Loan Syndication

Defination:

Loan Syndication is a arrangement of large portion of loan from the different lenders.In this process many lenders participate in providing loan to any entity ia case where a loan amount is large enought for single lender to provide.

This process of Raising loan is used where the amount of loan is very large and Borrower want to raise loan quikly and conveniently.It is also used when the exposer limit or appetite of any lender exceeds its loan issuing capacity.Also, Borrowers not want to deal with large numbers of lenders.

Roles within Syndication Process:

1.Arranger or Lead Manager:Role of lead manager is to arrange loan form different Banks or lenders and also ensure that the syndication is fully subscribed.He charge arrangement fee in return of providing his service.

2. Underwriting Banks:It is a Bank that commit to supply the funds to the Borrowers,if necessarly from its own resources if the loan is not fully subscribed.It is not necessarly that all syndicated loan are fully underwritten.There is also a risk associate that loans may not be fully subscribed.

3.Participating Banks:Banks that participate in Syndication process by providing portion of the total amount required charge interest and participation fees.It also involve borrowers credit risk as same as normal loans.

4.Facility Manager or Agent:He is a person one who takes care of administrative arrangements over the term of loans eg Disbursement, Repayments, Compliance.In Larger syndications co-arranger and co-manager may be used.

Benefits to the Borrowers:

 

1.Borrowers Deals with single Bank in Loan Syndication Process.

2.It is a quiker and simpler than other ways raising capital.(eg Issue of Bonds anf Equity)

Benifits to the Lead Banks:

1.Lead banls can earned arrangement and other fees without committing capital.

2.Loan Syndication process helps Lead Bank to enhance its reputation by showing its expetise in loan syndication process.

3.It helps to enhance Banks relationship with the client.

Benifits to the Participating Banks:

1.By Participating in Loan syndication process,banks access  to lending opportunities with low marketing costs.

2.It helps participating Banks to participate in future syndication.

3.If there is a case when Borrowers goes into difficulties in repayment then,participating banks have equal treatment.

Stages:

1.Pre Mandate Phase:The prospective Borrower may liaise with a single bank or may invite competivite bids from a number of banks.

      The lead banks need to:

       a) Identify the need of the Borrowers.

       b) Designed an appropriate loan structure.

       c) Develop a persuasive credit proposal.

       d) Obtain internal approvals.

 2.Placing the Loan:The lead bank can start to sell the loan in the marketplace.

       The lead bank need to:

       a) Perpare an information memorandum

       b) Prepare a Term Sheet

       c) Prepare a legal Documentation

       d) Approach selected banks and invite participation

 There shouldd be a Negotiation with Borrower may be needed if prospective participants raise concern.

 

3.Post-closure Phase:In this phase agent now handels the day to day running of the loan facility.

Indian Financial Market

In Today's time  "Feel good" factor for the indian economy is arising at Global level.Investors confident for the indian market specially Sensex is looking attractive then ever before.Indian foreign exchange reserve is rising to more than $300 billion.As per as Regulation is concern indian financial market is going in very suitable phase as the RBI and SEBI is regulation indian financial market.

    In recent years indian economy seen greatest transformation from closed,slow and controlled economy to the more open,liberalised and one of the fastest growing economy in the world.Economy reform in india scince 1991 accelerate growth,enhance stability and strength both external and internal financial sector.

    In india the Saving rate is growth at very high rate wich push the growth rate of the GDP of the country,shows the economy is tranfering to sustanable and high growth tragectory.

 Financial Intermidiaries:

A structural change was noticed in the Indian financial system with the establishment of a host of financial intermediaries during the second phase of evolution of the system.Financial intermediaries comprises of public financial institutions, NBFCs, mutual funds,commercial banks, housing bank etc.

Foreign Currency Borrowings:

In India External debt exposure to financial intermediaries is regulated. Their foreign currency borrowings have been subject to the prudential limit of 25 per cent of their Tier-Icapital. These limits amounted to US $ 2.7 billion as of March 31, 2006. With a view to enabling banks to raise resources overseas, the latest monetary policy announcement on October 31, 2006 has enhanced this limit to 50 per cent of their Tier I capital, or US $ 10 million, whichever is higher. With a move towards fuller capital account convertibility,banks are likely to access forex markets more, underscoring the need for further enhancement of the risk management capabilities of the banking system.

