Voyage Capital Primer 2017

V OYAG E C A P I TA L
THE INVESTMENT AND EQUITY RESEARCH CLUB
F I N A N C E P R I M E R 2017
Prepared in association with the Placement Preparation Committee
About Us VOYAGE CAPITAL
► Voyage Capital, the Investment & Equity Research club, aims to provide
participants a first-hand experience of investing in the financial markets and
strives to bridge the gap between theory and practice in Finance.
► Established in 2009, the club runs a student fund, wherein investments from
participants are pooled and invested in equities and other asset classes.
► The fund has given returns that beats the benchmark for many consecutive years
and 2016-17 was a continuation of that legacy.
► Other activities include carrying out and publishing sector analysis, conducting
knowledge sharing sessions and providing stock valuations and
recommendations.
► The club actively engages with the student community through its signature
events, The Stock Mania, Market Mayhem and Beat The Market, where the
participants are tested on various aspects of equity investments
Prepared by Voyage Capital, the Investment and Equity Research Club in association with Placement Preparation Committee
Introduction to Equity Capital Market VOYAGE CAPITAL
► Equity Share (Stock): A type of security that signifies ownership in a corporation and represents a claim on part of the
corporation's assets and earnings.
► Two types of markets exist for equity shares:

► Primary Market: A market wherein fresh stocks are issued. Here, the seller is the company itself and buyer are the
investors.
► Secondary Market: A market of buyers and sellers who trade in securities that have already been issued in the
primary market. The company is not directly involved in the secondary market.
► Firms issue stocks to raise capital. The capital is required to:
► To finance business ventures
► To finance growth
► Advantages of Equity Funding:
► Can raise more capital than it could borrow. One does not have any repayment obligations.
► Does not have to make periodic interest payments to lenders.
► Disadvantages:
► Have to share their ownership (dilution) with other shareholders. Shareholders have a voice in policies that affect the
company operations.
► The cost of equity capital is higher than the cost of debt in terms of floatation cost as well as no tax benefit.
Classification of Stocks VOYAGE CAPITAL
Large Cap Stocks

Large Cap ► BSE-Sensex or BSE-100 Index as a reference point
► Market capitalization ranges from ₹200 billion to ₹3,500 billion
Equity Mid Cap ► Large and well-established companies, strong market
presence safe investments
Small & ► Corporate disclosures and information are readily available

