then what is the use of other valuation ratios (PE,price/Book value.etc)
9.If the FCF is what a shareholder enjoy then does FCF and book value need to be same? Because i hope book value is what that belong to the share holder.( “The “Book Value” of a firm is simply the amount of money left on table after the company pays off its obligations.”).
10.Can we first calculate IV band for a stock (stage 3) and if the price is below that, can we proceed to equity research stage1 and stage 2.Because if the price don’t fall below that value ,we can simply avoid the stage1 and stage 2 which i hope would take more time than stage3?
11.I have calulated IV band for CochinShipyard and found it to be 179-219. with last 6 year average FCF and FCF Growth rate for first 5 years 18 % and next 5 year @ 10% and discount rate 10% and terminal growth rate 3.5%. will you be able to verify whether that IV band value is correct ?
1) Markets are all about variations – you don’t buy when you see the stock is overvalued, but no harm holding it. For example, HDFC Bank always traded at high PE, but the stock has performed phenomenally well.
2) If you are ok with some amount of risk, then maybe you can 🙂
3) Yes Sir, nothing much to do in Bull markets. You just accumulate cash so that you can deploy this in your portfolio when the cycle changes
4) The band is a guideline, you are free to work around these levels. There are times (although very rarely) when I’ve bought stocks higher than 5-10% of the upper band
5) Yes, it is supposed to generate free cash flow. We subtract because of its cash outflow.
6) No necessary, remember business landscape is dynamic so things can change quickly. But a company built on great foundation can be resilient to these changes.
7) Always take the restated numbers, on a consolidated basis
8) DCF is just one of the techniques. You also have relative valuation 🙂
9) Both are different. FCF is forward-looking whereas book value is as on the current equity
10) You can, no harm in experimenting
11) No sir, unfortunately, time is a constraint for me. Apologies for that.
hi Karthik
i was doing DCF for Lupin
i have following problem
i see lupin had a huge out go for 2016 ( acquisition ) hence its cashflow is negative this puts the FCF avg for a toss
basically it distorts the valuation. i understand that acquisition is cashflow positive for future ( or negative
i this case how should be go about it
2. Can you possibly share a bank or a Financial Institution dcf model. preferably a screwed up one not a straight forward one like HDFC . the reason being i was doing yest bank and i didn’t understand it at all.
Akhil, I get that. One way to deal with this is by capitalizing the benefit of this acquisition over the next few years. After all, a company makes such transcation for either startgic reasons or from a pure financial perspective.
I’m not really confortable with banks, hence I’d not be the best person for this.
hi sir ,recently read your finale chapter,here u mention in checklist that to filterout stock just go through nifty5o stocks and 1stpoint is to look around recognisable candlestick pattern,priortrend,and volumes,etc so my question is suppose today i have to take the trade,then do i have to see yesterday candlestick pattern ,and yesterday volumes,to carry out todays trade.
the way i am thinking in these way is because in first 20-25minute while filtering out stock we cant confirm the pattern correctly
Yes Chirag, looking at yesterday’s closing and volume gives you a fairly decent sense of what is likely to happen today – this is especially true when there is momentum in the market. But do remember, these are just estimates, no guarantees in the market.
Hi Karthik,
This is really informative and helped me understand it much better. I just have one doubt;
If a stocks clears all the three stages and its current price also falls way below the price after discounting the margin of safety, that would surely be a buy with strong conviction, but do I have to put stop-loss to take into consideration the possibility of occurrence of some exceptional behaviour in the market?
And if yes, at what price shall I put the stop-loss?
No, remember, you are doing this investment for long-term. The concept of stop-loss is short-term in nature.
HI Sir,
If IPO’s are overpriced then why do institution subscribe for it.In almost all IPO’s there are some or the other FII,DII,HNI subcribing.If the IPO overpriced then why do this smart money people subscribe ? In Anchor investor portion also these people subscribe. Why so?
Well, most of the institutions have a leverage play here. They subscribe to the IPO by paying as little as 5-10%, the rest of the funds are financed.
Hi Karthik!
My question is why do different Brokers report of same company have different Key ratio? Some ratios are very different and some are very close. I know this could happen because the market price of shares keeps on changing but what about other ratios. I was just comparing E.I.D parry report from Axis Direct vs Edelweiss website for the year 16-17 and results are varying from ratios to ratios.
When I was doing my own fundamental research I was getting very close results but not the same why?
I’ve noticed this as well, but I have no cue why this happens. Usually, the difference arises when you take standalone versus consolidated. Anyway, for this reason, I prefer to always calculate my own ratios 🙂
Yeah! I think doing your own analysis is better and safe options. After some practises I am getting used to it and less time is being consumed.
All thanks to you Karthik! ?
Yes, that is in fact, the best approach 🙂
Good luck and happy learning 🙂
Dear Karthik,
Stock of a company has doubled from FY12 to FY17, whereas its PAT CAGR for the same period (5 yrs) is just 1%. Why it must be so?
Maybe the sales improved leading to larger profits?
Dear Karthik,
Promoter holding in ITC is 0%. Would you suggest buying its stock provided it fulfills other investable traits.
ITC is a different story, yes, I’d if you think it matches all your investment criteria.
Great Source for any Beginner….!!!
Thank You Sir.
It’s Time for practical research.
Good luck, Omkar. Keep learning 🙂
Hello Sir,
Nice work, clearing concepts in easy and understandable language. For a Beginner this is just Priceless. Just want to know, Are the ratios all the same for screening a Banking or a finance stock. I am finding really difficult to screen banking stock with the approach. Kindly help us to clear those doubts as well.
Banks are slightly different. But for stocks in other sectors, this should do. Good luck 🙂
Hi Karthik!
Please suggest some good books on mutual funds.
We could not find one to our satisfaction, so contemplating to put up some material ourselves 🙂
That will be even better! Thanks.
Hi Sir,
First things first, a well composed, comprehensive and lucid article on Fundamental analysis.
Thanks a ton for helping the investment community in this way.
I would like to know when you are planning for the Financial Modelling course, because this course complemented by Financial Modelling would be a killing. Hope you have plans on that?
Again, my heartfelt thanks for your great work.
Sunil, I totally get your point about this module complementing the financial modeling module. I will try and work on it but unfortunately cannot commit a timeline.
Thanks Karthik.
Will be eagerly waiting.
Sir,
Value investing and dcf is the same thing?
If not then sir can you please give us some teaching of value investing.
DCF is a method to value a business. If a good business is trading at a deep discount to its true value, then investing in this stock can be an example of value investing.
sir,
can you please teach us the philosophy of value investing, which is practised by Warren Buffett.
I’m myself a very amature value investor, Vaibhav. I’ll try and share whatever I;ve learnt so far sometime soon.
Welcome!
Sir, Some queries popped up…..
(1) Regarding timing of selling a stock:
It’s understood that we should be ready to sell a stock once the company stops exhibiting investable attributes. But….
What about a position of selling the stock after long term i.e. after 2/3 years?
What if I need money after 2/3 years desperately and the market is down/bearish when I am about to sell my stocks for the need of money?
(2) What parameters to include in the checklist in place of inventory turnover and inventory days etc. for FA of software / IT / consultancy companies??
(3) Please guide us about FA of banks, NBFC (getting hullabaloo that Bandhan Bank might be good for long term) !
1) In this case, you have no option but to liquidate your position and take a hit. This is the reason why you need to invest only patient capital in the stock market
2) These ratios should be really low as software is a service-oriented industry
3) I’m not the right person to discuss this sector
Thanks for replies, Sir.
May you have 48 hours, get enough time to upload FA of banks, relative valuation and enhance the FA module further.
One of your ‘Fire-power’ is that you’re a great ‘Simply-Fire’ (simplifier). Hence, we’re waiting that part from you!
Hahah, thanks for the kind words 🙂
I will try and do my best. Thanks!
At the finale of FA module, let me tell you, Karthik sir, that……
Zerodha varsity is the sole reason because of which I opened account with Zerodha !!
Your seminal work will go a long way in educating people about stock matket.
Just a request…….
Please keep remembering your motto and keep varsity always free on the line of MOOC. This is USP of Zerodha varsity!
Without varsity, Zerodha will be just like any other street brokers.
Thanx.
Will keep asking Questions/doubts…….
Thanks for the very kind words 🙂
Yes, I can assure you, Varsity will always be free and I will continue to answer the queries here. Good luck and happy learning 🙂
thanks a lot for sharing your knowledge. please keep posting more. we are waiting.
Will strive hard to do that, Sir. Thanks.
Excellent.
After going through Zerodha Varsity, i decided to move my account from another broker to you provided Zerodha customer services is good. Anyone with Zerodha, please comment.
I can assure you won’t be disappointed 🙂
Hi Karthik,
Thanks for thee excellent content. Thoroughly enjoyed learning right from reading annual reports to calculating the intrinsic value of a stock. Varsity is a treasure. Kudos to you and your team.
I would like to learn about mutual funds. Can you please advise if you have any modules published on this topic? I did a search in varsity but can’t find it.
Kind regards,
Guru
Thanks Guru. A module on MF is long overdue. Will try and put up content soon. Thanks.
sir,
how do you take the financial statement in excel from the annual report and merge 5-year financial statement?
You can import the data from reliable sites such as screener.in.
Hello Karthik Sir,
Sir my humble request to you is if you have time, can you do one module on doing fundamental analysis of banking & NBFC stokcs?
Its on the list, Omkar. Maybe one of these days 🙂
Thank you sir. Will be eagerly looking towards it.
Thanks, Omkar!
Thank you sir,Will be eagerly waiting for it.
Sir is it necessary to develop an investing philosophy in the market? Also, it would be really helpful if you can write up on some of the investment hacks . Like following the big HNI’s and investors to see what they’re investing in. And such hacks.
Yes, you certainly need to have an investment philosophy before making an investment. ‘Investment Hack’, seems like an interesting idea 🙂
Sir I’ve two questions
1. Could you tell me what your investment philosophy is? And what do you think about investment philosophy such as contrarian investing? Do you think that ever works in our country?
2. I was analysing Brigade enterprises. And unlike your analysis on Amarraja Batteries, the PAT margin and EBITDA margin for last 5 years doesn’t seem to have any trend at all. It is just random like stock price. What do I make out of this?
Please shed some light on these sir. As always, thanks in advance.
1) Well, it may sound cliched, but I like investing in fundamentally good stocks for the long term. My long term can be in excess of 10 years ;). If you give your contrarian call time (provided you are right), it will certainly work!
2) I’d avoid companies which have volatile set of numbers
1. Are you saying that even if other numbers add up, if there is no trend in PAT Margin YOY you’d avoid it? Can you please explain the logic behind that sir?
Ideally, the company you invest in should generate PAT and should also ideally increase year on year. Dont you think its desirable?
I agree that it is desirable to have companies to generate PAT and it should increase YOY. But my question was, in this case, there is a clear indication of increase of PAT YOY. But there is no particular trend in PAT Margin. I’m asking, provided everything else is right with the company would you still avoid it? Mind you, PAT is positive all the years with increasing numbers. Thank you.
Sundeep, usually when I’m stuck in such situations, I check how the peers are doing. If this company still stands out, then maybe there is something more to it 🙂
In fixed assets to equity ratio you say that for the lesser it is the better. But isn’t it the other way round sir? After all, all the fixed assets belong to shareholders. So the higher the number the better, right? What am I missing here?
Sir I know you’ve been planning to come up with a module on Mutual Funds. But could you suggest me some resources/ books on MF’s related to India? Also it would be helpful if you can tell me the way you first learned about MF’s. I’m only asking because I could not find anything online. Thanks a ton.
Exactly why we intend to have a module on MF, Sundeep 🙂
Unfortunately, I’m not sure of any good resources on this topic which is comprehensive.
In fixed assets to equity ratio you say that for the lesser it is the better. But isn’t it the other way round sir? After all, all the fixed assets belong to shareholders. So the higher the number the better, right? What am I missing here?
Actually, you also need to check the FA turnover ratio. High fixed asset and low turnover is no good.
Coming to your question – yes, higher is better. Not sure why I’ve mentioned the other way round. Let me check. Thanks.
Hi, Mr Karthik, You are doing great job, thanks for your publishing. Downloaded PDF files only accessible through Dropbox, please fix to get via Google Drive too. Also some modules have no table of contents, it causes some difficulty to reach particular content.
Thanks, will look into this.
Firstly sir “Thanks a ton”.I have been reading your modules whenever I get free time to learn.And all these months of reading have given me a great incite on the art of trading and Investing through your explanation sometime even looks as spoon feeding .
Thanks
Regards,
Subham
Hey, thanks for the kind words, Shubham. Happy reading 🙂
Great Article. I read every single word and it made a lot of difference in my thinking about investing and gave me a structure on which I can further build on. Thanks a lot. You are a rock star in my book.
Hey Subhrajyoti, thanks for the kind words! You are the rock start for taking time out and putting in the efforts to learn, happy learning 🙂
Hi sir
I want to ask stock specific question
One company promoter holding increase by 5% company’s sales and profit is increase but not cash flow and
most of fundamental not fit this criteria .
Can I buy on base of peters holding increase ?
Your view ?
Amit, you will have to look at this on an overall basis, not just based on 1-2 parameters.
Your content is mind blowing! The way with which you have explained everything is pretty helpful for a layman to understand. Also, the live examples which you have included while explaining the theory is valuable. No one in the market has as good content as Zerodha has!
Good job!
Hey thanks for kind words, Aditya 🙂
Happy learning.
Sir with zerodha coming up with stock reports with a third party, I’m not sure how to efficiently use it. If the report has a perfect 10 rating then should I just go ahead and invest in it? If not, what’s the practical use of these reports?
Sundeep, 10 is a perfect score and qualifies as a buy. It’s best if you use the report in conjunction with your own analysis.
Hello,
In fundamental analysis where should we have to place our stop loss. ??
Based on the P&L and Balance sheet 🙂
Now since that we have concluded the topic I wanted to ask you something. We have talked about index valuation in the previous chapters right ? Now my question is do we need to check the PE ratio of an index, say Nifty 50 while I purchase a particular stock ? Currently the PE ratio of Nifty 50 is around 26.5 which is highly overvalued so is it even the right time to purchase a fundamentally sound stock ?
Ideally, you should look at the valuations of the stock. For example, the index could be at 26.5, but if the stock you are tracking has come down to a low valuation, say 12PE, then you should go ahead and buy it.
Thanks for the reply. Honestly without you guys I wouldn’t have gained so much of knowledge. Our community is active in the comments section too which is a great thing. Seriously guys I appreciate what you guys do👏
Thanks for the kind words, Ajinkya. Good luck and stay profitable 🙂
Sir how do you cope up with market falls such as the one going on now? How do we take rational decision when the stock you had bought only a few months back declines to half of its value? Do you still place conviction on your research or sell it off? Please advice. Thanks.
Sir how do you cope up with market falls such as the one going on now? How do we take rational decision when the stock you had bought only a few months back declines to half of its value? Do you still place conviction on your research or sell it off? Please advice. Thanks..
Yup, this really depends on the conviction you have. Frankly, I’ve been dispassionate about this fall, I’ve added a bit more, but certainly not worried.
I haven’t seen anything like this explained so clearly and concisely. I have thoroughly enjoyed reading, which hardly is my hobby but you seem to have changed. Also the Investor mindset which is so important in this Life of volatility ; it applies to all aspects of Life. Thank you so very much.
Hey Arvind, this is so good to hear! Thanks for the very kind words. Happy learning 🙂
Sir, i received a excellent information from these 16 chapters. I was searching for fundamental analysis from last 2 years and now I am able get right stock with this information. Than q very much sir
Good luck, Srinivas. Happy learning!
Thank you so much for priceless knowledge provid to me thx boss
Good luck, Shubhendu!
Sir you’ve said already that DCF is not a thorough valuation of a business as it holds lot of assumptions about the future. Now I’m not expert in finance but I always felt that DCF was not enough because it doesn’t take the assets and liabilities of the business into account while valuing. It doesn’t work well with companies with negative cash flow or other financial and banking companies. My question is what is the best resource to understanding theory on business valuation? Please shed some light into this sir. I greatly value your input. I love varsity. Thanks a lot.
Sundeep, from my experience the best way to look at this is to use DCF on a case to case basis. A mix of relative valuation and DCF should help you a great deal in estimating the value.