Banking Companies:
The banking sector is the soul-life-blood of the financial system in India. Significant progress has been made with respect to the banking sector in the post liberalization period. The financial health of the commercial banks has improved manifolds with respect to capital adequacy, profitability, asset quality and risk management. Further, deregulation has opened new opportunities for banks to increase revenue by diversifying into investment banking, insurance, credit cards, depository services, mortgage, securitization, etc. Liberalization has created a more competitive environment in the banking sector. The aggregate foreign investment (FDI plus FII) limit for the private sector banking has been raised to 74 percent in the recent country budget. The competition has increased within the banking sector (with the emergence of new private banks and foreign banks) as well as from other segments of the financial sector such as mutual funds, Non Banking Finance Companies, post offices and capital markets. 

Cash Reserve Ratio (CRR):
CRR is the amount of cash reserve that is required to be maintained by commercial banks in India with the RBI. The RBI hiked the CRR by 50 basis points to 5.5 per cent in two stages on 23 December 2006 and 6 January 2007. Currently the CRR is 5.75% of the net demand and time liability. From the fortnight beginning from March 3, 2007, the CRR will be 6%.

Statutory Liquidity Ratio (SLR):
SLR is an instrument in the hands of RBI to impose supplementary reserve requirements on the banking system. The maximum limit of SLR in India is 40%. It was 20% in 1963 and rose to 38.5% in 1990. The current limit is 25%. The Government has issued ordinance giving more flexibility to the RBI to fix SLR below the current stipulated limit of 25%.

Specialised financial entities – Housing finance companies:
A company, which mainly carries on the business of housing finance or has as one of the main objects in its Memorandum of Association, business of providing finance for the housing. To start business of housing finance, the Housing Finance Companies has to get it registered with the National Housing Bank. The principal mandate of the Bank is to promote housing finance institutions to improve/strengthen the credit delivery network for housing finance in the country. The Bank has played a facilitator role in this regard instead of itself opening such dedicated housing finance institutions.

Non- Banking Finance Companies
Non-Banking Financial Companies are under the regulatory framework of Reserve Bank of India by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934.

At the end of June 2006, there were 13014 NBFCs registered with the Reserve Bank of India, including 428 NBFCs, which are accepting public deposits. During the year 2005-06,Net-owned funds of NBFCs increased by 562 crores despite a decline in the number of reporting NBFCs. Total assets/liabilities of NBFCs (excluding reporting NBFCs) at the end of March 2006 were Rs. 35561 crores, down marginally by 1.2 percent from 36003 crores at end of March 2005. in the year 2005-06, there was a significant decline in fee-based income of the NBFCs while there was a marginal increase in fund-based income.

A slight overview of NBFCs vs. Banks:

 1. NBFCs have a much lighter regulation than that applicable to banks.

 2. Formation of an NBFC is much easier than forming a bank.

 3. Foreign direct investments in NBFCs are also much easier than those in case of
banks.

 4. A NBFC cannot accept demand deposits like banks 

 5. It is not a part of the payment and settlement system and as such cannot issue
cheques to its customers.

Investment Intermediaries
Mutual funds:

It is an instrument which pool money from the large numbers of investors and invest in predetermine objectives.

The pioneer in the field of mutual fund is Unit Trust of India established in 1964. Net mobilisation of resources by mutual funds increased by more than four-fold to Rs. 104950 crores in 2006 from Rs. 25454 crore in 2005. The share of UTI and other public sector mutual funds in the total amount mobilised was around 22.5% in 2005 and 17.8% in 2006. The total assets under the management of mutual funds during at the end of 2006 was recorded at 323598 crores.

Capital market: primary:
The market wherein resources are mobilised by companies through issue of new securities is termed as the primary market. In India, the primary market has grown exponentially during the last decades. Funds mobilisation from the market reached its peak in the year 1993-94, 1994-95 and 1997-98. During the year 2006, a total of Rs.161769 crores was mobilised through primary market by a combination of equity issue, debt issue, private placement and Euro issues (ADR/GDR).
Capital market is firmly regulated by the Securities and Exchange Board of India (SEBI) to offer better protection to the investors. The introduction of SEBI Guidelines for Disclosure and Investor Protection during 1992 revolutionised the Indian capital market. Later it was replaced by the Guidelines issued in 2000 and SEBI is frequently updating these guidelines to suit the need of the present time. SEBI has also prescribed regulations for the Intermediaries, such as the brokers, underwriters, Merchant Bankers, Mutual Funds etc.