Micro Cap ► Eg: TCS, Infosys, HDFC Bank, ICICI Bank, Maruti Suzuki,
ONGC
Mid Cap Stocks Small Cap Stocks
► Between the two extremes on parameters like size, revenues, ► Misconception of being hazardous or 'quick rich' stocks
employee and client base
► Usually companies in the early stage of development and have
► Market capitalization ranges from ₹50 bn to ₹200 bn smaller revenues and client bases
► More risky than large cap as investment options, yet not as ► Potentially big gainers as they are yet to be discovered within
risky as small cap companies the sector
► Investments could become tomorrow's runaway success ► Should be researched properly, can prove to be a very wise
stories and they offer higher returns in 3 to 5 years 'long term' investments especially if the chosen companies are
good
► Eg: Ashok Leyland, Bajaj Finserv, Biocon, MRF
Picking the Right Company VOYAGE CAPITAL
► An investor has three options to choose from as far as allocating money to stocks is concerned.
► The allocation is dependent entirely on an investor's risk appetite.
► Investors must decide the allocation based on the opportunity's merit and not just whether it is a large cap,
mid cap, or small cap.
► Investors looking to build a portfolio from a 10 to 15 years perspective can have a 60-70% allocation to large
caps and 10-15% each to mid and small caps, based on the market outlook and his/her risk considerations.
Key points to be considered while picking a company for investment
► Time horizon for investment: Equity markets tend to be volatile and hence time horizon or the amount of
time for which an investor is willing to hold on to his investment is an important parameter while selecting
stocks.
► Risk appetite: Certain stocks may give high returns but are equally risky if the markets turn the other way.
Hence, the return a stock provides must always be seen in concert with the amount of risk assumed. The
responsiveness of a stock to that of the market (proxy for well diversified portfolio) is Beta.
Picking the Right Company VOYAGE CAPITAL
Based on these two factors, stocks can be divided into the following categories:
► Blue chip Stocks: Large, established firms with a long record of profit, growth, dividend payout. Usually have a great
reputation for products, and services. Generally Blue Chip stocks are the safest stocks to invest in.
Eg: TCS, Reliance Industries, HDFC
► Income Stocks: Stocks of corporations which give money back to share holders in the form of dividends. Stocks that pay a
regular dividend are less volatile. Dividends partially compensates for the capital loss due to market volatility. Dividends are
considered taxable income. Income stocks are generally suitable if risk appetite is low and investor wants a steady income for
a long term. Eg: NMDC, Hindustan Zinc
► Value Stocks: Stocks of profitable companies that are selling at a reasonable price compared with their true worth, or value.
The time horizon of such investments is uncertain as it may take time for the value to unlock. Eg: Chennai Petroleum
Corporation, Kiri Industries
► Growth Stocks: Stocks of companies that consistently earn a lot of money and are expected to grow faster than the
competition. Eg: Eicher Motors, DCB Bank, Ujjivan Financial Services
► Cyclical Stocks: Stocks that move up or down in sync with the business cycle. Earnings and stock prices will increase or
decrease with changes in the business conditions or cycle. Eg: Sugar stocks, Cement stocks
► Defensive Stocks: Stocks that don’t change based on the business cycle. Tend to be generally stable and relatively safe in
declining markets. Industries that produce necessity items. Eg: HUL, Pharma stocks
► Penny Stocks: Stocks that are priced very low. Tend to be very risky. Issued by companies with a short or erratic history of
both revenues and earnings.
Analyzing a Stock: Fundamental Analysis VOYAGE CAPITAL
Key points to be considered

► Fundamental analysis of a business involves analyzing its
financial statements and health, its management and
competitive advantages, and its competitors and markets.
FUTURE
PROFIT
COMPANY ► The entire analysis must keep the over all macroeconomic
ANALYSIS sentiments into the perspective.
OUTLOOK
► Fundamental analysis maintains that markets may misprice a

security in the short run but that the "correct" price will
ECONOMIC INDUSTRY eventually be reached.
CONDITIONS ANALYSIS
► Profits can be made by purchasing the mispriced security and
then waiting for the market to recognize its "mistake" and re-
price the security. This is a continuous process as markets have
to consider all upcoming news and price it accordingly.
Fundamental Analysis: Key Ratios VOYAGE CAPITAL
There are 4 basic divisions of fundamental ratios:

► Profitability Ratios - Business's ability to generate earnings as compared to its
expenses.
► Liquidity Ratios - Used to determine a company's ability to pay off its short-term debt
obligations or current liabilities.
► Activity Ratios - A metric of how well a company is able to manage its operations,
convert inventory and receivables into cash and manage payables.
► Leverage Ratios - Measure the degree of a company's gearing or leverage as well as its
ability to service such debt.
Going forward, we give a brief overview of a few ratios in each division, without indulging into
details.
Profitability Ratios Liquidity Ratios

Current assets
Current Ratio = ;
Earnings Before Interest & Taxes (EBIT) Current liabilities
Operating Profit Margin =
Total Sales
The current ratio measures a company’s ability to pay off its current
liabilities (payable within one year) with its current assets such as
cash, accounts receivable and inventories. The higher the ratio, the
Profit After Tax(PAT) better the company’s liquidity position.
Net Profit Margin =
Total Sales
Current assets – Inventories
Quick ratio = ;
Current liabilities
Profit After Tax (PAT) The quick ratio measures a company’s ability to meet its short-term
Return on Assets = obligations with its most liquid assets, and therefore excludes
Total Assets
inventories from its current assets.
Accounts receivable
Days Sales Outstanding = ;
Profit After Tax (PAT) Credit sales per day
Return on Equity = ;
Total Eq𝑢𝑖𝑡𝑦
DSO refers to the average number of days it takes a company to collect
Equity = Share Capital + Reserves & Surplus payment after it makes a sale. A higher DSO means that a company is
taking unduly long to collect payment.
Activity Ratios Leverage (Debt) Ratios