Hi again sir. I do have one more question. Would you be comfortable giving out the name of the major stocks in your portfolio? I’m not asking it as an investment advice, purely educational one. It would be greatly helpful to know insights from the kind of stocks you pick. Thanks a lot.
I’m not sure if I should do that, Sundeep 🙂
Hi Sir,
Do we need to consider the face value of share while doing the fundamental analysis.Because face value is different of share to share.
Thanks,
Ramaiah Madala.
Yes, you will need that while analyzing dividends and other corporate actions.
A big thanks for putting this together. I can imagine the effort that went into this.
The efforts are worth it as long people can learn something out of it 🙂
Hi Karthik,
Loved your work and effort to keep educating us. I wanted to ask which software would you recommend to analyse financials and follow updates. Also can you add few more valuation models like P/E , P/R etc. which you think are important. Thanks!
I personally prefer to calculate these myself, Neel by picking data from the annual report. However, for a quick check, I look at screener.in.
Thanks!
Hi Karthik,
When there were some rumors about DHFL and YES bank, those shares got severely affected .
Could you please let me know why the ICICI share price is not affected even though there are allegations on Ex CEO.
Thanks
Satya
Interesting question, Satya. One needs to see the possible extent on the impact on the market cap, if it is not much, then there won’t be much damage.
Thanks Karthik for your response. Doesn’t come under corporate governance issue. Loan to Videocon has come out. But there might be many during her period. Really don’t understand why traders are not treating as this incident as fraud..
Well, alpha is created when you get to spot something before the market does. However, the trick is to have enough conviction on your thesis and actually act upon it.
sir,
I want to know that what happens when a person purchases a stock of a company before the merger. Example what is the return that a person will get if he had bought Satyam share after the after huge fall and before the merger with Mahindra.
The returns are not really dependent on the merger, Vaibhav. This depends on the way the company evolves post the merger.
sir,
can u explain in detail what is “investible grade attributes” explain in when to sell?
Have done that in the chapter, Vaibhav. In fact, this entire module is about that.
Sir,
Thank you so much for clarifying detail on FA. I searched on FA but didn’t get satisfied as much on this zerodha varsity I learned relevant information to pick a good stock. You done a good job..
Query, I bought 3 company on the basis of checklist. In that one company share price decrease 15 to 18% , know I add more to make the average or sell the share? These 3 Company which I purchased for only 1 year to hold..
Thanks, Pavan. I’m really glad you liked the content here!
Btw, it really depends on your conviction on the business. If you are convinced that the business will do well, then maybe you should buy more.
frist of all thank you for such a great modules.
my qustion is i want to make my creear in finacial feild i wan to ask you CFP (certified financial planner) Is good ?
CFP is great if you want to get into Financial planning. CFA is great if you want to move towards asset management and FRM for a career in risk management.
Hi Kartik,
If i have to buy a bank or NBFC, what are the main parameters to look for a good bank or NBFC for long term investing.
Regards,
MSP
I’m not an expert in this, however, you will have to look at, at least the following things –
1) NPA provision
2) Net interest income
3) Net interest income margin
4) Book value
It is not just looking at these numbers, it is about studying the trend and things that affect them.
this entire module is easily one of the best content ive ever come across…period! great work karthik and team 🙂
I’m glad you liked it, Harish! Happy reading 🙂
dear Karthik
when we do fundamental analysis it should be on standalone basis of the company or on consolidated basis? secondly do the technical and fundamental analysis both to be carried out or either one to be opted?
regards
a.k.mitra
Consolidated is always better.
TA vs FA depends on your time frame. TA is its for short term, FA for long term investement.
Hi sir
If company’s revenue are more than its market cap since 5 years is it good point ??
Yeah, the stock is most likely undervalued. But the same status for 5 years seems a bit of a stretch.
Thanks for reply
One more IT company have annual sales is 4817 cr and M cap is 1330 cr this type of scenario since 3/4 years .
According to u Is it good ??
Yeah, maybe you will have to dig deeper and figure out whats happening.
Sir
Please write chapters on mutual fund investments and Small cases at the earliest as Zerodha is offering to trade these products on its trade terminal.
Thanks a lot in advance
We are working on that, Kumar. You can keep track of it here – https://zerodha.com/varsity/module/personalfinance/
Thank u for this module it helped me lot.Im BBA finance graduate working as a equity dealer in HDFC . what are the new skills to be learned for successful career.can u pls reccomend any courses or certifications
Rahul, if you want to move ahead as a fund manager, then I’d suggest you look at CFA certification.
thanks for the Wonderful content sir
Sir Ian getting problem in finding stock from this huge univers of stock
Plz help me to filter
Thanks again for this content
Thank you
Why don’t you start by looking at just the Nifty 50 stocks?
Although you have done an excellent job of demystifying FA on stocks, I do feel each sector needs to be analysed with separate set of tools.
1.Can you let me know a book which deals with sectoral analysis?
2. How do we develop a framework for each sector? Please point me toward a resource or something. Thank you.
Sundeep, sector-specific additions would be a great way forward to continue FA. Will try and add that.
DCF method is applicable for every sector stock like fmcg, banking & finance, IT,consumer goods etc.
Not to BFSI, Sunil.
while calculating ROA you told formula ROA=(net income +interest*(1-tax rate)/Total Average Assets.
You mentioned intrest amount 7 Cr. But in P & L finance cost of ARBL f y 13-14 is 7.18 million. Is there is any typing mistake or something else.Please claryfy.
Thanks.
I’ve converted all the numbers to Rupee crores, Sunil. I dont think there is a mistake, but let me check. Thanks.
Hi Sir,
While calculating the share price in DCF model you added Net Debt = Current Year Total Debt – Cash & Cash Balance.
In current year total debt we have to take Long term Debt only or we have to take short term debt also.
Thanks.
Long term debt, Sunil.
the pdf version of this module contains so many technical errors (ex: chapter 9 is repeated), it need to be resolved
Hi Karthik,
I have read through the “The Intelligent Investor” by Benjamin Graham and he recommended to invest equally among stocks which make the 50 of S&P or DJIA; something like an Index Fund. What are your views of investing in Index Fund in India? I don’t have enough time in my hand to spend 15-16 hours to research a company.
Indexing is amazing and works wonders, even for people who have the time to research stocks. I’d recommend people to do that. I prefer a low-cost Index ETF instead of an ‘actively managed’ index fund.
Very informative content coupled with a simple yet interesting layout.
The explanation via an example from the Indian capital markets really helps. Great work Team Varsity.
Glad to hear that, Praval! Happy reading 🙂
Hi Karthik,
Regarding the advice to sell when the company does not hold on to the investible grade attributes, is it only about the Stage 1 and Stage 2 attributes or the Price as well.
Let’s say I invested in a stock that had good investible grade attributes and at a fair price. After a few years, if the company still has qualifies Stage 1 and Stage 2 but the price now is way above it’s intrinsic value, should I sell the stock?
Thanks,
Nikhil
Nikhil, you will have to look at it from an overall perspective. Good quality stocks can be undervalued for a long time, this is ok as long as the business metrics are heading north. So you will have to keep a tab on both price and business metrics. But yes, do keep an eye on the valuations, if it is way beyond the intrinsic value, you can consider selling it.
its Great
Wow
please also provide some knowledge and strategies on intraday
It is scattered all over Varsity 🙂
Hey Karthik,
Awesome content.
I just wanted to get a zest of this statement, while you say that, “it’s not a good sign if company is trying to get into multiple business areas, as it diverts its focus from its main business”
What would be your say about IRCTC, keeping the above statement in mind? IRCTC is now into Railways, catering, tourism, hospitality and packaged drinking water… ?? is this a good move?
Hey Karthik,
Thanks for this amazing content. I have a small doubt. I understand the form of investing thought in this module is value investing. Are there any other forms of Fundamental analysis?. Just curious as I have seen Mutual funds having various types of funds like growth, value etc..
Rahul, there are many different styles. The next module (13th) is on Financial modelling. This will help you get some insights.
Really superb , it’s like Bible for investor . Nobody could explain us like you .
Thanks sir
Big words 🙂
Happy learning!
I initiated a trade on Reliance(Bracket order) at 1566.3 with target 16 (1560.3) and trailing stop loss of 9.4 (1556.9) with a stop loss of 10.9 (1577.20)
The stock went up to 1553.4 and reversed but trailing stop not executed. May I know the reason why my trailing stop not executed?
Kindly consider my request and reply to me
Venu, I think some of the values are wrong. Anyway, I’d suggest you please call our support and they’ll explain this in detail.
Dear Karthik
Fantastic Work! Great Job!
May the almighty shower you with all the success and peace in your life!
I pray to almighty to provide you with good health and wealth to continue your selfless service!
Jaleesh, thanks for the kind words! Good encouragement like this motivates us to do better 🙂
THANKS FOR SUCH A GREAT WORK, ITS SO VAST BUT YOU MAKE IT SIMPLE.
ITS REQUEST, CAN YOU MAKE ONE MORE ANALYSIS OF OTHER COMPANY HAVING SOME RED FLAGS OR SOME FISHY CALCULATION FOR BETTER UNDERSTANDING AND IDENTIFYING SUCH COMPANIES.
Thanks Girish. The next module is on Financial modelling which will have all of these things and more.
Hey Karthik
Thanks for such an superlative overview on fundamental analysis which was much needed for education for rookie investors.
I was researching on one of the small cap companies and I found it suitable for most of the parameters listed by you. However, it has very low institutional holding(MFs) but fair FPI holding. Is it a cause of concern?
Thanks
Not really Alok, Institutional holdings may not have happened due to low float, but you as a retail investor do not have this concern. In fact, this is the biggest strength of retail investors.
Dear Karthik
I have gone through the complete Fundamental Analysis but I have not gone through Technical Analysis module. Can I start my FA research for investing? Or should I need to go through other modules like – TA, Fin Modelling, etc., before I start my FA research? Thanks.
You don’t need to go through the TA module to get started on FA research. So you are good to go 🙂
Hi,
U r a true gem. Lots of love from my side.
Thanks brother.
Happy reading, Arvind 🙂
Hi Karthik Sir,
Great Efforts at Teaching basics. Learnt lot of things in Zerodha.
Thanks and happy reading!
First of all I would like to thank you sir for your efforts the content u made is just amazing the way u deliver the concept is absolutely stunning. I must say readers have enjoyed a lot sir ji.
Sir, I’ve a query regarding intrinsic value calculation.
I have seen the excel sheet u share for intrinsic value calculation. But Sir as i Calculated the data of ARBL for recent years the intrinsic value comes to as low as in range of RS 48-59. I don’t know where I’m making mistake please guide me sir.
Possible, Arya. Business circumstances have changed, so has the company.
Thanks a lot Sir ji. Hope u will guide us like this in future also. I found myself lucky to have u as my mentor and feeling grateful.
I’ll, of course, do whatever I can 🙂
Great analysis and easy reading step by step material. Thanks Karthik😃
Happy reading!
Dear Karthik,
I can’t thank you enough for the work that you are doing for the community.
I felt incredible joy going through the modules. The content was pure gold, the explanations were super simple and the examples were amazing. The certificates from your mobile app are the cherry on top.
Thank you from the bottom of my heart. 🙂
Cheers!
Karan, thanks for the kind words! We are glad that you enjoyed reading Varsity 🙂
Hey karthik!
First of all thanks to you and Zerodha team who are working so hard teaching ammateurs like us. It is because of your varsity that I have developed interest in Financial Markets and now I am prepping for CFA L2. I know it would not be appropriate but I just want to ask do you guys provide Internship oppurtunities in Equity Research because I want to make my career in Financial Markets and do Valuations but couldn’t find on-field oppurtunities.
It would really be great if you could help me on this!
Happy to note that, Shivam. Good luck for CFA. Unfortunately, we don’t have any internship opportunities in Zerodha. Anyway, I think its best if you can speak to our HR directly about this.
Hey Karthik,
This is one of the best primers on the topic of fundamental analysis out there. I’m a beginner in investing and I’ve read the Intelligent Investor, Little Book that beat the market and a few others, but this one does a great job in consolidating all the key concepts for the readers.
A big thank you for the excellent work and making it available to everyone out there!
Happy to note that, Abhijeet. Happy reading 🙂
Hi Karthik,
First of all big ups to you providing this beautiful material. I have read about value investing for months, now to make the actual final step to buy the ones I shortlisted.
How do you decide how many stocks to buy in a company especially let’s say my portfolio has 5 of them to create substantial wealth for the future?
Thanks
Thats a tricky call 🙂
I usually divide my available capital and invest equal chunks across all stocks.
And how much capital would you suggest to me to invest in stocks?
I just completed my final year of ug studies and monthly income is around 1L. How should I divide my overall income into these investments? I am looking for a more detailed explanation on this.
Thanks.
Congrats, that is a great starting salary 🙂
I’d recommend you start with at least 50% savings in an equity fund. Alongside, you can also start by building your own Eq portfolio. Stay away from F&O till you are comfortable with trading and investing in EQ.
Best fundamental Analysis I have gone through it. Very Insightful, Practical and well structured right from the beginning module. Finally, A Big Thanks to You and Your Zerodha team.
Happy reading, Kumar 🙂
Sir
It will be very helpful if you will share a chapter on how to analyse best Corporate Governance practises in companies.
That will be tricky, but an interesting idea. Will make note of this and write a note on it as soon as I can.
Sir,
I read fundamental analysis chapters. It was very lucidly explained. I have plans for investing only. Is there any advantage in reading technical analysis in that case? One question I have is this? Will Fixed assets always depreciate? For example land bought by company for its plant. Land value can appreciate. Isn’t it?
Not really. You can stick to FA only. Most of the fixed asset, except land, do depreciates.
Hi Karthik,
I enjoyed reading the Fundamental Analysis module, thank you for the great content. I found the DCF model very useful and practical. applied it to companies in my portfolio and it was startling 🙂
Question: Can we use this model for Banks and NBFCs? Besides, how do we approach evaluating companies with significant capex and debts but low net operating cash flows
Thank you.
Not really. I’d suggest you avoid using this for banks and NBFCs. The treatment for companies with significant capex and debts but low net operating cash flows is still the same. Btw, with -ve cashflow you cannot apply DCF.
Q1.) IN SCREENER.IN THE PE ratio is changed on the basis of the price. since pe is related to earings of a company how can the movement of PE be on a day to day basis without the release of a new quarter or annual report to note the change in earnings
Q2.) why is the past info of only three years taken for dcf? I s there any specific reason behind it? In the book intelligent Investor Graham suggests to consider atleast 7-10 years of data.
Q3.) What is the difference between diluted and basic shares? which one must be considered for total equity shares?
Q4.) what is a goodwill in asset column?
1) While earnings is constant, price changes daily
2) Times have changed. Too hard to make such long term predictions
3) diluted
4) The premium received over an above the fair value on an asset sale.
After reading and re-reading varsity modules, no other materials appear to be readable… it’s really wonderful to see your lucid and crystal clear explanatios…thanks a lot for providing us with such valuable insights…
In the first step of dcf model we are calculating avg free cash flow by adding cash from operating activity and capital expenditure… but, let’s say, if the capital expenditure is so high in recent time that the sum becomes a negative value, then how can we proceed to future cash flow and so on?
Thanks for the kind words 🙂
DCF does not work for -ve CF. However, if its one time CAPEX, then maybe you can spread the amount over a couple of years.
If i want to be a fundamental investor only,and not engage in trading and speculation.
What modules of varsity should i complete?and which ones can i completely ignore?
Here is what i planned?
1)introduction to market
2)technical analysis
3)fundamental analysis
4)future trading
5)Options theory
6)market and taxation
7)currency,commodity,government security
8)personal finance
9)mind over market
While ignoring
Options strategies,risk management and trading psychology,trading systems
Please guide me on this,given that i dont want to do trading or speculation,just fundamental investing
As a suggestion,Varisty has grown a lot in size and content and a guide on how to use varisty,which order to go in modules,what can be skipped etc …such a guide will help a newbie a lot
Module 1 and 3. 9 to improve your overall approach towards markets.
Also wrt the question above,after varsity what resources should I read in order of priority sir?
I’ve suggested a few books at the end of the module, Divyam. Maybe you can look at that.
Karthik, hope you are staying safe
Thanks for your thoughts on my DCF query. A follow up q if i may
how do we evaluate instrinsic value for NBFC and Banks
can we please have an appendix in the Fundamental analysis module
That is a slightly different technique. Will update as and when possible.