Capital market: secondary:
Secondary market popularly known as the Stock Exchange is referred to as the “Barometer of the economy”. The stock exchanges are the exclusive centres for trading in equities. The stock market is touching new heights year after year since 2003, with the BSE and NSE indices crossing 14000 and 4000, respectively in January 2007. The 3rd of January witnessed the highest closing indices of 14015 at BSE and 4025 at NSE. NSE continued to occupy the third position after NASDAQ and NYSE in terms of number of transactions occurring during the calendar year 2006.

Debt:
In a developing country like India, debt market plays a very crucial role. Debt Markets are markets for the issuance, trading and settlement in fixed income securities of various types and features. Almost all legal entity like Central and State Governments, Public Bodies, Statutory corporations, Banks and Institutions and Corporate Bodies issue Fixed income securities to secure money. Current debt market has become more efficient, transparent and vibrant with significant retail participation. Government of India (GOI) securities continued to account for the major part of activity In the secondary debt market. The gross issuance of GOI dated securities in 2006 amounted to Rs.14 000 crores as compared to Rs. 129,350 crore in 2005.

Derivatives:
In India, derivatives trading take place under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. The turnover recorded during the calendar year 2006 in NSE derivative market is 7046665 crores and in BSE derivative market is 4012 crores showing significant growth over the previous years.

Commodities market:
Commodities Futures trading is a class of Derivatives trading, in which futures contracts derive their value from the ruling price of underlying commodities. This is a mechanism by which participants can enter into transactions for purchase and sale of commodities at a price, where the performance of delivery and payment obligation becomes due on a future date.
As compared to 59 commodities in January 2005, 94 commodities were traded in the commodities futures market as of December 2006, and these included major agricultural commodities, spices, metals, bullion, crude oil, natural gas and polymer, among others. Gold accounted for the largest share (31 per cent) of trade in terms of value, followed by silver (19 per cent), guar seed (11 per cent) and chana (10 per cent). The growth in the commodity derivative trading witnessed in 2005-06 continued during 2006-07. Total volume of trade rose sharply from Rs. 1.29 lakh crore in 2003-04 to Rs. 27.39 lakh crore in 2006-07 (till December 2006).

Valuations

VALUATIONS:

Valuation is the process of estimating the current or future value of any assets which consists its value in money term.There are many techniques to determine the vaue of assets like some are in subjectives and other  in objectives.

Needs of Valuations:

1.Selling or Buying a Business:Many big corporations doing valuation while selling its subsidairy or buying and other firm,in order to determine the fair value of the fir which is going to sold or buy.

2.Buy or Sell Agreements:If there is preperation of any agreement for buying or selling then there is the valuation of the property or assets going to buy or sold.

3.Gift,Estate,Inheritance Taxes:During the filing of income tax there is the need of  correct valuation of items related to gifts,estate,inheritance ect.

4.Charitable Contributions:There is also a needs of correct valuation during the contribution to any charity.

5.Divorce:If any couple get divorce than there is the valuation of assets of couple for any compensation made to any partner.

6.Bankruptcy:During the filing of bankruptcy by any firm than there is the need of  correct valuation of assets of that firm.

7.In Life Insurance:During the time of taking life insurance policy than there is the need of valuation of determing need of taking life insurance policy.

Types of Valuations:

1.Fair Market Value:It means valuing the  market value of the  asset on the basis of demand and supply of asset.

2.Fair Value:It is a rational estimation of potential market price of goods or services,assets ect.it consists of acquisition,production,distribution,replacement cost ect.

3.Investment Value:It is a value of property or assets owned by the investors.It is a price at which investors buy fro the market.

4.Intrinsic Value:It is a value refer to the company's stock,assets,products ect. determine through fundamental analysis without refrence to it's market value.

5.Going Concern Value:It is the value of the business that is going to continue operating into future.

6.Liquidation Value:It is the the price of an assets,allowed insuficient time to sell in the open market.Assets have less buyers.This value have less than fair market value.

7.Book Value:It the value of the business from the comany's financial statement.It is calculated from the balance sheet,it is different between the company's total assets and liabilities.

