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fundamental analysis Tools and Skills for smart Investing

What is fundamental analysis?

Fundamental Analysis is a comprehensive way to examine a firm. If an investor is looking to put money into a business for the long haul say 3 – 5 years, it is vitally important to gain insight into the company from different views. It’s essential to separate the daily stock price movements and pay attention to how the company performs overall. Usually, stocks of companies with strong fundamentals appreciate over time, thus generating wealth for their investors.

There are many companies in the Indian market that have given investors returns of over 20% CAGR yearly for at least a decade. TCS, Nestle, and Infosys, among others, are some examples. With a 20% CAGR rate, your money can double in roughly 3.5 years. But an even higher CAGR – such as 30% by Bosch India Ltd. – further accelerates this wealth-building process.

Do remember these are just 3 examples of the many that you may find in Indian markets. Here are long-term charts for 3 companies that can get you thinking about long-term wealth creation.

There are many companies that also deplete wealth. These are just three examples.

The trick has always been to separate the investment-grade companies that create wealth from the companies that destroy wealth. Investment-grade companies all share a few common characteristics that set them apart from the rest. A wealth destroyer shares a few common traits that are evident to an astute investor as well.

By identifying these attributes of wealth-creating companies, Fundamental Analysis gives you the conviction to invest long-term.

– Can I be a fundamental analyst?

There is a widespread misconception that individuals who are skilled in fundamental analysis must exclusively possess a chartered accountant designation or come from a commerce background. This is not true at all. An analyst adds two and two and ensures they add up to four. You will need a few basic skills to become a fundamental analyst.

A basic understanding of financial statements

Know the industry in which a business operates

Multiplication, division, and addition of basic arithmetic operations

The objective here is to ensure that you acquire the first two skills.

– I’m happy being a Technical Analyst, so why bother about Fundamental Analysis?

With Technical Analysis (TA), you can get quick short-term returns. It helps you find the right time to enter and exit the market. However, TA is not an effective way to generate wealth. Wealth can only be created by making intelligent long-term investments. For a better understanding of your market strategy, here is Eicher Motors’ chart:

A market participant might take a FA approach and choose Eicher Motors as a stock to invest in 2006. Unfortunately, however, the stock saw only a modest rise until 2010. This means investors’ returns were insignificant if they stuck with it. To make more money, shorter-term trades should have been taken instead, which is where TA plays an integral role. Having both approaches as part of one’s strategy is key – this particular methodology is known as the Core Satellite Strategy.

Let’s say a market participant has a corpus of Rs.1,000,000/-. The capital can be divided into two unequal portions, for example, 70 – 30. The 70% of the capital, Rs.700,000/-, can be invested for the long term. This portion, known as the core portfolio, is expected to grow at an annual rate of at least 8% to 10%.

The remaining 30% of the capital, which is Rs.300,000/-, can be allocated to the satellite portfolio. It is anticipated that this portfolio will generate a minimum absolute return of 6% to 8% per year. The satellite portfolio aims to capture additional returns beyond the core portfolio, utilising more active investment strategies.

By diversifying the capital into the core and satellite portfolios, the market participant seeks to achieve a balanced approach, with the core providing stability and steady growth, while the satellite offers the potential for higher returns.

 – Tools of FA

 For fundamental analysis, you will need the following tools, most of which are free.

You can download the annual report from the company’s website for free and find all the information you need for FA.

You will need industry data to see how the company under consideration is performing in relation to the industry. Basic data is available for free on the website of the industry’s association.

You can stay on top of the latest developments in the industry and the company you are interested in with the help of a good business newspaper or services such as Google Alert.

Although it is not free, MS Excel can be extremely helpful when performing fundamental calculations

By using just these four tools, one can create a fundamental analysis that is on par with institutional research. It is unnecessary to rely on additional tools for conducting effective fundamental research. Interestingly, even at the institutional level, the aim is to maintain simplicity and logic in the research process.

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Lumax Industries Q3FY24: Illuminating the Road to Strong Capex-Led Growth

Sector Outlook – Positive

In the third quarter of FY24, Lumax Industries Ltd. (LIL) performed better than expected, with revenue reaching Rs. 640 crores, up 9% from the previous year. This growth was driven by the recovery in the two-wheeler segment and sustained demand from the passenger vehicle segment, especially SUVs. 

However, the EBITDA margin contracted to 9.22% due to the commissioning of a new plant in Pune and higher staff costs. Despite this, the company remains optimistic about revenue growth, particularly from the new Chakan plant and increased revenue share from key customers like Maruti Suzuki, Mahindra & Mahindra, and Tata Motors. 

LIL is also focusing on increasing its LED revenue share, which has grown from 25% to 35% over the last five years, with plans to further increase it to 50%.

Concall Highlights

The interim budget allocated Rs. 3,500 crore for promoting the EV industry, boosting hopes for its growth.

The two-wheeler segment is growing steadily, driven by rural demand, but commercial vehicles are struggling.

Challenges in the tractor segment persist due to delayed monsoons.

There is optimism for the passenger vehicle and two-wheeler sectors, with a strong outlook and increasing EV adoption.

LED lighting contributed 36% of total revenue, while conventional lighting made up 64%.

Front lighting accounted for 66% of total revenue, rear lighting 25%, and other products 9%.

The passenger vehicle segment contributed 67% to total revenues, two-wheelers 27%, and commercial vehicles 6%.

The Chakan plant in Maharashtra began producing automotive lighting in November 2023, focusing on new business from M&M and Tata Motors.