Marvelous work Karthik bhaiya! Had fun reading and learning through all these chapters of fundamental analysis. You are really in the right direction of providing financial knowledge to everyone at no cost. Hats off!
Thanks, for the kind words, Raghav! Happy reading 🙂
Mr.Karthik Rangappa thanks a lot for sharing your knowledge. Each subject is well explained with simplified examples, have learned a lot during this lockdown. The narration of each chapter is well organized. Looking forward to read next module.
Thanks for the kind words! Happy reading 🙂
hi karthik .
any good source i can read about sectors which will help me in stock selection like banks auto airline etc. how can i know more about sectors
any website
any link
any source .
plz share
Hmm, we don’t have any sector-specific notes, Ankit.
Hai Mr. Karthik,
This was a detailed explanation on fundamental analysis. Hands off for the patience in creating such an elaborated explanation along with the link to practicality.
What are the main ratio while analysis of bank or NBFC ??
Ex : CASA etc.
thanks po katatapos kulang… salamat sa tyaga…Godspeed po.
Happy reading 🙂
Sir
Kindly have a brief module of ALTMAN Z Score, Modified C Score and F Score. Also kindly explain what are their importance and how to compute them ?
Thanks
Sure, making a note will try and do this sometime.
Hello Sir,
I read the book – The Little Book that Beats the Market. There was a magic formula mentioned in the book. So, I want to know whether that magic formula still gives good results in the current market scenario and how to use this magic formula for the Indian Stock Market. Is there any tool that could help me apply the magic formula for Indian Stocks?
Thanks
It is based on fundamentals, so it is quite relevant. I think Screener has preset filters to identify stocks under the magic formula criteria.
Should we use this magic formula approach during this uncertain Coronavirus market situation or wait for a few months?
Karthik, you can start work on that now, identify stocks and start investing in phases.
Hi Karthik,
I have two queries on which I would like your opinion.
1. I used the DCF model to value a company. The intrinsic share price after incorporating the Model Error and the Margin of Safety came out to be in the range of the current Market price of that share.
Is a stock considered cheap when the Market price is around the intrinsic price from the DCF model or should the Market price be below the price from the model for the stock to be considered cheap?
2. Should a value investor ever buy a stock that is already part of an Index? I am asking this because if a stock is part of an Index, it would automatically be bought by a lot of MFs and other institutions which would raise the stock price above intrinsic values.
Thanks,
Nikhil
1) It is considered cheap if the stock price is below the intrinsic value.
2) Yes, as long as you get it at a great value 🙂
Sir, I have read all the Fundamental Analysis modules that you wrote and let me tell you that I have become a fan of yours today. The way you wrote was very easy to understand and apply the methods for a newbie like me. You have truly inspired me. I wish to meet you one day in person and thank you for inspiring me. Wish you best. Keep winning 🙂
Very happy to note that, Vaibhav! Thanks for the kind words 🙂
Happy reading!
Sir, I read the book (The Little Book that Beats the Market) which you have recommended above. I came to know about the Magic Formula approach and also, a company called Smallcase has also created an investment technique using the same Magic Formula Approach called Magic Formula(https://www.smallcase.com/smallcase/SCMO_0006).
So, should I try to invest by myself or it is better to use Smallcase’s Magic Formula. I am a beginner in trading/Investing.
I’d suggest you speak to smallcase team on this 🙂
Thank for this immensely valuable content!
I do have a question though;
Assuming that we hold a stock of a well known company not having great fundamental qualities, should we wait for it to become better or book our losses?
Also what should one do if a good stock has been purchased at higher prices?
Do suggest something to get better at qualitative analysis.
Thanks again!
(and yes, I am looking for free advise😰
If you have a fundamentally weak stock, you should get rid of it the moment you realise it. No point hanging on to it. Good stock bought at a higher price, well, unfortunately, you cannot do much, depends on how much higher. You may just have to wait for it to get to a better price point and sell 🙂
Thanks a lot for your time & effort in creating this highly values content. I really liked the examples you have given to explain the concept which helped me to understand easily.
I have few question,
1) I understood that we shouldn’t buy the overvalued stocks but some stocks with momentum is performing well even though it is overvalues, How we should consider those stocks?
2) Can I start with the book “The Intelligent Investor”?
Thanks once again for providing the financial literacy at free of cost!
1) When you buy stocks based on momentum (even though they are fundamentally strong), then the play is on momentum and not really the business strength. The only measure is to keep tight SLs and ride along the momentum
2) Yes please.
Good luck!
thanks for all the efforts u have put …
can u tell me how to get access to the annual general meetings of the company and the access to the conference call of the company?
Please do check the website —-> investor section ——> reports and filings
Thankyou so much for your valuable information and time you’ve put into making these priceless notes. I hope I put this knowledge into use. these notes are actually great and understandable by beginners. The way you wrote actually made readers read them with full interest and concentration without considering it to be STUDY
So happy to note this, happy reading 🙂
Thank you! Very informative!
Happy reading!
Reading all these chapters is probably the best thing I did during this lockdown period. Done nothing but this module for the last 3 days. Did go through each and every detail explained in these chapters. I thoroughly enjoyed and loved learning fundamental analysis. I look forward to doing a detailed analysis before buying any stock. Thank you so much, Sir, for such an amazing explanation. This is such an invaluable content!!!
Happy reading, Arun 🙂
Sir, I highly respect you. You have done some colossal work here. I literally have no words to describe my respect for you Sir. This is some highly effective and useful piece of information you have come up with. The fact that team Zerodha and yourself have decided to educate people like us who have no clue whatsoever about investing completely for free is highly commendable. Please keep up the good work. Hopefully one day, I will also be teaching people about investing and clarifying their doubts.
Thank you so much for all of this.
Looking forward to learn more.
Best Regards for you and team Zerodha
Thanks for the kind words, Anirudh. I’m humbled. Good luck to you, hope you stay profitable!
Thank you so much
Welcome!
sir, for now, I just want to focus on long term investing, do the next three module(f&o, etc) has anything to do with long- term investing ? Also, after finishing this, I have decided to read many books on investing and now I’m starting with the the intelligent investor and I want to become a great investor no matter what it takes. so, do you have any suggestions for me? and apart from that, do you think I’m starting with the right book? if not, suggest me a good book to start with. Thanks sir, I owe a great debt of gratitude to you, the person who helped me start off my investment carrier. 🙂
Yash, you need not spend your time reading F&O and other trading related topics. FA is good enough. Yes, Intelligent Investor is good, also do try to read this https://www.flipkart.com/little-book-valuation/p/itmfbj4rekuzrxqz
Good luck.
Hi Karthik, been through all 3 modules of Varsity till now, and I have to this is some very valuable content that you’ve provided! Even to a newbie like me, everything seems perfectly explained and so easy to understand. I have a couple of queries –
1. I’ve completed the TA and FA module now, and you mention that TA is usually for short term trading and FA is for long term investments. How do you pick between trading or investing? And what would you recommend for someone who is completely new to the market?
2. If I look to get into short term trading, perhaps swing trading as you suggested, should I be looking at the candlestick charts of my opportunity universe daily?
3. If I look to get into investing using FA, how do I identify stocks or organisations to invest in? Both NSE & BSE have a large number of scrips and I don’t think performing FA for all would be feasible.
1) Gaurav, this depends on your risk-reward temperament, expectations from the market, capital, and patience :). If you are new, I’d suggest you invest and get a grip on markets, as you gain more experience in markets, move to trade shorter terms.
2) Yes, that’s right
3) I’d suggest you stick to Nifty top 100 as your universe and try to build a portfolio of 12-15 stocks.
Hi Karthik
1. Could you elaborate a little? For example, I know that if you’re willing to take a little higher risk, one should look at trading, where as if you’d like to keep risk at minimum, it’s better to invest. Likewise, on the patience part, higher patience means investing while lower patience means trading. (Please do correct if this is wrong.) Could you tell a little more about the ‘expectations from the market’ and the ‘capital’ factors?
2. and 3. Got it, thanks a lot!
1) Patience boils down to just that, for how long you are willing to hold the position and what kind of returns you expect. For example, I buy RIL and expect 25% on the investment, then I know I’ll have to be willing to hold for at least a year or so. By expectation, I mean what to expect in terms of returns. 25% return on a single stock per year is possible. But is it fair to expect that on an intraday basis? I don’t think so. You just need to be aware of this and have realistic expectations.
Good luck!
Alright, great, thanks a lot!
Hi Karthik,
I am extremely grateful to you for sharing such valuable content with us and that too for free. Three months back, I started looking for educational content regarding personal finance, stock market education, etc. I wanted to take control of my finances and find valuable options. For someone like me finding varsity turned out to be a goldmine of knowledge and new opportunities. This module on FA is pure gold, I feel much more confident and educated enough to start investing. I would suggest Varsity to every one of my friends looking for financial education. Thank you very much for doing this. I wish you lots of wealth and health.
Manish, thanks so much for the kind words and encouragement. I’m really glad that you liked the content here and I hope you continue to like it going forward. Happy reading!
Hello sir,
I am not able to follow the line “but no company deserves a FCF growth rate of over 20% “. What does it means FCF growth rate every subsequent year should be 20% and more
I mean to say that it is not sustainable 🙂
I have 2 queries
Q1. What is difference between FCF and retained earning?
Q2. What is difference between the retained earning, reserve – surplus and FCF
Thanks
1) Retained earning is the profits made for the year, purely from revenue/sales perspective. FCF considered all the cash inflow and outflow (like CAPEX etc)
2) Retained earnings (PAT) flows into the Reserves.
Ok sir, bit confused, so what should be FCF growth rate,
The growth rate in FCF depends on the company/sector right? An old company in the traditional sector will continue to grow slowly. However, a new age company in a new sector (Swiggy for example) will continue to grow rapidly.
Sorry to bother you again,
please correct me
Retained earning means PAT
Reserve – surplus means FCF (?? ) If not please correct me
Retained Earnings is PAT. No Reserves – Surplus is not FCF. Have explained FCF in the chapter itself, please do have a look at it.
Thanks sir!!
Good luck, Roshan!
Thank u Karthik ji
With lots of respect
🙏🏾.
Happy reading!
Thanks! Karthik explained the concepts in a simple and understandable way. This will go a long way in educating the Indians. Financial Literacy is much needed and you are making it possible.
Happy learning 🙂
Hi Karthik,
Can you please let me know where I can get a brief overview of all the Sectors and Industries in Indian Stock Market. Searched all over the internet but could not get any explanations for sectors and industries. It would be helpful if you can guide me as I am stuck here. Thanks in advance.
Maybe you should try Tijori or Screener for this.
hi karthik
in detail deep knowledge given about fundamental research of stocks.thank u.
I have a question. Why can’t you buy shares of a company that has good investible grade attributes, since it means the price will go up even if the value is more than the intrinsic value. For example, you held on to ARBL shares at 720 which means you were expecting the company to grow. So why cant someone buy the share at that price with the same expectation. In the end you make a profit regardless of the intrinsic value of the stock. Is it just that you will not get a good return?
That is the end objective right? To buy shares which are at attractive valuations?
so there is no harm necessarily in buying shares above intrinsic value. Thank you for your efforts
Not really, as long as you are not buying way above the IV 🙂
I asked the question because for the time you dont find an attractive stock, is it not better to stay invested than not invest at all?
But that does not necessarily mean that you have to force yourself for an investment right?
Okay. Got it. Thank you for all the help. This has really helped me get started. Amazing lessons
Happy reading, Yash!
After diving deep into YouTube for understanding fundamental analysis , passing upon 2-3 best channels. I felt many of the important concepts was still missing.
And then I found this module, which is BEST of the BEST to easily learn and clearly understand fundamental analysis. Best wishes to the creator.
Happy to note that, Harsh 🙂 Hope you’ll continue to enjoy reading the content here!
Hello Karthik
I am very thankful to you for providing such material. I have questions that I would like to ask you.
Small cap which have high growth potential but is it possible for them to have moat mean they don’t have brand value yet, pricing power, etc.
I read last 5 year annual report of a small cap company and
Should I read annual report of top players in competing or competitors with same market cap? And how many competitors would you study and last how many years report of those?
Many many thanks for the content and the webinars too.
Regardless of the company, you need to ensure that the company has a moat. That matters. Yes, you should read the annual report of other companies to get a sense of how the industry landscape is.
I just finished this modules. It is full of useful informations and I hope I’ll apply these formulas before investing.
Good luck!
Great content karthik rangappa, thanks a lot.
Happy learning, Anand 🙂
Hi Karthik,
How the failed delisting news made Vedanta to hit lower circuit? What is the thought process behind this?
Thanks
Satya
Well, its a failed corporate plan 🙂
Sir,
Thank you so much for explaining DCF valuation with real example. but let me ask you one question what do if FCF amount is Negative instead of positive
How to calculate then and what is the difference between Ben Grahams Intrinsic value and DCF intrinsic value. For me it is coming different amounts.
I want to know which one should consider DCF one or Ben Graham one.
Again, Thank you for making these modules, it helped me a lot to understand the financial statement but to be honest Other reading materials are boring.
Still struggling to understand the annual report. sorry for making it long. and again thank for making these modules.
God Bless You all Time
Aswanth, DCF is not applicable for negative cash flow. YOu’d rather opt for the Graham approach. Happy reading 🙂
That means negative FCF mean it is not valid to Calculate DCF ; i should avoid that company.
Why do Graham Formula’s is different from DCF?
Thats right. The valuation approach is different.
Hi Karthik sir,
Infosys posted good results today, but still share price has fallen. What is the reason?
Thanks & Regards
Satya.
Perhaps the guidance was weak?
how can i find total dividend paid out for that year. Some companies shows Interim dividend, Proposed dividend, Special dividend
and some companies only shows the dividend per share for that year. Where can i find the original dividend paid out for that year in Annual report.
please help.
Look for dividend payout section in the annual report, they would have given you the entire split. Usually for most companies its just one dividend per year.
Dividend payout section means in the director reports the dividend section
Thats right.
which intrinsic value should i take the Ben graham one or DCF because in one company i used both of them in Ben graham formula its overvalued and DCF formula it was undervalued. Why is that?
Why is that — well, maybe the company is really undervalued, and it could be undervalued for a reason 🙂
Which value should you take, – there is no preference here. Pick the one in which you have a higher conviction and the one which you feel has lesser modelling errors.
both are showing intrinsic value but different value make it confusing.
Yup, but which method are you more convinced about?
Don’t feel bad if it come to cash I take DCF. But I prefer Ben Graham one.
Thanks for this, Zerodha!
Happy reading!
Hi,
This is regarding the constant updates of DC, how do you apply this from the usage of annual report to quarterly report? How can we apply the quarterly values in the DCF model?
Its hard to update considering quarterly updates only contain P&L. At best you can update the revenue model and other P&L assumptions.
Sir, what if someone had bought shares of a company but the shares are not traded on the stock exchange anymore but the shares are still in the demat account ?
Is it possible that the shares might trade again on the stock exchange ?
Is there any way to sell those shares ?
Example – SRS Limited.
Although very slim chances, yes, there is a possibility for that.
There’s no other way except to sell it on the exchange ?
Yes.
Ok. Thanks.
Sir why do the values of DCF intrinsic value differ from Ben Graham’s Intrinsic value.
Because they are two different ways of valuations.
That means I have to choose between these two right
If I gets a negative fcf then how can I get an intrinsic value.
Unfortunately, you cannot derive the intrinsic value for -ve FCF.
Sir, in one of your youtube video on Volatality Based Stop Loss you calculated the 1 SD for Idea for a one year data.
Will not my answer be same if I use Bollinger Band and change the setting from 20 to 260 Days (i.e. 1 Year Data) and use 1 SD.
Then will not have to caculate it myself using excel right ?
Yes, even better would be the ATR indicator.
Ok Sir. Thanks.
valuable lessons
Thanks, but why are you leaving the same comment across so many different chapters 🙂
Thanks for making me understanding financials statements etc., very clearly explained with examples. great job and useful for many like me. thank you once again.
Happy learning, Kumari!
That’s still awesome that you reply towards our questions and answers 💯🎉🎉
Happy reading!
Hello Karthik,
I hope you are well.
Would you include a section on how to go through quarterly results, balance sheets, cash flow analysis of banks/nbfc/holding companies?
Not sure, bank balance sheet is not something I’m comfortable with.