8.Brand Value:It the value of the well known product of the company generating enough money which make its brand value in the market.

9.Human resource Value:It is a value of the personals working in the company.More efficient the employees of the company more he or she having human resource value.

10.Human Competence Value:It is a value of the human beign having specific skills,competency,knowledge ect.

Methods of Business Valuations:

1.Income Approach Methods:It is a basic valuation principle in which value of ownership interest in a company is equal to the present worth of future benifts of the ownership.

2.Discounted Future returns Methods:It means a discount rate which represents a total expected rate of returns that a buyer or investors would demand on the purchase price of ownership interest in an assets,given an risk inherent in that ownership interest.

3.Capitalized returned Methods:It is usually derived by subtracting company's expected average compound growth rate from its discount rate.It is approriate when it appear that company's current operations are indicative of it's future operations.

4.Market Approach Methods:Under this methds,the valuation of assets id done on the bases od similar or comparable assets beign sold in cash recently.This method is mostly use in large and public company counterparts.It is a most common price earning multiples.

5.Assets Based Approach:Under this method company's assets amd liabilities are adjusted to their appraised values and net result is an indication of the value of the company's equity.But this method is used in limited circumstances.

Intangible assets:Types

1.Technology related (eg Engineering drawings)

2.Customer related(eg customer lists)

3.Contract related(eg favourable supplier contract)

4. Human resources related(eg trained workforces)

5.Marketing related(eg Trade marke and Trade name)

6.Goodwill related(eg Going concern value)

Methods of Valuations:

1.Cost approach methods:

2.Income approache methods:

Capital Market Instruments

CAPITAL MARKET INSTRUMENTS:

A Capital Market is a market for securities like debts or equity,where business enterprises and government raise long term funds.It ia a types of market in which money is provided for a period more than one year and for the arrangement of funds for the short term period is from another market known as  money market.

Capital market is characterized by a  large variety of financial products like equity and preference shares,Fully convertable debenture(FCD),Non convertable debenture(NCD),Partialy convertable debentures(PCD).However,new instruments are beign introduce such as debenture bundled with warrants,participating preference share,zero cupon bonds ect.

Types of Capital Market Instruments:

1.Secured Premium Notes(SPN):It is a secured debenture redeemed at premium along with ditachable warrants.It is redeemable after notice period say four to seven years.The warrants attached to SPN gives holders the right to apply and get alloted equity shares.

There is an lock in period for SPN during which no interest will be paid for an invested amount.the SPN holders have a right to sell back the SPN to the company at par after lock in period.If holder use the option then no interest or premium is paid to the holder.If the holder hold it further then he have to paid the premium and interest on redeemption on installments as decided by the company.

2.Deep Discount Bonds:It is a types of Bonds that sells at discounted rate from par value and it has no coupon rate or lower coupon rate than prevailing rate of fixed income securities with a similar risk profile.

The main objectives ot this types of bonds is to meet the long term funds requirements of the issuer and investors who are not looking for immidiate returns.They are sold for the long maturity period of 25 to 30 years.

3.Equity Share with ditachable Warrants: A warrant is a security issued by the company entitled holders to buy the given numbers of share at stipulated price during the specified period.these warrants are seperatly registered with stock exchange and traded seperatly.Warrants are frequently attached to bond or preferred stock as sweetener allowing the issuer to pay lower interest rate or dividends.Eg Essar,Reliance ect issued this types of warrants.

4.Fully Convertible Debentures with Interest:These are the debt instruments and converted into equity share after a specified period of time.The conversion may be in one or several phases.If the debt instrument is pure debt then interest is paid to investors.After the conversion interest is ceases on the converted portion.If the project is financed through Fully Convertable Debenture issue then the investors can earn interest even when the project is under implementation.Once the operation of the  project is started investors get share price appreciation and dividend payments.

5.Equi Pref:They are fully convertible cumulative preference shares.This instrument is divided into two parts,Part A and Part B.Part A is the automatic conversion into equity shares on date of allotment without any appllication by the allotee.Part B is redeemed at par or converted into equity after lock in period at the option of the investors,at the price lower than 30% average market price.

6.Sweat Equity Shares:Sweet equity are a types of equity share given to the companies employess in recognision of their work.It means to give options to the employees to buy the share of the company.So they became a part of owner and participate in profit apart from salary earning.This helps to boost the sentiments of the employees to wark hard and to achieve the goals of the company.