Annual Sales or COGS Earnings Before Interest and Taxes
Inventory Turnover Ratio = ; Debt Service Ratio = ;
Average Inventory Annual interest and principal payments
A high number is a positive indicator of a company's success at turning This ratio measures how many times a company can service its debt.
its inventory into sales.
Average Payables Total Liabilities
Average Payables Period = ; Debt−Equity Ratio = ;
Per day COGS Shareholder′s Equi t y
A high number is a positive indicator of a company's success at turning Earnings Before Interest and Taxes
Interest Coverage Ratio = ;
its accounts receivable into cash. Interest Expense
Annual Sales The interest coverage ratio is used to determine a firm's ability to pay
Fixed Asset Turnover = ;
Fixed Assets
interest on outstanding debt. The greater the multiple, the less risk to
This ratio indicates the sales per dollar investment of fixed assets the lender and typically, if the company has a multiple higher than one,
(property, plant and equipment). Higher the ratio, better the they are considered to have enough capital to pay off its interest
utilization of fixed assets to generate higher sales. expenses.
Consolidated Balance Sheet of
ITC Ltd. VOYAGE CAPITAL
Share Price as on 31st March 2017: ₹ 280.30
A few calculations from the Balance Sheet is shown below:
Current Assets 24,134.74

• Current Ratio = = = 1.654
Current Liabilities 14,587.86
(Reasonably high liquidity)
• Networth = Total Assets – Total Liabilities = 49,518.43 – 14,587.86 –

2,001.57 = 32,929.00
Short Term Debt+Long Term Debt

• Debt − Equity Ratio = =
Shareholder′ s Equity
3.60+25.83
= 0.00089 (Almost Debt free)
32,929.00
Profit & Loss Statement of ITC Ltd. VOYAGE CAPITAL
Share Price as on 31st March 2017: ₹ 280.30
Let us have a look at a few ratios from the P&L statement,

also a few combining the balance sheet numbers:
Net Profit 9,844.71
• Net Profit Margin = = = 25.48%
Total Revenue 38,641.93
Profit After Tax 9,844.71

• Return on Assets = = = 19.88%
Total Assets 49,518.43
Total Sales
• Fixed Asset Turnover = =
Fixed Tangible Assets
38,641.93
13,816.77 + 2470.08 = 2.373
Price Per Share 280.30
• P
E Ratio = = 12.20 = 22.96
Earnings Per Share
Fundamental Analysis: Different Types VOYAGE CAPITAL
Top-down analysis
This subset of fundamental analysis looks at macroeconomic factors such as interest rates,
inflation and employment in an effort to gain a picture of the context in which the planner or
analyst would be able to make investment decisions with clients
Bottom-up analysis
This subset of fundamental analysis, by contrast, considers the fundamentals of a company from
numerous perspective including its financial statements, quality of management, product or
service, where it is situated in its respective industry, who its suppliers and competitors are, etc.
Such analysis seeks out industries and companies that represent promising opportunities in the
context of the business cycle.
Industry (Sector) Analysis VOYAGE CAPITAL
► Typically employed by investors who are using a top-down approach to selecting stock to invest in.
► In the top-down approach to investing, the most promising sectors are identified first, and then the investor
reviews the companies within that sector to determine which individual stocks will ultimately be purchased.
Classification of industries according to business cycle Parameters of Sector Analysis
► Growth Industries: Industries with high rates of ► Fundamentals of Sector

expansion of earnings irrespective of business
cycle ► Growth of Sector
► Cyclical Industries: Industries likely to benefit ► Nature of Competition

from prosperity and suffer from recession ► Profitability
► Defensive Industries: Industries least affected ► Nature of Product
by downturn in economy
► Government Policies
► Research & Development
Firm Valuation VOYAGE CAPITAL
There exist various valuation techniques to value a firm. The basic objective of valuation is to quantify the
value of a firm based upon its current balance sheet size and future (estimated) income.
1. Dividend Discount Model (DDM):