Sir i followed the steps done by you while I calculated the intrinsic value where I got 1078 after deducting the margin of safety 30% 1078 while the market price is 714 hence I declared the stock is undervalued and other checklist was good,if you don’t mint shall I share my calculations so that I can get corrected of I’ve done any mistakes
Chandu, I’m not sure if I can check these calculations. IOC is a popular stock. Not sure of it is so undervalued, especially in a bull market. PLease do check the calculations again, just to be sure.
Sir company name is IOL Chemiclas and pharmaceuticals I started to dig into the company because of FII have increased there shareholding from 2% to 6.5% I checked in screener to whether my FCF where right it was around 100 during March lows and now it is 721 almost it has 7x now by DCF I found that it has still undervalued.
Thank you sir!
Ah ok. I’m not sure about the company Chandu.
Sir and the company PE is 10 where the ROE is 55% and ROCE is 61.32% it’s my calculation, when I got such huge calculations I checked in screener whether I’m crct and in screener it’s not exact but it’s in the range I calculated when. I compared to peers there ROE AND ROCE is low for peer company like biocon but PE is very high like for peers like 30,40 and industry PE too is way above 9 and it’s other confirmation that it is undervalued. While calculating RoE I checked debt too there is no long term debt in balance sheet and company clearly stated it in their annual report they have cleared their debt
Possible Chandu, I’d suggest you look at the annual reports of the company along with the reports of the peers as well. YOu will gett valuable insights into their industry.
Sir,
When I found the intrinsic value band of sbi card using fcf it is negative. Why is it like that?
Just have one word.. Perspicuous..
Thank you, Karthik 🙂
Happy reading, Shreya 🙂
Dear Karthik Sir,
I trust you are well.
Companies release it’s annual balance sheet once a year which shows all its assets and liabilities and the amount of debt the company is carrying.
For example say a company takes a massive loan in the second/third quarter of the financial loan. I am not a fan of companies that have loans and prefer debt free companies. I will only find out about this when the company releases its new balance sheet next year. Is there a way around this?
Also can you please mention how to read a bank/nbfc balance sheet please? It is important as these companies basically run the market in all economies.
Most often the decision to take a debt (especially large ones) is not overnight. If there is an intention, they will hint at this in the annual report, else they will make a public announcement and it gets released via circulars to the exchanges.
Dear Sir,
If a company has debt of 50 cr while its Market Cap is 1500. Is it safe to say that 50/1500 of the company is funded by debt?
Or do we have to use the enterprise value?
Hmm, a tricky proposition this one. You will have to consider many other factors, but if it were decision-based on just the debt part, I’d hesitate.
Dear Sir,
You have not spoken much about enterprise value.
Do we consider enterprise value for our company valuations?
Yes, in fact, I’m planning to have a detailed module on Valuations.
Dear Sir,
Would you please include understanding banks and nbfc financial statements in that module?
Have been meaning to do that, Trace. Will try and do that one of these days.
I am speechless by the efforts that you have put in. I hope I can pass this knowledge ahead to the people I interact with. There are many paid courses are out, but none can match this. Thank You, Karthik!
Thanks for the kind words, Kiran and I think your thought of passing this knowledge is quite impressive. Good luck!
Sir,Can you do case studies on a large cap,mid cap,small cap companies.From qualitative analysis to price valuation(end to end analysis).
Please 🙂
Sanit, I’m aspiring to put up a financial modelling course here, that will include all these things.
Karthik.. I have gone through the first three modules sequentially. Wonderful insights and cannot thank you enough.
Quick question .. Do we need to go through the modules sequentially or can i go directly to another module for example Personal Finance ? Your suggestion please.
Swati, thanks for the kind words. Yes, you can go directly to Personal FInance. However, few modules are connected, for example, the module on trading systems is connected to derivatives.
Dear Sir,
Can you explain why people create holding companies?
Why are holding companies valued so less, for example, if Maharashtra Scooters has a 3.15% stake in Bajaj Finance a 330000 cr company yet Maharashtra Scooters has a market cap of 4300 cr. That 3.15 % stake is valued at around 10000 cr.
This does not make sense right?
Namaste sir,
Can you explain one thing to me?
Alembic Ltd Owns 50-60% of Alembic Pharma and Alembic Pharma has a small stake in Alembic Ltd.
How exactly does that work?
For example, if Alembic Pharma has a good quarter and its price rises and gives a dividend, this would increase Alembic Ltd’s valuation as they have received a sizeable chunk in dividends and their investment value goes up. This obviously causes Alembic Ltd share price to go up which ends up causing Alembic Pharma’s invest to increase. So isn’t this going in a circle? I must be missing out something.
Please explain?
Mostly likely the holding of Alembic Pharma in Alembic Limited will be to fulfil some statutory requirement, hence I’m guessing this won’t have an impact.
Dear Sir,
Can you explain why people create holding companies?
Why are holding companies valued so less, for example, if Maharashtra Scooters has a 3.15% stake in Bajaj Finance a 330000 cr company yet Maharashtra Scooters has a market cap of 4300 cr. That 3.15 % stake is valued at around 10000 cr.
This does not make sense right?
The purpose of a holding company is just that i.e. to hold shares of the company. The incomes are depended on the dividends and the holding company will never sell shares to gain from capital appreciation, so the value of the stake does not really matter. Hence the low valuation.
Hi Karthik, had a small doubt. I believe I read somewhere that Fundamental Analysis for banking stocks needs to be done slightly differently (probably because they tend to have a lot of debt iirc), could you explain this in more detail? Thanks!
Ah, I’m not too comfortable doing it myself, hence I’ve avoided doing that here 🙂
Hello Karthik Sir,
To follow up with my question,
Lets say Maharashtra Scooters sells it 3.15% stake in Bajaj Finance. Wouldn’t it stock price increase considerably?
But owning equity stock is nearly as liquid as Cash. If maharashtra scooters gets bought over by another company, I’m sure they will take it into account that maharashtra scooters owns 3.15% of Bajaj Finance?
Yes, that would will have a positive impact on the stock price. That’s right as well. Btw, Eq cant be compared to Cash, given that EQ is volatile.
Dear Sir,
I still do not understand why the company is undervalued despite holding a substantial stake in other companies.
Sure equity is volatile, But that stake it owns would be considered an asset in its Balance Sheet right?
So the company owns more assets than its market cap?
This doe not seem to add up sir.
Think about it, if I hold 10kgs of gold, you know that the value of it is worth the price of 10kgs of gold multiplied by its market price. This is based on the assumption that at some point I will sell this gold. On the other hand, what if I told you that I will never sell this 10kg gold? What value will you ascribe it?
Dear Sir,
Thank you for your prompt reply.
I understand what you are saying, but who is to say that Maharashtra scooters or said holding company will not sell those shares.
For example if Maharashtra scooters sold of Bajaj Finance before the March covid drop at 4000 and rebought it at 1900. Wouldn’t that have made a big difference? How does the market automatically assume that the said company will not sell of its shares
Like Berkshire hathaway is a holding company that is valued very high.
I’m surprised they did that. I’m not sure. Usually, these companies trade at a discount because there are no triggers to rerate the stock, highly predictable cash flow, no business model, holdings are forever. Equities appreciate for the exact opposite reasons.
Oh that’s alright. Any resources you could point me to where it’s explained?
Have mentioned a few across this module, Gaurav.
Hello Karthik,
I hope you are doing well.
Can you explain how small cap/micro cap stocks are manipulated by operators ?
Do check this – https://zerodha.com/z-connect/tradezerodha/stock-market-scams-everyone-should-be-aware-of
Dear Sir,
This is mainly for penny stocks.
What about larger companies like BHEL, ADANI Green, Ruchi Soya. All these companies have terrible financial data yet they are rising almost all the time.
For example Ruchi Soya, was 14 in Jan2020 and and 1300 in June2020. Rising 5% everyday while everything was dropping cause of the pandemic.
Can you care to explain?
Thank you so much to Zerodha varsity
a common man can easily understand this subject by your explanation
Happy reading!
Dear Sir,
You don’t really talk about enterprise value of a company and how one should come use it as it is a more useful than market cap of a company?
I will in the next module, which is on Financial Modelling.
Hello Sir,
I am considering creating a portfolio of 10-16 companies.
Ideally Large cap companies in Banking, IT, Pharma, Chemical, FMCG.
Like one large cap and maybe 1 small/mid cap company for each sector.
Assuming I have 10L on hand to invest.
How should I go about it? Put in equal weightage for each company or do what?
Lets say I invest roughly 9L and keep 1 L cash on hand. The 9L I pledge and use that margin for derivative trading or maybe short term trading.
For futures, everything goes through margin while M2M requires cash on hand correct? or can M2M work via the margin you have received after pledging?
Option selling requires margin similar to futures, can it be utilized from the margin I have pledged my stocks with?
For option buying do I need cash or can I use the margin I have received from pledging my stocks.
When you pledge shares, you are required to bring 50% in cash. For option buying, you need to bring cash, can’t use collateral margin.
Hello SIr,
When I pledge shares. The company allows me to use roughly 60-70% of that value.
I cannot use that margin for futures/option selling??
Option buying requires upfront cash? Can I not use my pledged margin? What about intraday?
Thats right, Suresh. YOu cannot use collateral margin for option sell.
Fabulous work sir, what a detailed and comprehensive explaination
Happy learning, Nitesh!
Hello sir,
Starting by thanking you for this amazing work. Its an honor to learn from you.
I had some doubts regarding the screening process. You have provided yours screening process but I am failing to apply this.
till now I have two fixed value. GPM >20%, roe>25%. Rest of values, I couldn’t apply as they were subjective Like dont take too much leverage. But being a newbie and since screener ask to exact value I couldn’t use it.
So my questions are how should I apply this. The screener asks for exact value.
1.) what value should I fill in debt leverage in % term. As I am new I don’t know what is too much leverage for normal company what’s less.
2.) could you tell any nice screener to use. I tired using yahoo finance, after applying just roe and gpm , it just showed 50 companies. Majority of them large cap. So how do I find new companies worth investing.
3.) % value of eps to use.
4.) Do I need to use other parameter(other than gpm, eps, roe) for tech companies, or will the told parameter will be enough for any field.
Please guide. And if you have any suggestion for newbie, please do that too.
Thank you, waiting for your reply
Thank youuuu very much sirr, after 7 years of publishing these module, I read it now and complete it !very helpful for retail investor like me, I have purchased stock market course but I get morr valuable information here rather than from course, Again Thank you Karthik Sir🙂….. I will be kept in your touch by twitter so that I can gain knowledge from you over long period of time….
Happy to note that, Pathan. Hope you continue to like learning from Varsity. Good luck 🙂
You cannot find this much of expert knowledge in that workable structure. I very glad to you this course. I am thankful that you created this course.
Happy reading, Sachin! Hope you continue to enjoy reading Vasrity!
Thanks buddy for great content, can u tell hoe can I give the certificarion exam?
You need to download the app for this, Nibban. It is possible via the app.
Dear Sir,
When is your new module coming out??
Its tougher than I imagined, but working on it Madhan. Hopefully soon.
Mahoday ji aapke portfolio mein kaun kaun se stock Hain mujhe batana chahenge kya?
Mahoday ji hamen aapse madad chahie
A great series of chapters on fundamental analysis. Simply great!!!!
However, I have one question in mind. Most of the times if we see in today’s markets, can we really find good companies below their DCF values on intrinsic values? Or it might happen that the company is actually good in all respects as per stage 1 and 2 of analysis but the right price may never come. What to do in that case? how to decide?
In DCF calculation we dont necessarily take into account the value of other parameters such as say brand loyalty or some other aspects which could increase its fair price. How to factor in these kinds of parameters in the analysis. I know we have analyzed them in stage 1 and 2 but havent valued them in terms of finding intrinsic value calculation. Please guide regarding the same.
Your work is fantastic. I started learning about stock markets last year from Varsity and have never stopped reading it. Till date i revisit many chapters for refresh of concepts and must say the initiative taken by you and your team is commendable.
Rohan, its very difficult to find value in bull markets, however, if you know what the true value of a company is, then you may get plenty of opportunities to invest in a bear market. Yes, DCF does not factor in intangible assets. You will have to kind of factor this in.
Thanks for the kind words, I’m glad you liked the content. Hope you continue to like reading and learning from Varsity.
Hello Sirjee.
How should one do analysis of a companies debt??
If a company has a market cap of 2200 cr has 880 cr of Debt (long term+ short term), 900 cr of reserve and 80 cr of cash on hand??
How do I utilize this information appropriately?
That is a large amount of debt for a company of that size. Maybe you should check to see why they have taken such a large amount of debt, see the cost of funds, and the revenues its generating.
Hello Sir,
The company is Ram Krishna Forging.
How will I know why the company took such a large amount of debt?
What do you mean by the cost of funds?
You need to check the annual report for this, maybe they have quoted the reason. Cost of funds = interest rate at which the companies borrow.
Hello Karthik,
At the outset, I have scrapped through dozens of internet sources, links, pdf for good investment, fundamental analysis theory but your modules on Fundamental analysis are way above the benchmark. It’s pure gold.
I used your DCF (excel) to calculate intrinsic values for many companies. (Considered both conservative and optimistic scenarios) Some queries which I have in mind:
a) Many companies like godrej agrovet have huge variations in free cash flow.(Last 5yr cash flow : 35, 692, 107, 171, -23) Even taking 3yr-5yr avg doesn’t seem ok.
Should I assume that DCF model is not suitable for companies having huge variations in free cash flows ?
b) Many companies like Relaxo, Pidilite, Dixon Tech have Market Price way above their intrinsic values (using DCF). Infact, Upto 3-5 times. During these stock histories, the market price has never tried to correct itself to its intrinsic value.
Should I ignore these companies and see it as a sign of irrational market pricing ? OR Am I missing something and under-valuing these companies ? ( Maybe their Moat like strong brand like fevicol etc)
c) Some companies only show negative free cash flows ? Safe to ignore them?
Thanks and Regards
Thanks for the kind words, Sidharth.
a) Yeah, volatility in free cash flow can be an issue. Did you try going the full yard and calculating the fair price? Else you can try relative valuation as well
b) Yup, thats bull market for you 🙂
c) Yeah, unless you have a superior insights into the sector and the company itself.
well structured information and understanding of fundamental analysis with real time examples.
Happy learning!
Please make a separate module on Quantitative analysis(QA)
Have included a bit in the Trading systems module – https://zerodha.com/varsity/module/trading-systems/
Dear Sir,
Simple query of Godrej Industries.
Company has had 4 consecutive negative quarters (1 full year) and I believe 3 of them had substantial losses.
Yet the company is practically increasing in price almost every other day.
Is this a clear case of promoter/operator manipulation?
Not really, perhaps the market had already factored in this and expect better results in the future.
Hello Sir,
To followup with my previous question.
How exactly does one know if the market has factored in this??
This essentially means that If I had shorted Godrej on the basis of having a bad quarter I would have lost a large amount of money.
This somehow does not make sense how a company has has negative quarters for 1 entire year and still moving up.
Similar to BHEL, it is a government company that has had negative operating profits for over 1 year. Yet Bhel has been increasing substantially everyweek. How does one even make a position in this company?
In your module you have said to to use fundamental, quantitative and technical.
Fundamentally this company is not a good bet as if BHEL was a not government company (privately operated) which had negative operating profits for over 1 year it would have shut down. Yet Bhel is rallying like anything.
Technically Bhel is bullish and quantitatively it keeps moving above 1-2 SD from time to time.
What logic is there to this?
There are two things which together make up a framework –
A technical range for the company – this could be a range within which the company can trade for a long time given the set of fundamentals at play. For example, a stock could trade between 75 and 100 or 120 for a long time giving multiple trade opportunities. The stock will continue to trade in this range as long as the fundamentals don’t change. So when the stock is at 120 and moving back towards 75, it appears bearish, and bullish otherwise.
Fundamental range shift – The range itself expands or contracts based on how the fundamentals move. For example, a company like Godrej may post several quarters of weak results, traders expect it. Hence it could be stuck in a range. But few quarters of positive results can help shift the fundamental range to a new level.
So this is one way to look at the stocks markets 🙂
Dear Sir,
I completely understand.
But confusion arises from how companies are making losses consecutive quarters yet stock prices are rising. How can one trade on results if the results are bad and the stock rises?
Also could you let me know why would a company like BHEL rise so much despite having negative operating profits for almost 1.5 years?
Street expectations 🙂
Hello Sir,
I hope you and your family are doing well.
Do you generally keep Banking/NBFC/ Insurance companies in your long term portfolio?