7.Tracking Stocks:These are a securities issued by the parents company to track the result of the one of the subsidiaries without having claim on the assets of the parent company.When parent company issued the tracking stocks then its all revenues and expenses are separeted from the parent company's financial statements.Sometimes the high growth subsidiaries financial statement is seperated from the lose making parent company's statements.

8.Disaster Bonds:It is a high yield debt instrument and is usually linked to insurance and is used to raised money in case of catastrophe.If the issuer suffer al loses then the issued has to pay the interest or principle amount to the investors.

9.Mortgage Back Securities(MBS):It is basically a types of assets back security.It is a debt obligation the represent a cash flow from mortgage loan mostly from the residential property.It derived and claim their ultimate values from payment of principle and loans in the pool.The payment is broken down into different class of securities depending on the riskeness of the mortgaged.
Kind of Mortgage back securities:
  9.1 Commercial Mortgage Back Security:These are the commercial property which is beign kept as a mortgaged.
  9.2 Collateralized Mortgage Obligation:It is a complex MBS in which morgages are ordered into tranches by some quality,with each tranche is sold as a seperate security.
  9.3 Stripped Morgage Backed Security:Each mortgage payment is partly used to pay down the loan principal and partly pay the interest on it.

10.Global Depository Receipts or American Depository Receipts:These are the negotialble  certificate held in the bank of the one country which representing the specified number of share traded on the stock exchange of another country.Mainly GDR facilitate trading in the shares of developing countries companies.The GDR price are closely related to the price of related shares.
ADR are the negotiable certificate traded in US stock market which carry share of US companies.


11.Foreign Currency Convertible Bonds(FCCB):It is a mix between the equity and debt instrument.It is a bond having regular coupon and principal payment.This bond also give option to bondholders to convert the bond into stock.FCCB is issued in the currency different than the issuer's domestic currency.
Advantages of FCCB:
  a) Many companies like Banks,Finance institutions ect decided to issue bonds in foreign currencies  because they predict that their domestic currency may be stable in near future.
   b)  It gives issuers a opportunity to access foreign market for raising capital for investment.
   c) These bonds act like a debt and equity instruments.These bonds also helps bondholders to convert the bonds into stocks,apart of getting regular coupan and  principal payments.
   d) It is a low cost bonds because it consist of lower interest rate normally 30 -50% lower than market rate due to the equity component consist in it.
    e) It have an advantages of large price appreciation in the company stock's.
    f) It is redeemable at maturity if not converted.

Disadvantages:
    a)There is higher foreign exchange risk in FCCB as the borrowing is in foreign currency so the interest is also paid  in foreign currency.The firms which have low debt equity ratio and have earning potential is in foreign currency are opted FCCB's.
     b) FCCB create more debt in foreign currency,so the interest is also more in the form of foreign currency.
     c) In FCCB interest rate is low but there is more exchange risk in both interest and principal.
    d) If there is decline of stock price,investors will not go for conversion rather go for redemption.So the companies are going for refinancing for fulfilling promise of redemption which can hit earning.
     
12.Derivatives:It is a financial instrument,which have a characteristic in which value have been derived from any underlying assets like Commodity,Bonds,Equity,Currency ect.These are sometime leverage in which small movement in underlaying value can cause a large difference in value of derivative.Derivatives are largely use to protect the risk of fluctuation in the value of currency,shares ect by using hedging techniques.
  12.1 Futures:It is a types of financial contract obligation  in which buyer is purchasing the assets such as physical commodity or financial instrument at predetermined future date and price.Future contract have detailed on quality and quantity of underlying assets.Some future contract have facility in delivery in physical quantity while other are settled in cash.This market have characterized by the ability to use very high leverage relative to the stock market.
   12.2 Options:It is a types of financial derivatives which represents a contracts sold by one party called option writer to another party called option holder.These types of contracts offer buyers the right but not the obligation to buy(call) or put(sell) a security ot other financial assets at agreed upon priced during thr certain period of time or an specific date.
  A call option give the buyer the right to buy the assets at the given price which is called strike price.The holder of the call optiion has the right to demand the sale of the assets from the seller,who have only obligation and not the right.Similarly,put option gives the buyer a right to sell the assets at the strike price to the buyer.Here a buyer have a right to sell and the seller has the obligation to buy.

