Along with the increase in the volume of trading in stock markets worldwide, there has also been a rise in investors’ sentiments and awareness about the risks and returns associated with their chosen portfolio(s). A boost in the growth of industrialization and globalization in business has further interlinked the economies and industries on a large scale.
Against the backdrop of such a scenario, an investor gets presented with a wide variety of financial avenues for investments in the stock markets. The stock market is a very sensitive domain among the various investment opportunities. A slight miscalculation or interpretation of the performances of various stocks may lead to wrong assumptions and the selection of inappropriate equities(stocks) of companies. This ultimately may cause huge financial risk and losses to retail and institutional investors or foreign investors.
In such a critical scenario, it becomes imperative for investors to have complete and unbiased knowledge and information about various companies trading in the stock exchanges in order to evaluate, analyze and choose the right kind of stocks to invest in. This is where an equity analyst comes into the picture. The job of an Equity Analyst is to do an extensive study on the concerned industry/company in any particular economy by looking into and measuring the past and present performances of the company and projecting its future potential and line of profit based on these detailed studies.
Thus, Equity Research is a radical study involving the analysis of various industries and companies done by an Equity Research Analyst. These analysts are usually engaged by investors who actively trade in stock markets worldwide or even by large investment institutions. So, such analysts perform a meticulous survey on various business sectors of the economy and give recommendations to their clients on ‘Buying’, ‘Selling’ or ‘Holding’ of stocks and based on the performance of such stocks in the future, the analysts earn rewards or their share of profit/earnings.
An equity research analysis is mainly of two types: Fundamental Analysis and Technical Analysis. Both these methods of approach towards analyzing stocks are different in their work methodology and are therefore in contrast with one another. Fundamental Analysis focuses on determining the intrinsic(true) value of stocks by evaluating the performances of a company based on its financial statements like the Balance Sheet, Profit & Loss statement, and Cash Flow statements. It is a long-time approach to Equity Analysis and is the traditional one between the two. The Technical Analysis requires an extensive study of the market and the demand and supply factors that influence the prices of stocks in the market.
The work methodology here involves studying the past pricing trends of stocks in the market and predicting their present & future values by studying such trends from various statistical data and patterns like bar diagrams, charts, and graphs and using statistical tools like Moving Averages, Candle-Stick, Relative Strength Index(RSI), Fibonacci Series, etc. Both these kinds of analysis offer useful orientations to evaluate stock prices and their performances and are a debatable topic among research analysts as both come with certain pros and cons related to their basic principles and fundamentals.
This project is hence, a kind of research to dig deeper into the Indian Stock Market and analyze which industry is the best to invest in, from an Equity Analyst’s point of view.
RESEARCH OBJECTIVE:
This research project broadly aims to find out the best possible alternatives for an equity investor to invest in the Indian economy by studying and analyzing the performances of relevant industries and companies within it. To detail it out in the following points as mentioned below, the objective of the project covers:
To find out if the Indexing Strategy is effective or not (Any alternative method/strategy can also be used)
Indexing Strategy is based on the passive psychology and sentiment of investors wherein they believe in investing only in the high-performing stocks of the market or usually in stocks of blue-chip companies or those stocks which are included in the stock indices like Sensex or Nifty. The main strategy here is to follow and analyze those stocks in the market to invest further in them, which follow the stock index returns closely or have a close correlation with the market index returns. Hence, this project aims at following the Indexing Strategy to evaluate stocks of blue chip companies in order to find out the best stock/equity to invest in and see how many effective results it gives.
To find out the best performing Industry/sector presently in the economy.
The aim of this research project is to find out which Indian industry is performing optimally in the capital markets during the past quarter and hence can be the most favored option for equity investors to invest in. This research also attempts to find out which Industry follows the Indian stock index closely and hence is the one to be most impacted by the market index returns.
- To find out the best-performing companies in the resultant best-performing industry.