The DDM is most useful for cash rich, debt free firms that have a long history of paying dividends. It
calculates present value of future dividends.
2. Discounted Cash Flow (DCF) model
It looks at the present value of the cash that can be paid to shareholders after all expenses, reinvestments
and debt repayments have been made.
3. Comparable Valuation
Many times when future earnings are not predictable, the companies are valued in comparison to their
peers. Ratios such as Price/Earnings and Price/Book are used and compared with similar ratios of the
industry and the peers o the company to determine whether the company is overvalued or undervalued.
Analyzing a Stock: Technical Analysis VOYAGE CAPITAL
Forecasting prices based on historic price movements and charts is the essence of Technical Analysis.
Assumptions Common techniques used
► Market value is determined by the interaction of supply and demand. ► Charts

► Supports and Resistances
► Supply and demand are governed by numerous factors, both rational
and irrational. ► Patterns
► Indicators
► Security prices tend to move in trends that persist for an appreciable
length of time, despite minor fluctuations in the market.
► Changes in a trend are caused by shifts in supply and demand.
► Shifts in supply and demand, no matter why they occur, can be
detected sooner or later in charts of market transactions
► Some chart patterns tend to repeat themselves.
Technical Analysis : Dow Theory VOYAGE CAPITAL
Charles H. Dow, popularly known as the father of Dow theory came up with a few concepts related to how stock prices
behave. He had several principles, which although a century old are still relevant.
Principle
The stock market discounts all information – The stock price is an
indication of past, present and future of the economy, industry and
company. Markets discount every news except natural calamities, which
cannot be predicted. Supply and demand are governed by numerous
factors, both rational and irrational. cannot be perfectly captured by the
trader
The Three Trends
The stock market has three trends:-
► Primary trend – Each peak in the rally is higher than the previous peak and each trough in the rally is higher than
the previous trough
► Secondary trend – Secondary trends are usually against the direction of the primary trends in the form of
correction if primary trend is bullish and pullbacks if primary trend is bearish
► Minor trend – These are short term price movements, which should be completely ignored as the same cannot be
perfectly captured by the trader
Technical Analysis : Patterns VOYAGE CAPITAL
Head and Shoulders
• Head and Shoulders is a pattern with three successive

movements, with the one in the middle forming a head
(either maximum or minimum) and the other two
shoulders.
• Both the trends are famous reversal trends indicating a
major breakthrough in the movement. The role of the
trend line and existing volumes is pretty important in
determining the strength of the market movements.
Technical Analysis : Patterns VOYAGE CAPITAL
► The support line is based on points B and C. It

is important for points B and C to have buying
pressures.
► Movement to point E is a small reversal. Falling
beyond the neck-line confirms the head-
shoulder pattern.
► If the upward movement around from D to E
breaks the neck-line, then it is opposite to the
movement of head & shoulder.
► The quantum of fall from D to F is measured by the distance between head’s top and neckline.
► Every movement in head & shoulder pattern should be supported by the volume.
Mutual Fund: Basics VOYAGE CAPITAL
► Investment vehicle that allows several investors to pool their resources