13.Participatory Notes:These are known as P- Notes which are Financial Instruments used by investors or hedge funds that are not registered with Security and Exchange Board of india invest in indian securities.Indian based brokerages buy indian based securities through P-Notes on the behalf of the foreign investors.If any divindend collected from the underlying securities are going back to the investors.

14.Hedge Fund:This is types of fund available to the very small numbers of investors that undertake a wide range investments and trading activities in both domestic and international markets,investors pay parformance fees to the investment manager.Every hedge fund has its own investment stratergies that determine the types of investment and method of investment it undertakes.This types of funds invest in board range of investments including share,debt and commodities.

15.Fund of Funds:It is types of investment stratergies hold portfolios of other investment funds rather than invest directly in share,bonds or other securities.Thsi types of investment is often refered to a multi manager investment.A fund of fund allow investors to achieve a board diversification and appropriate assets allocations with investment in a variety of fund catergories that are all wrapped up into one fund.

16.Exchange Traded Fund(ETF):It is an investment vhical traded on stock exchange like stocks.ETF hold the stocks traded on stock exchange and move same as the exchange move.Most ETF track the index such as S&P 500.ETF may be attractive as investment because of their low cost,Tax efficiency and stock like feature and single security can track the the performance of the growing number of different index fund.

17.Gold ETF:It is a financial instrument like mutual fund whose value depend on the price of gold.In most cases one unit of gold ETF is approximately equal to one gram of gold.As the price of gold rise then the price of ETF is also expected to rise by the same amount.Gold exchange traded fund are traded on the major stock exchange like mumbai,zurich,londan ect.

Financial Forcasting of Company

Financial Forcasting:Meaning 

It is a estimate of  future financial outcomesfor a company or a country.Financial forcast identifies trends in internal and external historical data and analyse those trend and provide informations to the financial analyst what the company is to be at some point of time in future.

Types of Forcasts in Company:

1.Profit/Loss Forcasts:It means forcasting future profiltability of the company by analysing historical Profit/Loss accounts.Profit/Loss forcasting helps financial managers to predict future scope of the businesses and makes financial policies accordingly.

2.Sales Forcasts:It means predicting future sales figures by analysing historical sales data.It is a key financials drivers for most of the business.

3.Cash Flow Forcasts:It means to estimate company's future cash situation based upon the anticipated result from all operating activities.

4.Projected Balance Sheet:It is a estimation of company's assets,debts and owner's equity position based upon the anticipated result from all operating activities.

5.Others:

    5.1 Breakeven:Company has to forcast the breakeven period to analyse the time required by the company to recover its investments of the business.

    5.2 ROI:Company also forcast the Return on Investment(ROI) to judge the profitability of the business.

 

QUARTERLY PROJECTION OF COMPANY FINANCIAL ANALYSIS:
1.Sourcing Data & Information:
   1.1 Sourcing Company Quarterly Data:
     a) Analyst has to capture the Performance data for last 12 quarters of the company by keeping the industry characteristics in mind.
       b) Analyst of the Company also arrange the important notes in the disclosure which should indicate any change in the past.
        c) Company has to segmented the different information arranged into segmented revenue,results,Capital employed ect.
   1.2 Sourcing Other Information of Company:
       a) Analyst has to arranged the recent annual report of the comapny for financial analysis. 
      b) Financial analyst also arrange the press release and media coverage of the company to get various valuable information ablout company and its sectors.
        c) Company arange the analysis coverage report on the company.
   1.3 Capturing Industry Trends:
    a) Company arranged the scanned news on industry value chain for 3 month,which indicate raw materials,intermideate product and supplies,Human resources,Regulations,Competition & comsumer trends.
     b) Analyst has to research companies monthly publications like Newspapers,Magazines and Industry association websites.
      c) Financial analyst has to arrange the free and sucsccribed sources of industries ,also has to arranged the publication of brokerage houses.
      