The other objective is to further analyze the companies within the chosen best-performing industry to find out which 3 companies have the highest correlation with the stock market index and then draw a comparative analysis among them to choose the best option available to the investors for equity investing.
To study the impact of the recent demonetization of Indian currency (optional objective)
This study will also focus on finding out what effect the recent demonetization in the economy had on the whole stock market in India. The study will hence reveal what kind of positive or negative impact the demonetization had on the various sectors and companies of the Indian economy that actively trade in the stock markets, the effect on Sensex/ Nifty, and also reflect the effects on the stock prices and their returns on investment.
HYPOTHESIS:
The stock of a particular company that has strong fundamentals(financial statement records) and follows the Indexing Strategy style of investment serves to be the best possible investment option for an equity investor in present times.
RESEARCH METHODOLOGY:
This research methodology is based on analytical research. The approach/technique used here to evaluate the performances of industries and relevant companies within it is the fundamental (and technical) analysis of stocks. This will be from an equity analyst’s perspective.
Nature/source of data:
The data used will be secondary data. The financial statements and annual reports of the companies would be procured from the relevant company’s official website and through authorized statistical data-oriented sites. Much of the information is also obtained through the official trading sites of NSE and BSE and through other frequent equity trading sites. The literature review information is obtained after going through several economic and financial journals relating to “Equity Analysis of stocks”.
The time period covered:
The daily share prices of the relevant companies chosen and the financial statements of companies are taken for a period of the past 5-10 years (a long time period needed for carrying out fundamental analysis). For technical analysis, around 5 year period can be assumed.
Steps of Research Process:
The framework of the research process is described as under:
FUNDAMENTAL ANALYSIS: This involves evaluating and studying the financial statements and reports of the companies in order to analyze the performances of each company on the stock exchange. Fundamental analysis involves:
Analysis of the industries –
Some prominent business sectors/industries in the economy would be taken and studied thoroughly. The industries which have a strong impact on the index or vice versa will be traced and accordingly, the best sector will be chosen for investment. A thorough analysis of the resultant sector would be carried out like
- Key revenue drivers.
- Critical factors driving the industry.
Analysis of the companies –
This will involve taking an array of companies within the specified sector and the top three companies that follow the market index returns closely will be chosen. Then a comparative analysis among the three will be drawn through RATIO ANALYSIS by employing different profitability and valuation ratios. Lastly, Equity Valuation models like Discounted Cash Flow method(DCF) will be used to arrive at the present value of equity for various companies and hence decide their worth for investment and profitability or returns.
STOCK RECOMMENDATION: This will involve recommendations on holding/selling or buying the stocks depending on the results of the research work and nature of the business and the stock market scenario.
Statistical Tools employed: ( subject to changes as and when required)
- To identify the industry most correlated to stock index returns-
Covariance of ( index return, industry return).
- To identify companies (within the chosen sector) most correlated to stock index returns-
Covariance of (company return, index return).
Covariance =( ∑{[ return of market index – average return of market index] * [return of industry, company – average return of industry, company]}) /( sample size)-1
- Return of index/company-
By using Relative of Change (ROC):
Return = ( {Ending price level – starting price level } / { Starting price level }) * 100
Where Starting Price= Opening price on the 1st day of the start of the quarter.
Ending Price= Closing price on the last day of the end of the quarter.
SCOPE OF THE RESEARCH:
A better understanding of the performance of companies and valuations of their stocks against the stock market trends will facilitate the allocation of financial sources to the most profitable investment opportunity. The valuations of stocks will enable equity investors to make appropriate investment decisions.
The equity analysis research work also helps in understanding the behavior of the equity market. It helps the investors to be aware of the risk-profit relations concerned with equity buying or selling or holding of shares of companies and has a specific idea of how each sector or industry is operating in the economy. Ultimately, the analysis process helps in identifying the stocks which could yield higher returns and lesser risks.