► Funds are then invested by an fund manager appointed by a mutual fund company
(called Asset Management Company or AMC).
► Underlying holding of the fund is known as the 'portfolio', and each investor owns a
portion of this portfolio in the form of units. Investors pool their
money with a
History Registered Mutual
Fund
► 1963 - Formation of the Unit Trust of India (UTI) as an initiative of the GOI and RBI
► 1993 - Entry of private companies in the sector. Mutual fund companies have
grown exponentially Mutual Fund – Fund
Returns are passed
Manager invests
back to the
► 1995 - The Association of Mutual Funds in India (AMFI) was established investors
this amount with
securities
Types of Mutual Funds
► By Structure: Open-ended Funds, Closed-ended Funds, Interval Funds
► By Investment Objective: Growth Funds, Income Funds, Balanced Funds, Load Generates returns
on the pooled
Funds, No-Load Funds investment
► Other Schemes: Tax Saving Schemes - Investors invest their money in the mutual
funds to obtain tax benefits
Advantages of investing in Mutual Funds
► Professional money management, Diverse Portfolio, Affordability, Tax Benefits,
Liquidity
Assignments VOYAGE CAPITAL
Assignment 1:
► Calculate the following ratios for ITC Ltd. for 3 financial years and compare its performance over the
years on these parameters
1. Return on Assets
2. Days sales outstanding
3. Average Collection Period
4. Debt Service Ratio
5. Operating Profit Margin
Note:
1. Take the financial reports of ITC Ltd. from http://www.itcportal.com/about-itc/shareholder-value/report-
and-accounts.aspx;
2. This assignment may be submitted in an Excel spreadsheet.
Assignments VOYAGE CAPITAL
Assignment 2:
Analyze the likely impact of following events on Indian equity markets and substantiate with rationale. You are free to
analyze the economy/markets in general or go into the specifics of industry or stock
1. Finalization of GST rates and July 1 roll-out 4. FII’s love for India
The central government has almost finalized on the GST The expectations of faster reforms and encouraging earnings
rates and markets reacted to this move. GST rates for has led the FIIs to pump-in more money into the Indian markets
Gold, apparels, biscuits and footwear have been finalized
in the most recent meeting
2. Infosys and Wipro prepare for share buyback 5. India’s IPO frenzy
in FY2018 2016 was the year of IPOs and with the indices scaling all time
With huge amount of cash piling up on their book, is it a highs in 2017, more companies are joining the pipeline to get
good move by IT companies? themselves listed
3. RBI crackdown on NPA 6. Hawkish tone from the US Fed reserve

The Government of India recently has empowered the In the most recent US Federal Reserve meeting, the Chair, Janet
RBI to crack down on the 7-lakh crore NPA problem Yellen indicated Fed intends to raise the interest rates 3 times
this year, more than the earlier consensus
Note:
1. This assignment may be submitted in a PDF format. You are expected to write 3-4 sentences on the likely impact of each of the events with rationale.
Evaluation will be mainly on correctness and depth of analysis
VOYAGE CAPITAL
References
► www.investopedia.com
► www.moneycontrol.com
Submission
► Send in your entries with subject “Primer submission – 2017-18” to
voyagecapital@iimidr.ac.in
► Deadline: as per SAC E-mail
► As a zip folder containing two separate files for two assignments.
► Naming convention “Full name_CAT ID”
► Candidates with the best submissions will be given direct entry to the interview
round of Voyage Capital’s selection procedure

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V OYAG E C A P I TA L

THE INVESTMENT AND EQUITY RESEARCH CLUB

► Two types of markets exist for equity shares:

Large Cap Stocks

Small & ► Corporate disclosures and information are readily available

Key points to be considered

► Fundamental analysis maintains that markets may misprice a

There are 4 basic divisions of fundamental ratios:

Profitability Ratios Liquidity Ratios

Activity Ratios Leverage (Debt) Ratios

Share Price as on 31st March 2017: ₹ 280.30

A few calculations from the Balance Sheet is shown below:

Current Assets 24,134.74

• Networth = Total Assets – Total Liabilities = 49,518.43 – 14,587.86 –

Short Term Debt+Long Term Debt

Share Price as on 31st March 2017: ₹ 280.30

Let us have a look at a few ratios from the P&L statement,

Profit After Tax 9,844.71

Classification of industries according to business cycle Parameters of Sector Analysis

► Growth Industries: Industries with high rates of ► Fundamentals of Sector

► Cyclical Industries: Industries likely to benefit ► Nature of Competition

1. Dividend Discount Model (DDM):

2. Discounted Cash Flow (DCF) model

Assumptions Common techniques used

► Market value is determined by the interaction of supply and demand. ► Charts

Head and Shoulders

• Head and Shoulders is a pattern with three successive

► The support line is based on points B and C. It

► Investment vehicle that allows several investors to pool their resources

3. RBI crackdown on NPA 6. Hawkish tone from the US Fed reserve

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