The reason I ask this is because you have said multiple times that you are unable to properly understand these companies financial statements, so how does one go about investing in them?
I would really like to learn how to understand these companies financial statements as I think they the finance sector plays a very important part to the economy.
Not really, Hitesh. Even if I do, it will be based on momentum and not fundamental based.
Hello Karthik,
One of the detailed step by step explanation on fundamental analysis, very useful especially topic “calculation of intrinsic value” clearly explained.
thank you
Regards
Rajendra
Happy learning, Rajendra.
Thankyou sir @KarthikRangappa for an organized course.
It is very difficult to find such an organized course with simple explanation in internet clutter.
your course is the best.
Happy learning, Anchal!
Hello Sir,
Companies like HDFC Bank, Pidilite, Asian Paints, Dixon Tech are shown to be overvalued, yet their share prices are constantly growing YOY atleast 30-40%.
So does it mean I should not invest in over valued companies or what exactly should I do?
This is quite common in a bull market, but doing the same thing in a bear market will butcher the capital.
Hello Sir,
How does one then invest in a bull market, with all these companies so overvalued?
But these companies’ stock prices keep increasing year on year, so isn’t it pointless to say a company is very overvalued.
It is very unlike to see a company that trades below its Book Value.
How should one go about this?
Its very hard to pick fundamental stocks in a bull market because every stock seems overvalued, hence you need to switch to other playbooks in bull market. Momentum stocks is one of the things traders follow. You can read more about momentum here – https://zerodha.com/varsity/chapter/momentum-portfolios/
Hello Sir,
Lets say company X has been propitiable past 5-6 quarters. Each quarter has had profits roughly in the same range up and down 4-5%. The company issues some dividend, rest it uses for its work.
However, the company is constantly in a trading range and not moving up despite being very profitable.
a) Why does this happen? If a company is constantly profitable why would it remain in a trading range?
b) Doesn’t that profit less dividend become an liquid asset for the company?
c) What exactly does a company do with its reserve fund? where does the reserve funds come form?
d) Does this profit get added to the companies reserve or become an asset?
1) Usually its factored in
2) Nope
3) Comes from the profits, goes for dividends
4) Yes
Hello Sir,
For part d does the companies profits become an asset or does it go to the reserve?
Second, consider the example of ITC.
Its main business is providing it robust profits (cigarettes), and fmcg and hotels are not doing as well and are not contributing as much as cigarettes do.
Despite all this the company is more or less providing 2000~ 3000 cr profits per quarter.
Its market cap is not increasing because its price is not increasing. A good chunk of these profits remain in the company and in turn I guess improves the book value correct?
My question is that ITC from 2020-2021 has roughly created 12000 cr in profits while the stock has more or less remained around 200~240 levels. ITC is 12000 cr richer than it was last year.
So where does that 12000cr go if it has not increased a company’s valuation?
It goes to reserves, and gets treated as a liability.
I guess in case of ITC, these are already factored in by the market. The real cue market wants from ITC is a new line of revenue which can replace cigarettes. I’m not sure if thats in place.
Hello Sir,
I hope you are doing well.
How does one know if a company is going to have a good result, bad result or poor result?
Only once the result happens then one can know.
Often it is said that the week before the result one can sorta understand the direction, if the up move big institutions already know and move the price up etc or vice versa.
However in my experience I have seen the opposite happen more.
Many of times I have seen a stock a week before the result drop upto 3-5% in value and then have a very good result and I have seen the opposite also where it gains a week before the result and then drops badly cause of a bad/neutral result.
So how does one trade or even come to predict results?
That information won’t be known, however, you can make intelligent guesses if you can track the financials of the company. I’m trying to explain this process in this module -https://zerodha.com/varsity/module/financial-modelling/
Hello Sir,
I understand what you mean by estimated guesses like for example most Agricultural companies like Rallis India etc have 2 good June and September quarters while December and march quarters are weaker.
But how can you trade options on results without knowing the result?
Again based on what you expect 🙂
Or you set up spreads and take positions. Have explained spreads here https://zerodha.com/varsity/module/option-strategies/
Hello Sir,
I hope you are doing well.
I have read your option strategies.
Ideally you have mentioned strangle, straddle, iron condor long and short for all for trading options.
These are delta neutral strategies but one needs to know if delta would move or not otherwise serious losses would happen.
Delta would move big if the results are good or bad and flat results will not cause it to move.
Hence what kind of strategy could one implement before a result?
Delta will move as long the underlying moves.
Hello Sir,
I am confused about the option position before results.
I have read that one should buy Straddles/strangles 3-4 before a result and gain from the rise in IV. But that also causes a risk of drop in IV once the result is announced.
I have also read that one should sell short straddles/strangles a day before the result and sell it around the result to gain from the drop in IV.
Basically I am confused on when I should implement short/ long delta neutral positions.
So when does someone implement a delta neutral strategy to gain in delta?
Martin, why don’t you try both on paper around results time and decide for yourself which one works?
Hello Sir,
I understand I have been doing that on paper for large cap companies.
However, I would need atleast 4-5 years (16-20) results to form some consistency in my strategy hypothesis.
Hmm, you can download the historical data I guess.
You convinced me to open a demat account for my birthday next week. After this thorough read, my assumptions on market is fairly better now. Thanks for this knowledge.
I wish you all the luck and I hope this Demat account brings you abundant wealth and prosperity. Good luck!
Hello Sir,
I hope you are doing well.
When a company takes a short-term loan/long-term loan.
How do I know if it a secure loan or unsecured loan? The interest payments are done from its profits or reserves.
Every time I see that a company has taken up a loan, do I need to check its reserves to see if it will be able to pay it back later?
Usually these are unsecured loans. But you can actually check the nature of the loan by looking at the associated notes. Look at the profitability of the company and calculate the interest coverage ratio to get a sense of the company’s repayment capacity.
Hello Sir,
I hope you are doing well.
Top Line companies like Bajaj Finance, HDFC Bank, Axis Bank are extremely high priced.
Despite being overvalued they continue to increase in prices constantly.
So how do I invest in these companies? Do I just buy it market price or avoid it? I believe the overall future of these company are very very good.
Kalpesh, this is the problem with bull markets. Quality stocks are always at a premium 🙂
Hello Sir,
I mean mostly bull markets exists and bear markets are very few.
Does this mean I should wait to buy said companies or just buy it right now at the current price?
In bull markets, people usually ride the momentum. This means you need to set tight SL for such trades. See if this works for you.
Hello Sir,
I am looking towards holding a few companies longer than a year or so.
So should I continue to wait for a price dip or just buy it at market?
One thing that you can do is buy a few now, wait for the price to increase, buy more at the higher price, and do this till you deploy your capital. By doing so, you are averaging on the upside, which is ok.
Hello Sir,
I hope you are doing well.
My issue is with market behaviour pre and post results.
A week before the result you see a stock price reduce after which post results it increases substantially.
I have seen the opposite happen before results and big events etc.
Example Yesterday NMDC has very good results, yet the stock price went down by 2-3%.
So how should I know what kind of delta neutral position I should employ for results as there is no idea where the price would go?
Harish, this is the nature of the market. No one really knows where the prices are headed 🙂
Hello Sir,
Then should one avoid making positions before results etc?
No, as long as you know what position and for what reason, its ok.
Hello Sir,
I mean I expected NMDC to move up on the basis of good results, yet i got it completely wrong.
Which is why I am confused.
Happens all the time 🙂
Dear Sir,
I have been reading about the bear cartel in kolkatta and several others etc.
They would often short stocks to reduce the prices.
But in India we cannot carry naked short positions to the next day. So how did they do it? We also did not have derivatives that time.
There was the badla system that allowed you to carry over a short position.
Hello Sir,
For fundamental analysis you have mentioned to continue holding stocks till you see it does not maintain your requirement.
Your technical analysis module is catered to a more short term view.
Is there a way we can combine both approaches properly?
Yes, lots of traders and investors combine both. FA to derive a deeper understanding of the business and TA to time the market and make an entry to buy/sell the stock.
Absolutely great way of explaining the valuation method for newcomers and very easily facilitated the walkthrough of the entire process.
A vote of thanks and appreciation
Thanks, Aditya. I’m glad you liked the content.
Hello Sir,
What are you thoughts about algo trading. Do you use it? Is it worth it?
Full algo is not permitted for retail I guess.
Hello Sir,
Then what part of Algo is permitted for retail traders?
Semi automated, the like one you see here – https://www.streak.tech/
Hi sir, I want to know that after completing this module (fa). Which modules should I prefer first? As related to fundamental analysis or is it necessary to read it by sequence?
I hope you got me🙏🏻
You can keep track of the latest module on Financial Modelling as its directly related to FA.
Sir, can you just elaborate “when to sell” a share or stock in detail.
There are multiple ways. I’d suggest you check the chapter on S&R.
Hi Karthik,
I have currently around 5 stocks in my portfolio for the long term but I have around 50 more stocks for the short term or ultra short term period since cash market is doing well nowadays.
but as discussed above 10 – 15 stocks is the maximum stock needs in your portfolio.
is this recommendation is only for long-term holding? or it is advised for any time period?
Thanks
-Ganesh
Preferably long term portfolio should have not more than 20 stocks.
Hello Sir,
I have a few questions.
1) Do you talk about PEG ratio and Enterprise Value ?
2) Several very good companies that have successful businesses are quite overvalued, however their prices are constantly moving up. Should I just bit the bullet and enter or wait?
3) Let’s say I bought a company like CDSL around Rs. 300. I partially exited at Rs. 700 and now the price is nearly Rs. 1300. I currently feel that the company is doing very well, but It is fairly over valued and over priced and this large increase in prices is due to heavy retail participation. The company is constantly breaking its all time high every now and then. When does one exit such company as technically I am bullish, fundamentally I think it is very good but over priced.
1) I will, in the ongoing module on Financial modelling
2) This is typical in a bull market, hence traders usually chase momentum in bull markets and not look at valuations
3) You can keep locking in profits and trail your SL in such cases.
Hello Sir,
I hope you are doing well.
Even If I am an investor, and not looking to trade.
Should I invest in these companies with high valuations??
Secondly,
When exactly would the financial modelling module be complete? Are the chapters posted once a week?
Its tough to find an investment opportunity when valuations are high. Traders usually play momentum here. Trying my best to update chapters regularly for financial modelling.
Hi Sir,
You have mentioned fundamental analysis for long term investments. But what about technical analysis?
Also is there a module on quantitative analysis?
The module on the trading systems has quant-based content.
Hello Sir,
I hope you are doing well.
I am currently trying to maintain a portfolio for my Father, Mother, Grandmother and my self with 4 different accounts.
It is difficult to maintain all four.
Is it better to create a holding company?
What are the benefits of a holding company or just trading normally?
You can create a HUF and a HUF account. Please speak to your CA about this.
Sorry sir, I didn’t understand!
What is S n R
Support and Resistance, have explained here – https://zerodha.com/varsity/chapter/support-resistance/
Hello Sir,
HUF is for Hindu, Sikh, Jain.
However, I am adopted and brought up in a Parsi family.
What should I do?
What are the benefits of creating a partnership company for trading?
Namaste Sir,
I am assuming in your portfolio you have 15-20 stocks.
How many different sectors do you currently have your portfolio in?
Do you keep 1 large cap 1 small cap from each sector? Like for example keep like Bajaj Finance( NBFC large cap) + Ujjivan small Financial service ( NBFC small cap).
I am confused on how I should diversify my portfolio.
20 seems just about right. Diversify as much as possible, pick a stock from the sector, 2-3 stocks, have a large and mid cap.
HI
My first time here. I need some guidance. Can you guide me to the right person for this?
Thank you,
Abi Murali
What are you looking for, Abi?
Sorry sir! but I just asked for FA.
Hello Sir,
I hope you are doing well.
Lets say I maintain 20 stocks in my portfolio for a longer time frame, some for multiple years some shorter.
Can I keep some other stocks just for swing trading and shorter time frames or do I just stick to 20?
Yes, you can. You can even tag which is for which purpose using the tags feature in Zerodha – https://zerodha.com/z-connect/console/tagging-on-console-trading-journal-tracking-goals
Hello Sir,
I hope you are doing well.
I am trying to build a multicap portfolio of around 20-25 stocks. In that mostly 15-20 would be holding on a longer time frame while others would be for shorter/swing trading.
I am really confused on which different sectors I should involve me self in? Should I have one large cap and one small/mid/mirco cap from each sector?
I’d say start by giving priority to the sectors that you’d understand best. So highest weightage to companies you know to the the lowest belonging to the sectors you understand the least.
Hello Sir,
I am a newbie in the stock market, tracking companies etc since 1-2 years.
Trying to create a long term portfolio.
I am not really sure how to enter and approach each sector which is why I am confused.
Do you give large cap more weightage?
If you intend to have a portfolio of say 20 stocks, then ensure you have at least 10-12 large-cap stocks.
Hello Sir,
In a companies annual report, it shows a revenue of 100 cr. Pat of 15 cr. In the balance sheet it shows that the trade receivables are roughly 60 cr. Now the 15 cr profit that the company is showing, is that gained from the 40 cr it has received or it is assuming as and when the company receives the full 100 cr it would gain 15 cr profit?
Sultan, it is out of the 40Crs that has been recognised.
Hello Sir,
So if the company is showing 15 cr PAT from 40 cr revenue. In the quarterly result do they show 100 cr or 40 cr?
When do they add that remaining 60 cr? Suppose they sold goods in Q1 and only receive payment for it in Q4, doesn’t that skew data?
40Cr in P&L, 60Cr is in receivable in the Balance sheet.
Hello Sir,
But the balance sheet only comes once a year. PL is shown every quarter.
How does understand what is truly happening?
Like there is a sale of 100 cr but realized sale of 40 cr. Does the company let me know this every quarter or do they only show it in the final balance sheet?
Sultan, for this you need to keep a close tab on the analyst con call where these things would be discussed. If not the call, you can even keep track of company-related filings with the exchange, press release, and other official statements.
Hello sir, hope you are fit and fine, i heard a concept regarding backward, forward and vertical integration while reading annual reports. Can you please explain these concepts and provide clarity?
Thank you:)
I’m doing good, Mohit. Hope the same with you. I’m not sure what this means, can you share more context? Thanks.
Hi Sir,
I hope you are doing well.
1)I am a little confused about holding companies. Why exactly they are set up, what is their purpose apart from just holding shares of their subsidiaries?
2) Is it better to invest in a holding company or its subsidiaries?
3) Some holding companies have some operations and also hold subsidiaries like (L&T, Naukri, HDFC Ltd) but some are just plain holding companies.
4) If Company X creates a subsidiary Y and owns 50 % in company Y. Then Company Y decides to invest in its parent company X?
How exactly are the profits distributed? Not sure how all that works, seems confusing.
Basically If I am not mistaken, Bajaj Holdings owns a large stake in Bajaj finserv while Bajaj finserv owns some stake in Bajaj Holdings. What is the point of the subsidiary holding a stake in the parent company?
1) Could be for n number reasons. For example, a company manufacturing footwear maybe interested in setting up a rubber processing company
2) Subsidiary if listed then you can evaluate it as a separate company
3) True
4) Not sure if such cross-holding works like a major holding, please evaluate on a case by case basis.
Its a common practise, but it will always be smaller share holding, not controlling stake.
Thank you Karthik for such amazing explanation. Each and every chapter is a gold. I have a query, I am only inclined towards investing in stocks and I have gone through the Varsity’s chapters: Introduction to Stock Markets, Fundamental Analysis and Personal Finance(Part1). I would like to ask: Should I go through technical analysis chapter too? Will that help me too in my investing journey? Also, can you recommend which all chapters one should look into in Varsity apart from the chapters mentioned above for Investing purpose. Thanks 🙂
I’m glad you liked the content, Attraya 🙂
I’m assuming you are interested in long term investing. Given that TA is not necessary for long term investing. However, any added knowledge helps (hopefully) in better decision-making ability.
Awesome way of explaining the fundamentals . . . it took three weeks to complete all the 16 chapter (I’m bit slow and beginner ), I appreciate the efforts taken to write it. . . Every new investor should read it before getting started. . . Thank you so much for writing this wonderful content. . .
Happy reading, Rubesh 🙂
Hello Sir,
What do you think of investing in holding companies??
What about holding companies with no other business like maharashtra scooters or some with other business like LT, HDFC ltd etc?
Why do they always trade at a discount?
Not a big fan of holding companies. YOu may as well invest in the company directly right?