Revenue growth in Q3FY24 was limited (Rs. 20 crores) due to fewer working days, but Q4FY24 is expected to improve, targeting a monthly revenue of Rs. 30 crores.

Phase-1 of the plant is expected to reach 70-75% utilisation by the end of Q4FY24, with Phase-2 expansion starting soon for full commercialization by FY26.

The current order book is worth Rs. 2,200 crores, with 64% from new business and EVs accounting for 34% of this.

LED lighting orders make up 85%, with around 70% expected to start production in FY25, leading to significant revenue growth from FY26.

FY24 revenue guidance expects 15% growth (Rs. 2,600 crores) with margins exceeding 9.3-9.5%.

FY25E is poised for stronger double-digit growth, estimated at ~20%, with margins expected to reach at least 10%.

After Phase-1 and Phase-2 expansions at the Chakan plant, peak revenues are projected to reach Rs. 900 crores.

The expansion will increase capacity by 30%, leading to a 50% boost in revenue, with Phase-2 starting operations in Q3FY25.

Lumax secured orders for Maruti’s first EV model, expected by year-end, and is in talks for a potential second model in FY26.

Financially, capex for FY24 is expected to reach around Rs. 280 crores, with an ETR of 31% and net debt of Rs. 560 crores for the first nine months of FY24.

Valuation and Outlook

In the third quarter of FY24, Lumax Industries Ltd. showed impressive growth with a 9% increase in revenue compared to the previous year. This growth was mainly driven by higher sales in the 2W segment and steady demand in the PV segment, especially for SUVs. Looking forward, the company expects this positive trend to continue, supported by increased 2W sales, a rise in electric vehicle (EV) adoption, advancements in driving technology, and changing trends in automotive lighting design. 

The management anticipates significant industry expansion after the second half of FY25, despite possible capacity constraints. Operational efficiencies and better raw material consumption led to improved gross margins, with further enhancements expected as new plants become operational. Lumax is focusing on cost reduction measures like part localization and in-house manufacturing to boost margins. 

Phase 1 of the new plant is expected to be 70-75% utilized by Q4FY24, paving the way for Phase 2 expansion by Q3FY25. The company is also working on reclaiming lost market share and expanding its client base, especially in the EV segment. Lumax’s strong relationships with OEMs, coupled with its strategies for margin improvement and client diversification, are expected to drive significant revenue growth from FY25 onwards.

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ICICI Bank –  Record-breaking growth in digital and payments platform

ICICI Bank –  Record-breaking growth in digital and payments platform

Suggested Title: 

ICICI Bank Q3 Results: Net interest income grew by 13.4%

Sector Outlook – Positive

In Q3FY24, ICICI Bank showed solid performance with its Net Interest Income reaching Rs. 18,679 crores, a 13.4% increase compared to last year. 

Its operating profit before provisions also rose by 10.9% to Rs. 14,724 crores. However, the bank had to set aside more money for potential losses (provisions), which jumped to Rs. 1,049 crores due to new regulatory requirements for investments in alternative funds. 

Despite this, the bank’s profit for the quarter still managed a 23.6% year-over-year increase, reaching Rs. 10,272 crores. Its interest margin slightly declined, and the ratio of bad loans (Gross NPA) improved, indicating better loan quality. 

One major expense was a one-time payment for retirement benefits. The bank’s total deposits grew by 18.7% to Rs. 13,32,315 crores, and loans increased by 18.5% to Rs. 11,53,771 crores, showing strong growth especially in business banking and SME sectors. However, the proportion of low-cost deposits (CASA) decreased compared to last year.

Key Concall Highlights

ICICI Bank’s goal is to increase profits before taxes, focusing on customer needs across different sectors.

Personal loan growth was slower in Q3FY24 due to higher loan pricing, tighter lending criteria, and reduced sourcing costs.

New defaults occurred in retail, rural, and business banking, but didn’t significantly impact total bad loans thanks to improvements in corporate and SME loans.

Profit margins from lending (NIM) faced pressure but were balanced by additional income from tax refunds.

Non-interest income, including dividends from ICICI Securities and other investments, showed significant annual growth.

Operating expenses rose due to increased sales and marketing activities during the festive season.

The bank aims to maintain profit margins at FY23 levels, anticipating a slight decrease in NIM in Q4FY24.

Changes in term deposit rates are expected to impact profits in Q4FY24 and Q1FY25.

Management has implemented stricter measures for unsecured loans, such as increasing prices, rationalising sourcing costs, and tightening lending standards.

Valuation and Outlook

ICICI Bank, one of India’s major private banks, had a strong performance in the third quarter of the fiscal year 2024. Despite some challenges with profit margins from lending (NIM), the bank did well due to its fee income, beating profit expectations. The bank managed to reduce its provisions for bad loans thanks to fewer new defaults and a good approach to risk. A key achievement was attracting over one crore customers from other banks using its digital platform, iMobile Pay. The bank has been focusing more on attracting deposits lately. While its loan quality looks stable for now, there might be some concerns about potential loan defaults in the future, but the bank’s strong lending history suggests this won’t be a major problem. ICICI Bank’s strategy includes expanding its services in rural areas and using its large network of branches and ATMs for more product sales, which should keep its profits high. With a Return on Assets (RoA) within the expected range, the bank is positioned for double-digit growth. In case of any pressure on revenue, the bank might reduce its operational expenses to maintain profitability, but this could mean losing some market share due to stiff competition in the banking sector.

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