Hello Sir,
1) But lets say I would like to invest in the tata group stock of tcs, tata steel, tata consumer, titan etc.
wouldn’t it be easier to purchase tata investment corp instead of individually purchasing multiple stock?
2) Also what about holding companies that have their own other business like LT, Info Edge, HDFC ltd?
3) and lastly why do holding companies always trade at a disocunt?
1) If you specifically want to do that, maybe you can. But it’s usually 1 or 2 companies funding the entire group, so why would you want to buy the entire basket? May as well buy the profitable one
2) YOu can based on the value you get at the time of investing
3) YOu invest in a stock, with an intent to profit at some point (for which you need to sell). Holding companies wont do that, they wont sell their own stock. Hence the discount.
Hello Sir,
Why wouldn’t a holding company actively trade the stock they own or even sell far OTM calls of said company to earn some additional income?
Secondly, since the holding company is part of the promoter group and they know said the result will be bad, can’t the holding company short sell and rebuy the stock for a profit.
That’s not the purpose of forming a holding company Tejpal 🙂
Also, the 2nd point will constitute as insider trading and it is a serious offence.
Hello Sir,
Why exactly do companies create holding companies?? Also what is the point of listing them in the stock market?
Also Tata sons and Tata investment are two different holding companies of the same group. What is the purpose of this?
This is mainly to ensure efficient distribution of wealth, efficient tax structure, and a better way to hold controlling stakes in the group companies, Tejpal.
Sir maza aagaya
Thank you so much for enlightening every common man. I personally believe you deserve a national award for sharing your knowledge in such a simple way to understand. You are awesome bro..
Thanks for the kind words, Damo 🙂 I’m glad you liked the content on Varsity. Happy learning!
Sir which book is best to read about share market
I’d say Varsity itself 🙂
Ok sir
Jsk
How to calculate the share capital given in the dcf excel sheet
I’ve explained that in the chapter itself.
Does any particular screen has a good checklist in the screener. in?
and mention a good website to check the fundamentals of all stocks in one place
I think there are a few good checklists that can be used in screener directly. Guess its on screener site itself.
maza aa gya.
hi. i am an avid reader of your Varsity modules. i started naive with the stock markets and thanks to Varsity , i know a lot about them now. have also made mutual fund investments based on the knowledge provided.
i would suggest you to include other topics like market cycles, sectoral and industry analysis, value investing, cyclical vs defensive stocks, specific analyses of various sectors, e.g. FMCG, BFCI etc. to the existing modules so that it can help the investors to pick stocks. also please make Personal Finance 2 part asap. we are eagerly waiting.
There is a lot to be done, Mayank. Working on it. But I’m glad you found these notes useful 🙂
Happy Diwali to you and your family sir!
If company is good,but last two to three quarters..earnings are below estimates,stock corrects..can one start buying the dip.
Happy Diwali to you as well, Chandu!
Yes, if the company is good and you think the last 2-3 quarters is bad due to some transient external factors.
Sir most of the mutual funds and fund managers invest in companies like Bharti airtel,nazara where there is no good fundamentals
was just looking airtel basic filters like ROE,ROCE and 5yr sales growth and profit growth,debt to equity..even they are not good
why mutual funds all hold more stake in airtel?
Excellent & Brilliant – Teaching Platform for Initial Investors with scientific ways of Techniques.
Happy learning, Moni!
Thanks sir. This module on Fundamental Analysis helps me a lot. I request you kindly print book of varsity module. So that we can learn from it easily & increase our knowledge base.
Love,
Vineet
Sure, Vineet. Btw, did you check the video series we released recently?
GREAT KARTHIK… HATS OFF. YOU PUT SO MUCH ENERGY WITH LOTS OF EFFORT… OFFCOURSE MOST PRECIOUS IS YOUR GOOD INTENSION..THANK YOU FOR EVERYTHING
How to do industry analysis. Industry analysis is not explained in this.
Yup, we have not covered industry analysis since that a massive topic. I’ll try and do that one of these days.
Hi Karthik,
The way you explained the fundamental analysis, even a layman can understand and start exploring opportunities in the market. I have just one question that if I want to explore an opportunity in a company who is not yet listed but getting ready to do so through an IPO, how can I find the annual report and other stuff to ensure whether it has investible attributes? I have already gone through the website of it which has only blogs about company’s success so far, and it seems just another way to market it’s products rather than business information. Thank you
Thanks Kamal. Getting information about unlisted companies is not easy. You can probably look for it in the MCA website.
Hey Guys….You did an amazing job by starting out videos based tutorials for these classes, for a person like me who finds difficult to read a book but at the same time want to learn the technical & fundamental aspects, these videos are a boon. Awaiting for the video content on Options, Currencies, etc.
Thanks, Ravi. We will put up options videos shortly.
Dear Kartik, I did DCF valuation of a stock but since FCF was negative for 4/5 previous years, can you please explain how to do valuation of such companies?
Also what I understand is FCF can be -ve if company is going for CAPEX aggresively, does it mean that borrowing of company will be more than its cash generation which will in turn increase its finance cost? please explain so that I can clear my concepts.
Anuj, unfortunately, you cannot apply DCF on a stock that has -ve cash flow. YOu will have to switch to other valuation techniques like the relative valuation technique. Yes, if the borrowing increases, the finance costs also increase, which further reduces the PAT and PAT margins.
Sir when we are invested in a company,should we need to worry about quarterly earnings and look at it?
Its good to keep an eye on it Chandu.
Good morning sir,
With respect, i want to ask that if company’s promoters holding is pledged then it can be the bad sign to invest in that company as per the fundamental analysis. Stock like tata motors, asian paints or vedanta etc. stocks are performing good. Is there any range of pledged shares that is considered to be good. Can we stay invested in that companies for longer period.
Its not a bad thing as such because promoters pledge stocks for meeting personal and sometimes working capital requirements. Do check the reasons why the pledge has happened.
Sir, can it happen that a company is never/rarely overvalued?
Take an example, suppose a company’s valuation band is 50-60. But since 5 years it is trading above 100(i.e. at least 2 times than valuation band) also trading at a CAGR of 15-16% and is continously overvalued.
Now, I get the window of investing in those companies only when there is a huge market fall like that of Covid, 2008 crash, dot com bubble etc.
So, there are two scenarios in front of me:
1. Invest in fundamentally strong stocks without caring about the valuation since it will always be overvalued.
2. Wait for the huge market crashes that comes once in a decade.
Please enlighten your thoughts on my concern.
Yes, this is entirely possible and few companies in India are like this. So your investment is the basis of future cash flow expectations and not really valuations.
But sir many companies are generating enough cash flow then why they are getting their shares pledged, they can use also their reserves for working.
Yup, but if the cost of capital is lower then it probably makes sense to pledge and use the capital right?
Dear Kartik, While Doing DCF valuation I found that if the face value of shares changes the equity share capital will also change as in our module company is having face value of 1 so we can directly use equity share capital for calculation where as for other companies whose face value is different we will have to divide equity share capital and then use it for calculation. Is this Correct or I am doing some mistake ?
Kindly Help.
Thank You for sharing this knowledge.
Thats right Anuj. If the face value is 1, then share cap = number of shares outstanding.
Hello Sir,
I hope you are doing well.
So I have a family of 5 demat names and we all have shares in our name.
Now to constantly maintain 5 different accounts is pretty cumbersome. My idea is that I should try to sell far OTM calls for some income but that is difficult to maintain in five different accounts.
What should I do about this??
Nothing much that can be done. YOu will have to use these accounts separately.
Hello Sir,
Can I create like a account where all those accounts are joined together? Like a company with all those accounts joined??
No, not for family. But you can maybe pool in funds and open a joint HUF account, which means you will have to create a HUF in the first place. Speak to your CA about it.
Hello Sir,
Ironically since my father is not Hindu I cannot create an HUF.
Which is stupid that HUF only applies to Hindu.
Is there any alternative?
I’m not sure about the alternatives, Sriram. Please check with your CA or financial advisors if there are any.
Hello Sir,
Are you planning on talking about Banks, Insurance and NBFC companies anytime in the near future?
Nope, not in the near future.
Hello Sir,
How come?
Banks and NBFCs are the most important part of private business. Anyone who creates a portfolio has like 30-40% in these two sectors.
Please advise?
Yes, that is a common perception. But that does not mean you need to have these in your portfolio. Portfolios can be built with stocks you are comfortable holding. Btw, its just that I’m not good at explaining about these businesses. Hence refraining 🙂
Thanks alot from the bottom of my heart.
Happy learning 🙂
One of the best learning to do analysis of the stock. Thank you for the effort that you have put in teaching FA. Please provide more content related to FA so that we could learn more in depth about it.
Vishal, please do check this module – https://zerodha.com/varsity/module/financial-modelling/
Thankyou very much for this brilliant write up. I’m 19 still I find it very easy to understand as a newbie kudos to your simple approach of teaching
Happy learning Pratyush 🙂
I read all the chapters of fundamental analysis. Since I write poetry and have also published one book (Satya Prem Iswar, Available on Amazon ). I can relate
to your style .You have presented all the knowledge in poetic style. I felt as if you are a poet of finance. Thank you so much for such a wonderful module. I will read other modules too.
Thanks so much for the kind word and I feel happy to read your comments 🙂
Karthik, I am inspired by your knowledge on the topic of financial statements and it’s analysis. I have prepared an analysis for a Company using your techniques and wish to run it by you. Is that possible? If yes, how can I share my work?
Thanks, Sagar, unfortunately, I don’t have the bandwidth to check individual excel sheets. However, please do keep an eye on the financial modeling https://zerodha.com/varsity/module/financial-modelling/
Thank you Karthik, will do.
Sure, please do.
Hi Mr karthik I have a doubt please clarify it how to find mid cap and large cap stocks. For eg Mid cap is above rs 5000 crs and less than rs 20000 crs is midcap right but how come tata elxsi market cap is 53000crs but it shows as midcap why ?? please clarify it and please guide me how to find mid cap and large caps.
thank you
This must be as per the latest market capitalization classification by SEBI. Please check the SEBI circular for the same.
thank you so much sir for a great teaching and writing of fundamental analysis. I went to the many websites for fundamental analysis but this one is great, never want to forget this sir…
thank you one again sir
Happy learning 🙂
Hi Karthik,
I completed the Fundamental Analysis module. I appeared for all the tests and at the end, it is showing “You have qualified for certification”. Where can I get the digital certificate?
Its on the app itself, Sanjay.
Under Progress, 00 certificates showing. At the end of the fundamental analysis course, “you have earned a certificate” showing. Not sure, what is the issue.
Sir
If I think today I want to buy a stock for long term. Which factors I took to choose stock . I always do analysis after selecting stock. But I want to buy today, take this assumption. Can I see 52 week low or high or any other things like news, i don’t no Please tell me sir
It depends on what sort of end objective you have. If your long-term is for a few weeks, then TA based approach (like 52 weeks high, moving avg cross-over) etc works. If its five years plus kind of approach, then you will have to do a rigorous fundamental analysis.
Hi Karthik,
Few Years Ago I downloaded Excel Sheet on Discounted Cash Flow Analysis For ARBL,but now I am unable to find it.Also I see some sections are added/removed/merged.
Pls share excel sheet if possible.Thanks
Abhilash, keep track of this module, will update the complete DCF module soon – https://zerodha.com/varsity/module/financial-modelling/
Hello, Karthik Sir I’ve read your fundamental analysis module 3 times now in 1st read I just finished it, in the second read I wrote every definition in my own words and in 3rd read I calculated the ratios of some companies on my own from the pipe industry. And after this, I’ve only 1 major doubt and that is all of them seem to be the same on the chairman’s message and M&DA part every company talked about how far the pipe industry has come how it has grown at a CAGR of 11-12 % how much more it’ll grow, considering global as well as Indian economy (everybody talked about housing, Agri and industries requiring pipes etc.) There were few differences Prince pipes talked about new launches in a few segments with their partnership with global partners also they have plans on expanding their production capacity in a few more southern states, whereas supreme, on the other hand, boasted about their exiting large network of manufacturing plants but no new products, there is nothing very optimistic I found about Finolex. (i did not compare Astral pipes because they are selling on very high PE and I was not gonna buy them in any case). On the financials part numbers of prince pipes seemed healthy they have inventory turnover (ITO) 5 times, accounts receivable turnover ratio(ACTR) 8 times and for Supreme ITO was 6 times rest of the numbers were the same as prince pipes but it was just multifold as compared to Prince pipes(considering Supreme is a midcap company). And lastly, on valuations, Finolex is available at a good price but prince pipes are a little costlier and supreme is costlier than that. I did not calculate IV as I’ve not completely understood that concept of DCF and I don’t know if I am doing that thing right( because according to a ticker website FCF of Astral pipes has grown at a rate of 43% which I could have never guessed for these three companies). nevertheless, in the end, I decided to buy 1 stock of prince pipe as their face value is 10 and they have a potential to grow, still, I paid a little extra for that I know. *In such cases where qualitative analysis feels the same what can be done?*
Mohit, glad you read the module and have reached a position to apply what you’ve learned. Congratulation on that 🙂
So in the case of similar companies, you can do one of the following –
1) Invest in a company that has a better promoter, and better management. This is the qualitative aspect of investing.
2) Invest in both by splitting your capital into two halves
3) Invest based on market cap, higher market cap or market share indicates a leadership position.
Good luck!
Thank you so much for sharing so much information for a person with non finance background in a well explained manner. It will be grateful for you to come with such information.
Thanks, Kamlesh; glad you liked the content here.
Team,
Download pdf option is not available for hindi version (for fundamental analysis module – 3).
plz make it available for all module, only for module 1&2 (hindi version) pdf download option is available.
Checking this.
Team, For hindi version of Module 3 (The fundamental study) there is no option available for download pdf, Pls make it available.
Plz also make available the same option (download pdf) for other module also, becoz only in module 1&2 this option is available but not available apart these.
For all module english version download pdf option is available but not available for all hindi module, plz make it available for all module.
Thnk u in advance.
Checking on this.
Thanks a ton for making these tutorials. These are really great value additions. You have also been successful at making complicated stuff simpler for newbies like me. Thanks again ! Kudos to you.
Happy learning, Ishan 🙂
Everything till now I understood but how do you choose a stock among thousands?
YOu need to develop a tracking universe and include interesting stocks. If you don’t have one, start with the Nifty 50 basket.
Dear Sir,
Is there any books on how to identify fundamentally good small caps companies. A good book where it mentions what are parameters to consider for small caps companies.
Thanks
Zidane
I’m not sure about this. But do follow Ian Cassel for this topic – https://microcapclub.com/about/microcap-experts/
Thanks for putting this in simple and practical way. do you know is there a site which calculates valuation based on DCF and also let us know the assumptions?
I read about DCF and other concepts in my MBA but they way you explained is really practical and get deep into the brain 🙂
Thanks again…
Hey Gauri, glad you liked the content. Do check out Tijori, I think they have something to do DCF. Also check out this module, dedicated to DCF 🙂
https://zerodha.com/varsity/module/financial-modelling/
It’s been years since this content was created and there has been a lot of fintech disruption, are there any trusted or recommended sources, paid or unpaid where the Y-o-Y numbers can be picked up instead of individually picking up the numbers from each Annual report, understand that there can be some discrepancies but still is it recommended to use ballpark numbers from sites like Tickertape and Screener.
PS: Appreciate the effort in making this content available to everyone
Harsh, I’d suggest you look at screener and Tijori finance. They both have clean sources of data available on their sites.
Thanks for coming back Karthik, appreciate it.
Happy learning, Harsh!
But if we feel stock has good future than sale it and reinvest the profit in stock.
What you say sir?
Or you can let your investment continue.
👍
Hello Karthik,
I went through the Fundamental Analysis chapter, and till date I had been through some random educational YouTube videos over few years.
The depth at which you explain the elements of the concept are worth appreciating. I can only imagine how much effort it must have been. I have learnt a lot through this chapter.
With gratitude, thanking you and your team for Zerodha Varsity!
Thanks for the kind words, Naveen. I’m happy you’ve liked the structure and depth of these lessons. Happy learning 🙂
Appreciate your reply, will keep learning other chapters! 🙂
Happy learning, Naveen 🙂
Hi Karthik,
How to do Analysis if we are in mid of financial year and annual report no are 6-8 months old. We only have quarterly results but what about balance sheet and cash flow data ?
Regards
One best way is to understand the business and numbers based on the latest year’s annual report and build on its basis the quarterly results.
Sir if compay make loss in quarter or year. From where compay will pay these loss
The company either has a net worth or borrows.
But they can pay from reserves also ?
Yes, that is possible.
Sir can you explain reasons for increase and decrease in share capital (in balance sheet).
The only reason for an increase or decrease in share capital is either raising more capital or issuing a split.
Hi Karthik,
I am seeing significant differences for ratios on Moneycontrol and Annual Report, I tried with standalone and consolidated view as well still it’s not matching.
I hope Annual Report ratios should be followed. Still Wondering why that much differences in ratios.
Regards
Please follow the data in the annual report.
Very best attempt to explain each and every topic on understanding the basic concept on Financial Analysis.
Thank you very much.
Happy learning, Ramesh 🙂
Sir I’m trying to understand about personal consumption expenditures index(PCE). I understand that it is one of the most important index along with CPI that Feds use. But can’t understand whether an increase in PCE is a good or bad thing since this is related to GDP as well. I understand that CPI should be in control, but couldn’t understand the macroeconomic view from a PCE perspective. Can you brief me on this? Thank You.
Hi Sir,
You have mentioned a 15-18% return in long run is good and at one place u have also said , short term trader can achieve around 12 %
Is that the max that traders earn.
Also sir, u have mentioned not to be swayed by 50-100 % returns in short term as they are not sustainable…
The traders ( who are profitable ) …aint they able to consistent trades…????
Also , i am curious to know, Is TA really a science cum art , or is it Probabilities that work.
Thanks
Puneet Chawla
Puneet, here you go –
1) 15-18% is like a dream. I’d now revise it to say 10-12% over the long run 🙂
2) There is no maximum or minimum number to what a trader can earn. It all depends on how well the risk is managed
3) Market conditions change, as does each strategy’s behavior, so being consistent is not possible.
4) TA is a mix of all, more skewed towards the human reaction to prices.
Good luck.
Thank you for your great write up. Appreciated your effort, heart, mind and passion you have put into it. It is changing my life.
Thanks for the kind words, I’m really glad you liked the content on Varsity. Happy learning 🙂
1. If a company looks overvalued compared to its peers, but only a few players are in the industry and assuming the analysis says that the company enjoys high valuation due to its superior fundamentals, how to proceed further?
2. Assuming the same company also announces a buyback at a much higher premium than the current market price should I just look at the high valuation and avoid or dig deeper?
Would like to know your personal approach towards this. Thanks
1) This is quite common. Eventually, you should be comfortable paying the price (which is a function of valuation). Make sure you know the exact reasons for high valuations
2) Dig deeper, always helps 🙂
For cash rich and mature companies like Asian paints, DCF method is always showing as overvalued. Which leaves us with relative valuation and as you now its subjective. I did spent some time understanding relative valuation part from one of the books you suggested. I had a hard time understanding usage of relative valuation on matured companies. Could you point me to some source where I could understand this concept better? Thanks Sir.
We will probably develop a module on this soon 🙂
This is the best thing that I have read today 🙂. Your content is the Bible for me. If not a module, then even if you could write a page or post a Twitter thread, I would be glad to read it. Really thanks for considering my request.
Noted, will do that 🙂
Thank you Karthik ji,
I have only read the fundamental analysis topic and it has really helped me in learning and understanding these concepts. I will go through these points again with results of different companies.
The content is good and able to sustain reader’s interest. I bought a book on balance sheet few years ago but got bored and never completed that. But I could complete this chapter in few days.
I wish you good luck.
Happy to hear that, Ashok. Hope you continue to learn and benefit from Varsity.
Sir,
You have prepared a 360 degree material on the entire stock market so nicely and which is very useful and easy to grasp even for a novice like me. Meanwhile, although few points have already been highlighted to search for a good stock for investment, meanwhile, I would request if you could think to write a module (may be a small one) more specifically on “How to search out for a probable multibagger?” may be through elimination of steps through help of any screener.
I am sure this will attract and benefit many readers like me.
Thanks, Anirban. I’m glad you liked all the content. I noticed you’ve been learning enthusiastically and getting all your doubts cleared 🙂
Hope you continue to learn and grow. About multi-bagger, it is a simple FA approach. The difference is in the discipline part, which no book or article can teach. You develop it with practise over time 🙂
Sir,
Thanks for your kind words.
Sir,
What is a NCD bonus. Britannia industries have given twice such in 2018 & 2020. Can you please let me get an idea how it is different from a simple bonus issue?
Its a bonus debenture, similar to bonus shares Anirban. Not a widely practised corporate action, and only a handful of companies have issued this so far.
Sir,
When I get time, I used to see some you tube videos where many one comment that companies which have gain robust M-Cap will not give returns much in future.
So, there are many large caps like TCS, RIL, HDFC ,Infy which have already gained large M-Cap. I know it will be difficult to comment. However, looking for 25-30 years ahead, will it be hard to expect 10-12 times return?
Kindly advise.
Hard to comment, but 25 yrs is a solid time frame, 10x does not seem unreasonable 🙂
Sir,
can you suggest me which are the industries which have increased contribution since past 5-6 years towards India’s GDP?
Clearly, tech and services industry has done that Anirban.
Sir,
I have started few investing in large caps. However, for AI, I am looking to invest in US stocks. Could you kindly suggest the way?
I hope there has been few recent changes with norms to investing in US stocks.
Sir,
In the content, it is mentioned that unsystematic risks get flattened after 20 stocks in portfolio. Now, you have mentioned in Module-1 that an ideal portfolio should consist of large cap & mid cap and small cap. In this perspective we should keep a portfolio consisting of 70%-80% of large cap stocks and 20%-30% of stocks in mid & small cap. I would request you to kindly help me in below understanding:
(i) Should we look to keep max 20 stocks in each of the segments i.e, large, mid and small caps to reduce the unsystematic risk? In that case the stock count may raise upto 60.Please help.
(ii) Does this stock count anyway also depends on the investment amount made?
1) Not really…look to construct a porfolio that has 20 stocks….of which 70% is large cap and the rest are mid and small cap
2) Hmm, it should not matter as such I guess.
Sir,
1) Regarding investing to counter the unsystematic risk, like stock count, is there any notion on the extent/barrier of sector count too?
2) Kindly suggest the sector wise percentage allocation out of the total wealth.
3) Also, there are several sectors in the market and I guess it becomes too difficult to intake all the sectors in the portfolio for diversification. I would request if you could guide on views for how to select the industries, taking a 25 years time horizon ahead.
1) Not really, but generally sticking to 7-8 sectors at the lowest end is a good idea
2) Please check the previous reply
3) You can take cues from the index composition – say Nifty 250?
Sir,
I am on the verge of completion of Mod-9 and will complete in a day or two. I have plans to first cover the entire 15 modules as written by you. However, I would request you to kindly help on the below which will help me immensely:
(i) How to understand the economics of India specially on the parameters which influences the capital markets?
(ii) How to understand the sectors? Specially the transition of sectors at different times based on which I can bet on them?
I would anticipate you to please guide me with sources/ways to learning to understand the above two. Various youtube videos which are aired are not upto the mark mostly. I had been scratching my head to tame the abobe two but failed repeatedly.
N.B: I thought of asking this question at the end of 15th module but then I couldn’t resist.
1) Content on macros trends are still very scattered. Will try and develop content on thus
2) We have a module on this – Sector analysis. Have you checked that?
Sir, I come across this term called ‘NEW debt received’ in Aswath Damodaran’s book. Could you tell me what does he mean by this. Is it the difference between current year’s total debt and previous year’s total debt?
Ah, not sure. Can you share more context?
A small correction in my previous question sir. It’s actually, ‘new debt issued’. This was used in a formula ‘new debt issued – debt repaid’.
While I guess debt repaid’ is current year’s finance cost(please correct me if I’m wrong), I don’t get what is new debt issued’. Total debt difference between the current and previous years? Thanks Sir.(Please include an editing feature in the comment section so that we could edit in a single post)
Ah ok. So new debt issued is all the new loans that the company takes on its books for the current year.
Understood sir. So let’s assume a company has 150 Cr in debt in current year and 100 Cr in previous year.
In this case is the new debt issued 50 Cr(difference between the 2 years) or 150 Cr? Thanks
New debt issued will be 50Cr, and the total debt will be 150Crs.
Hi Karthik,
This module of Fundamental Analysis has taught me about Fundamentals like no other. Thanks for the detailed module. Best wishes.
Thanks for the kind words, Kiran. Glad you liked the content. Happy learning 🙂
loved it. will go through it again and again
Sure, please do feel free to clarify your queries here, if any.
Hi Karthik sir,
I am great fan of your writings and teaching. your doing great job by sharing financial literacy to young people.
sir can you please make video series or small chapter for how to analyse banking annual reports: income statement, balance sheet and cashflow because its totally from normal financial statements.
Thank you sir.
Do keep an eye on this Pavan, we will cover it shortly – https://zerodha.com/varsity/module/sector-analysis/
I cannot imagine how much time and effort was spent creating this masterpiece.
Thanks Varsity and team.
Happy learning!
It would be great if a module is included for analysing bank stocks/NBFCs as the approach for their analysis is slightly differently I heard.
We have been discussing sectors here, Swathi – https://zerodha.com/varsity/module/sector-analysis/
Thank you soo much Karthik sir!!
Your work is literally fun to read and learn.
Glad you like it, Ali. Happy learning 🙂
Sir,
I believe you are doing great.
I read the whole content of Zerodha. I am now trying to focus on influences of micro/macros on markets. I have come across a abridged content of the same in ICICIDirect and have also studied.
Now, some few moths before I come across one video of you where you have categorically mentioned the several factors (like inflation,GDP,oil prices etc.) which influences the market and also the sites to look for to understand each of them. Could you kindly help me share that link of the youtube video presented by you so that I could study more? Even if you share more videos on micro/macros, I would be happy to learn those too.
Looking for your further guidance to tame these micro/macros.
All our videos are available on Youtube, please do look for Zerodha Varsity on Youtube to find the channel 🙂
Sir,
From where can I get the below data?
1. Budget
2. RBI’s policy review details
3. GDP Data
4. Inflation
5. IIP
Maybe you can check RBI website for this most of the data points are available on the site itself, Anirban 🙂
Sir, lets assume that you spent time on fundamental analysis, calculated the intrinsic value and have made a decision to enter a stock for a long term investment. Also lets assume that the stock is available at your margin of safety levels but is in a downtrend. Given the situation, would you avoid catching a falling knife and wait for a breakout or something like a 30 week MA crossover to happen(risk here is that the price may not be available at intrinsic value) or would you not care about TA and enter at the margin of safety range?(risk is it might still fall down) As a person who use both Fundamentals and Technicals into the mix, I would like to know your view on this.
(Read Stan Weinsteins’s book sometime back. An excellent book, but got me confused at different levels. Now You know, why I’m asking this🙂) Thanks
I’ve been in this situation quite a few times, so I exactly know what you are asking. Here is what I do, assuming the downtrend persists –
1) Dont invest the entire corpus in 1 shot, split it across multiple entries.
2) If the stock goes below your entry price i.e intrinsic value, buy another 20%. But do remember, averaging on the downside is not a great idea. You are doing this because you have a strong conviction on the intrinsic value.
3) If the stock bounces and move up, and lets say crosses 10% above the intrinsic value, then purchase for the balance amount.
Hopefully this technique gives you not just an entry but also puts you at ease.
Glad to know this approach. I have been doing the first half of this approach right, but the second half in the opposite direction. I will correct it.
But Sir, in the book they have repeatedly mentioned not to hold stocks below 30 week MA. Like even if we got a right entry, but the entry failed, it was suggested to exit at the 30 week MA crossing below and to enter again if it crosses the MA above. But I’m assuming that this might help in a normal economic situation. Given the current situation(with ongoing war and volatile crude price), the market sentiment is changing on a daily basis. So if one follows this approach, he might have to enter one day, exit the next day if sentiment changes and again had to enter the next day if the direction reverses again. This doesn’t seem to be practical.
So assuming that we got a good entry point to deploy the full capital, and something like a war happens and changes the market sentiment the next few days, now our stock might see a decline below. In this situation, does it really matter to keep a stop loss if it is for a long term investment?
(I understand that a straight forward answer is difficult, but the opinions are largely contradicting each other in many books I have come across. So would like to know your personal opinion) Thanks.
In that case you can look at longer term averages and not neessirly 30 day average. Maybe 50 or even 100 day EMAs might help. You need to have some sort of cut off price at which you will exit, even if its long term. Else the stock might bleed forever and you maybe stuck through out.
Understood sir. But the suggestion was 30 week average. Not day average. Is it fine?
Ah, sorry, I read it as 30 day instead of 30 week 🙂
Thats fine since its a very long term average.
Sir,
Regarding hyper long term investment, I requirement the below advice/viewpoint from your side:
(i) What can be a good proportion to keep Direct Equity & Index Fund in one’s portfolio?
(ii) Out of the total index fund, what could be a good ratio to invest in Nifty 50 index fund, Midcap index and small cap index?
N.B:
(i) Unlike Index Fund, I am not very comfortable with Raw Mutual fund.
(ii) I am in between low and medium risk taker.
1) Direct equity can be 20-25%, assuming you have the time and bandwidth to research on stocks
2) You will have to consult a financial planner for this, but I’d say at least 60-70% in Nifty 50.
What can I read next from zerodha modules make my fundamental analysis more stronger? Btw thank you for enlightening knowledge…
Rick, you should check out the module on Financial modelling, that will help I guess.
What are some really good books for fundamental Analysis of stocks?
There are plenty, I’ve shared a list in this module. I’d suggest you read up all articles from Prof.Ashwath Damodaran.
Thank you sir
I really enjoyed this module both in video as well as text I would like to know whether the test for the certificate includes all these formulas?
Happy learning, yes, you can 🙂
This content is absolutely fantastic and the very thing I was looking for. Thank you so much!
Please help me with this query – In chapter 9, EBITDA CAGR and PAT CAGR are calculated considering 4 years. But shouldn’t it be 3 years instead of 4 years because for calculating CAGR, we have taken numbers which were at the end of 2011 in the denominator of CAGR formula?
Thanks, Sanket. In that way, 2012 numbers would be at the end of 2012. So I guess its ok.
Sir,
Is there any way to understand the inflow/outflow of money in a particular industry at a particular time?
Inflow/Outflow of money – do you mean the investments? If yes, then a simple industry report should give you this information.
Sir,
(i) I tried to mean from the perspective of “Industry rotations”. Sometimes a particular industry is booing and sometimes that particular sector is down. Is there any possible ways to identify which is the upcoming industry which is going to boom?
(ii) Where can I get a particular industry report? Could you kindly share such a link?
1) No, you only have to keep reading, learning, and developing insights.
2) Yes, you can if the industry is well developed. For example – SIAM ( https://www.siam.in/ ) provides industry updates for Automobiles and NASSCOM provides updates on Information tech.
Sir,
The below definitions has been taken from the PPT floated by SBI Cards in this QTR ended results. I would like you to help me if I have correctly understood the definitions:
1. Yield % : Calculated as interest income from cardholders divided by average receivables for the period (annualized).
–> Is that mean how much the company is truly getting money as interest from customers divided by credit sales?
2. COF % :Calculated as total finance costs for the period divided by average borrowings (including lease liabilities) for the period (annualized).
—> Is that mean the interest that the company has to give to its borrower divided by the amount of borrowings?
3. NIM %: Calculated as interest income after subtracting finance cost from cardholders divided by average receivables for the period (annualized).
—> Is that mean the interest income that the company is actually making from customer minus the interest that the company has to actually pay to its lender divided by credit sales?
Anirban, check this – https://zerodha.com/varsity/chapter/banking-part-1/
You will find all your answers here 🙂
Sir,
The below definitions has been taken from the PPT floated by SBI Cards in this QTR ended results. I would like you to help me with the below two terms to understand.
1. Gross Credit Cost %: Calculated as Gross Write off and provision on loan asset divided by average receivables for the period (annualized).
2. Cost to Income %: Calculated as operating and other expenses divided by Net revenue (Total revenue after subtracting finance cost.)
ANirban, can you please ask these queries in the banking sector? Your query there will also help others who have similar doubts.
Sir,
What is “Credit cost” to a financial institution?
The cost of borrowing funds is credit cost.
Sir,
Is the financing profit (as mentioned in QTR P&L section in screener) for a financial institution denoting its operating profit?
Yeah, since the institution is dealing with financing, this would be core operations.
Sir,
In screener, nder the “Shareholding pattern”, it shows no. of shareholders for every quarter. However, the number varies for all the quarters. Now, to know the EPS for a particular quarter, should we have to divide the PAT by the no. of shareholders for that particular quarter?
YOu can divide by the overall number of outstanding shares. That will remain constant, while the shareholding pattern may change and has no impact on PAT.
Sir,
What does a negative inventory mean?
Means the company is receiving cash in advance for the inventory.
Hi Karthik,
Thanks a lot for the wonderful FA modules. I have learnt a lot from these series and following investible grade attributes checklist for my investments.
However, I have the below queries for now.
1. How frequently we need to validate the checklist and Intrinsic Value estimation (Valuation)? Considering Long Term horizon (10+ years) do you suggest it do every year after AR report is available?
2. As per the investible grade attributes whenever there is a disruption it suggests when to sell. Considering the qualitative analysis(understanding the business) is pass and Quantitative Analysis checklist and Intrinsic Value is just on par/not so good due to poor quarterly results, do you think we should be considering to sell?
3. If there is a disruption in investible grade attributes for shares like Titan, Infosys, ITC etc., which are known to rebound and proved investment worthiness many times .. so is it fair to say that we can look for few quarters maybe 2-3 and validate if there is still a disruption in investible grade attributes before selling? How much time we need to wait/consider to identify the disruption (maybe last 3 years as considering the 10+ years of long term investment horizon ?
4. What if both qualitative and numbers checklist is just on par or all pass except P/E ratio say.. P/E is trading about 50+ what do you suggest for investment? Do we need to wait? or We can proceed as it just one of the variable didn’t pass/or just on par in our checklist? or Do we need to discard investment decision at first place when we saw one of the valribale or may be only one varibale is just on par/not so good during validation of the checklist?
Regards,
Pavan
1) At least once in 6 months. Just to check if things are in places as per your understanding.
2) Yes, only when you feel there is a lot of deviation from your original thesis.
3) You need to be in position to figure the impact of the disruption and how resilient is the company’s ba;ance sheet to the changes. If its short term, ignore. If you feel it have long term impact, then do act on it.
4) It depends on the company you are dealing with. For example, a few FMCG companies are always at high PEs but still their stock prices have soared.
Hi Karthik,
Thanks for responding.
If I understand correctly, we need to validate once in 6 months and just need to make sure the quarterly results are inline with the initial analysis with which we made buy decision. If there is any lot of deviation, which may impact long term the we should consider selling.
To validate the checklist we have considered past 5 years AR report, but we considered only 3 years data for the valuation(Intrinsic value). Why so?
I did consider 3 years data for one of the Paper Stocks(PAKKA) result was 60% lower than the CMP of stock price(3.5% terminal growth and 9% discount rate).. but with 5 years data with the same assumptions result was around 30% lower than the CMP of stock price.
Most of the stocks have shown lower/negative return during 2021(maybe CoVID impact)
So, I am bit confused.. how many years should we consider while calculating the Intrinsic value?
Regards,
Pavan
Thats right and this technique plays out well when you’ve bought a stock with sufficient margin of safety. Considering 3 years data could be a bit tight, look for at least 5 years of data. Also, valuations and business thesis is one thing, and actual market price is another thing. Eventually we all expect the valuations and price to catchup.
Hi Karthik,
Good Morning!
Thank for clarifying my doubts.
I am here with one more query, if we find a company which has a strong ‘MOAT’ or enjoys Monopoly and qualitative & quantitative things are inline. How do we compare the valuation(Price to Sales, Price to Book Value, Price to Earnings) with the peers to know whether CMP is cheap or costly?
Does the Intrinsic value alone will suffice? or Is there any other way we can compare?
Regards,
Pavan
You’d need to do a relative valuation and compare the ratios, margins, growth not just with peers but across industry. The moat will eventually show up in these numbers.
Also, while evaluating the valuation part combination of all Price to Sales, Price to Book Value, Price to Earnings should be in line with the peers right?
I have observed that sometimes, Price to Sales looks good, so is Price to Earnings but Price to book value will be too high when compared the peers. In that case can we conclude it is overvalued compared to its peers?
It depends on company to company, sector to sector. Also, companies with moat, if discovered by market, will always have a premium.
Hi Karthik, i finished learning through calculating the ratio for amarraja and wanted to check my knowledge for other batteries companies, when i started with excide, there are lot of subsidary, so i couldnt figure out where to start from. other companies such as everready – earlier statements for yr not available, hbl power- again subsidiary. can you please guide me where to start with batteries stocks. any help would be great help.
That is normal to have multiple subsidiaries, hence always stick to consolidated statements.
Hi Kartik, sometimes the warnings are given by nse to companies. Like in paytm rbi gave it. where can i find the warnings for each comapny as they are given. ty
What type of warning are you talking about? Btw, that is why tracking news daily is very important.
Dear Karthik,
First of all thanks “From the depths of my heart, thank you, Karthik, for generously sharing your profound insights on finance. Your wisdom has truly enriched my understanding and empowered me on my financial journey.”
My question is how to analyze the stocks that are generating negative ROE, currently loss making but I see that there will be good growth in the future and they can offset there losses. And also the management is confidence about the future growth story and they are rapidly expanding. How to analyze these type of companies and there valuation. Examples in recent time we saw a good run up from IDFC FIRST BANK, Zomato and now I’m looking at PVR(which is looking like a old days of IDFCFIRSTBANK AND ZOMATO).
Thanks for the kind words, Akhilesh. Unfortunately, ROE as a concept does not fit in well here in such situations. In fact, none of the traditional metrics do. What you need instead is a through understanding of business and the sector it is operating in. You need to develop enough conviction to make that investment 🙂
The problem if you invest without enough conviction (more so in this case) is that in case the companies stock price does not move in your desired direction for a prolonged period, then you maybe forced to sell…and the business may start unfolding after you do.
Hi Karthik,
Thanks for the reply, like I have another question which is not related to fundamental analysis, I got this question while analyzing NBFC’s just curious to know. let me brief it out with example:
Scenario:
You are starting a new lending Non-Banking Financial Company (NBFC) specializing in providing loans for new bikes. Let’s assume you have invested 10 Lac INR in this venture.
Loan Details(initially):
Loan amount per bike: 1 Lac INR
Annual interest rate: 20%
EMI per bike: 10,000 INR
Loans disbursed in the first month: 10
Repayment and Reinvestment Strategy:
For next month, you receive EMIs from the borrowers that is 1 Lac.
You reinvest these EMIs to provide new loans, so for the 2nd month you receive 1.1 Lac and I will lend this 1.1 Lac to new customer and thus maintaining a continuous cycle of lending.
Question:
How do you calculate the return on investment (ROI) in this scenario? Additionally, what would be the value of your investment after 5 years, assuming no defaults or Non-Performing Assets (NPAs)?
So there is something called as Asset Liability Mismatch report that NBFCs have to report, so on one hand the NBFCs receive interest payment and on the other you NBFCs also have to repay the loan (assuming they have borrowed). If its their own capital, then for growth they will have to borrow (leverage) and then comply with the ALM policies.
Coming to you question – a standard XIRR model will help figure the ROI.
Thanks Karthik!
Happy learning!
Great job Karthik!
Sir,
The quarterly results will be published soon for organizations. In between, I would like to know the following:
(i) Could you suggest a consolidated place where I could get to search if results of a orgnization met the analyst prediction?
Ah, that could be a little tricky. Maybe try Tijori Finance?
suppose, if a company in my portfolio is trading way higher than its intrinsic value but still holds investible grade attributes should I sell and then buy again when the price comes back to its intrinsic value/ hold the company until it no longer has its investible grade attributes?
This can happen especially if the stock is in momentum. Best thing to do is stay invested and trail a stop loss 🙂
Sir,
Analysts used to predict the result outcome of organizations. Could you kindly let me know how this is really predicted? I know this should be a routine work backed through discipline. However, I want to know a little on the path on how should be it approached to predict? Any gross idea pls.
They build financial models and project growth 🙂
Sir,
I started researching equity market since Feb last year. During the last year, I had tried only passive investing in largecaps only. My profit stood 16 %.
This year I started searching for midcaps and large caps and tried to invest in mid and small caps in required proportions.
However, in nifty, I could find some microcaps also. Now, my query is:
(i) Can I invest some money searching through fundaments of these microcaps? Do fundamental analysis also hold good for microcaps like lagecaps/mid/small? Require your suggestion please.
Microcap is a different beast, almost like private market investing. Yes, basic fundamental analysis provides a good staring point.
Karthik sir any good book on valuation for beginners and intermediates on Indian context? I found intelligent investor and security analysis too difficult.
You can checkout the little book on valuation from Ashwath Dhamodaran.
For NBFC like manapuram finance , muthoot finance have negative operating revenue then how should we calculate cashflow to get intrinsic value…
In such case its not possible. You will have to figure other avenues of valuation.
Hello Karthik,
You guys have really put the content of 2 years of an MBA 😉 for free.
Thank you for the simplistic and practical presentation throughout the modules.
I wanted to ask you about the Wealth creation. So if you found a stock ( after Fundamental Analysis) you would invest a certain amount of money in it. But for creating a good wealth not sure if that would be sufficient enough.
Then how can I create wealth from the 10-15 stocks portfolio?
By systematically analysing the companies in the portfolio and increasing the stake or is there anything else which we should know about on this part.
Thanks in advance….
Thanks Vishal.
Yes, once you develop enough conviction on a stock, it is important to ensure you also invest in it so that it makes a difference. One way to do this is by systematically increasing the stake over time.
Sir,
As we all know that long term capital gains has been taxed to 12.5% from 10% in Indian equities. Now, if someone as positions on equities in other countries, will still capital gains be taxed as per Indian slab or will be taxed as per that country slab?
Anirban, I think its best if you take an opinion from your CA regarding this.
Sir,
I have built some positions in Indian markets and thought of making some diversifications exposure in two areas- Foreign investment and Crypto currency. Now zerodha has taught us immensely from A-Z in capital markets in domestic segments.
I would like to know if you could suggest some links/materials/way to study in the above mentioned two areas (Foreign investment and Crypto currency). How shall I learn things in the two areas? Please suggest.
Anirban, I’m not sure about Crypto myself:) For other Foreign assets like EQ, we keep putting up articles and conducting Twitter spaces. Please do join in 🙂
Sir,
Does the EPS value include profits of credit sales also?
Yeah, as long as the the cash is registered. Tts the bottom line right?
Sir,
Do technical analysis fits in P/E ratio analysis?
No, Technical Analysis is more about studying chart patterns.
Sir,
Do technical analysis helps in studying the below chart?
(i) P/E chart.
(ii) India VIX.
Not really. TA is about price and volume analysis. But these charts are not price based.
Thank you so much for this module really helpful
Glad you liked it, Rishikesh. Happy learning 🙂
Sir,
Is there any resource from were we could conduct Industry Analysis of a particular industry like we do company analysis from their Annual reports?
Also, request you to please share the link if possible.
Check this – https://zerodha.com/varsity/module/sector-analysis/
Sir,
My mistake to ask you the previous query. More specifically, I would like to ask that is there any source through which I could analyse how a particular sector is poised nationally and internationally to benefit in the upcoming years? Because, once and if it is at a good place, then only I thought of analyzing the companies under the umbrella.
Should the margin of safety of 30% be applied to the upper intrinsic value as well?
Yeah, margin of safety implies creating a band around the intrensic value.
Hello Sir
I’ve just finished the fundamental analysis module and wanted to thank you for the amazing work you have put together. I found it extremely helpful that you explained the theory by using an example, which was ARBL in this case. I hope you can take the time to answer a few questions that I have:
1. I think you wrote the DCF primer chapter in 2014, At the end, according to the calculation you determined the then current stock price to be overvalued, hence you didn’t buy the stock. But now in 2024 the stock price of the company is trading at 1500 INR. What are your thoughts on that? Was it just chance? My goal is not to criticise your decision, instead I’m just very curious to know if there were other factors involved that you couldn’t have accounted for/ foreseen while determining the intrinsic value in 2014.
2. Till now you always referred to the annual report, when does it make sense to look at the quarterly reports?
3. I was thinking about investing into NVIDIA, but to be honest the main reason of me wanting to do so is because of the unusual high growth that it has shown over the past few months. But in order to be a disciplined investor I need to make a well-researched and informed decision and not just go with the trend and crowd. Many people say that it is overhyped and many say that it surely will still continue to grow and is a good investment. I have found arguments for it to keep on growing but I know that they aren’t good enough. On 28 Aug its earnings call will take place. What should be my approach? Should I buy the stock before the call or should I wait for the call and then buy the stock depending on the results it’ll show?
Thank you for your guidance and support, I hope you can give me elaborated answers which can help me in my investment journey which I have just recently started. Thank you for your time, sir.
1) DCF always have specific outcomes. It leads you to either a buy, sell, hold decisions. This is expected. You need to combine this with qualitative analysis and take a call.
2) One a base model is built, you can calibrate it using quarterly results.
3) Buy for 50% of the amount and see how the stock price moves. For example, if you wanted to invest 1L, then reduce it to 50K and invest.
>> If after buying, the stock continues to rally, I’d buy for the rest….this way, my avg buy price would be lower
>> If the price goes lower, then at least the loss is restricted to just 50% of my capital.
By the way, this is just an idea, please dont be in a hurry to execute it. Think through from your perspective and see if it makes sense.
*3. if possible, I hope you can also share your view and perspective on NVIDA
Ah, US stock, I dont really track it actively.
Sir,
Suppose a company has published its last quarterly result on 07-APR-2024. Now, I am seeing data in screener on say, 01-MAY-2024. Assume, in between 07-APR-2024 & 01-MAY-2024, no result has been published by the company. Now, if I am seeing a data in TTM, what does it mean?
Does it mean the data pertaining to past 12 months from the date 07-APR-2024 or the past 12 months from the date 01-MAY-2024? I believe it should be the data of the past 12 months till the date 07-APR-2024. Right? Or am I missing somewhere?
Yeah, as long as the new data is not updated, its safe to assume its trailing 12 months.
Dear Sir,
GM
Just finished reading the little book that beats the market by JOEL GREENBLATT.
Pls let me know where I get list of NSE listed stocks with
1. Return on Capital
2. Earnings yield .
Thanks in advance,
VIDYADHAN
I hope you liked the book 🙂
You can get this on 3rd party sites like Screener and Tijori finance. If you are a client of Zerodha then we display this information on Kite as we have an integration with Tijori.
Dear Sir,
Good evening,
Yes I like the book.
I have used tickertape as have subscription for same.
Filter used
1. PE ratio
2. Return on investment.
RAYMOND is coming on number 1 from nifty 500.
Sure. You can set other criteria as well, like debt being low and high ROE etc 🙂
Sir,
Like Nifty 50 index, I want to look the historical data of a specific industry say, Bank/IT of the last 20-25 years. The ETFs available don’t provide data of past long back dated.
Is there any way out? If yes, Kindly provide me the link or guide.
Ah, not sure. Do you want to check with Nifty indices once?
Dear Karthik sir,
Thank you for sharing your knowledge with us and I am really thankful to you for explaining the content in such a wonderful way .
Thanks for the kind words, Yash.
Karthik sir, would love to know your recommendations on non-finance books?
Apart from non finance books, I cant think of any. I dont read much 🙂
Sir,
I could find “Intrinsic Value” for any search in “Screener” website . Also, you have taught finding Intrinsic value in the Varsity material. Now, regarding the same, can I instead refer this value from the screener instead? How this value could be replied upon? Or shall I find the value and then compare? Request your thoughts here.
I’ve not used Screener much, but I do believe its an excellent platform. Please do check once with the team on how they are arriving at the intrinsic value. That will help.
Sir,
The screener allows me to provide Q/Y data upto past 3 years only. I would require data (Sales, profit etc.) of a company for the past 10 years and above. Could you kindly suggest wherefrom can I get or advise any way out here.
This is extremely crucial for me.
I think Screener does provide. Else please check with Tijori as well.
Sir,
Can you please define the below?
(I) Quality turonover and its physical interpretation
(II) Interest coverage ration and its physical interpretation
What do you mean by physical interpretation? Not sure about that.
Sir,
What is the difference between physical interpretation of RoE,ROCE and RoI?
I’m unable to get the context of physical interpretation. Please elaborate.