2.Business Analysis:
    2.1 Product & Services:Business analyst has to analyse the product and services of the company which shows the quality of product and services.
    2.2 Business model & Stratergies:Analyst had to identify the Business model and key stratergies of the company,which helps to rectify any error in the Business model.
    2.3 Key Business Drivers:Business analyst has to identify the key business drivers of the company.
    2.4 Segment Analysis: Analyst also has to do the segment analysis to identify the profitability of different segment.
3.Financial Aanalysis & Projections:
    3.1 Use Quarterly Data:Financial analyst has to use the quarterly data of Balancesheet,Profit and Loss a/c,Cash flow statements ect. for projection of future financial performance of the company.
    3.2 Anchors of Revenue Projections:Analyst has to use the past revenue for analysing the future revenue of the company.
    3.3 Expenditure Projections:Also,analyst has to predict the future expenditure by using historic data of the company's expenditure.
    3.4 Projections of Other income & Expenditure:If the is any other expenditure and income which are also predicted by the analyst.

4.Industry Numbers & Validation: 
   4.1 Analyst of the company has to use the past trends of the Industry and use it's historic numbersfor the forcasting the future policies of the company.
   4.2 Company has to look the industry average to compare it's current result in oreder to take correct decision for the future growth.
  4.3 Company has to see the key risk while using the  industry numbers for forcasting it's future results.Company hs to verify whether the industry numbers are accurate or not.
  4.4 Analyst has to compare the whole data of the industry with the small data of the companies like compare industry annual average balancesheet numbers  with companies quarterly balance sheet numbers.
  4.5 Company has to analyse the industry seasonal factor's with company's factors.

Valuations of Companies

1.RELATIVE VALUATIONS(Market based Valuations):

    1.1 P/E Ratio:It is known as Price to Earning ratio,It is valued by dividing company's current market price by annual earning per share(EPS).It shows how much times the share is traded on its earnings.

      Formula,

           P/E ratio = Market price/Earning per share(EPS)

       

             Advantages of P/E ratio's:

             a)It is easy to compute/calculate becuase easily data of EPS and Market price is available.

             b)It is widely and easily use by any Retail investor's to check the level of affordability of shares. 

             

             Disadvantage of P/E ratio:

             a)If earnings of the company is negative then the P/E/ ratio produce is useless and can't show current picture of stock affordability.

             b)It there is a volatility and trasitory position of earning makes the interpretation of P/E 's difficult of analyst.

             c)If there is discretion in the management within the allowed accounting practices which can distort reported earning and thereby lessen the comparability of P/E's across firms.

    

        There are two types of P/E ratio:

       (1) Trailing P/E ratio:It is calculated by dividing company's current market price by trailing earning per share for the most recent four quarters.

         Formula,

          Trailing P/E = Current market price(CMP)/EPS over 4th quarter

        (2) Leading P/E ratio:It is calculated by dividing company's market price by expected future earning (expected EPS) of the next years.It may not be relevent if the earning are sufficiently volatile,so the future years earning are not forcastable with any degree of accuracy.

         Formula,

         Leading P/E = Current market price(CMP)/Forcasted EPS of next year

    1.2 P/B Ratio:It is also known as Price to Book ratio,It is a ratio of Firm's Current market price to it's Book value.It compare the firm's market price to its book value.It is calculated by dividing current closing price of the company with it's latest book value per share.

   Formula,

   P/B ratio = Current market price/(Total assets-Intangible assets and Liabilities)

  

Lower P/B ratio shows that stock is a under value,which shows there is some problems with the fundamentals of the company.It also shows the how much you are paying for a particular stock and how much you get after company go  bankrupts.

         Advantages of Using Price to Book(P/B) ratio:

       a) Book value is cumulative amount that is usually positive even when firm reports loss and EPS is negative.so it hepls P/B to be positive.

         b) Book value is more stable than EPS,so it may be moe useful than P/E when EPS is volatile.

         c) Book value is an appropriate measure of net assets value for the firms,which are usually liquid assets like Finance,Insurance,Banking ,Investment ect.

         

          Disadvantages of using P/B ratio:

          a) P/B ratio does not refect  the intangible assets such as human capital.

          b) Sometimes P/B ratio may be mislead in case of firms which are outsouce some of the activities and have lower assets which have lower book value and hence have higher P/B ratio,example software firms.

          c)Book value and market value are too different due to the Technological and inflation,which makes difficult to value accurate shareholders investments.

        

 1.3 P/S Ratio:It is a ratio which compare price of the stock with the sales revenue of the firm.It is also known as valuation ratio.It is calculated by dividing total market capitalization of the company with it's total sales revenue.It is  also calculated by dividing price per share by sales revenue per share.The P/S ratio of any firm is compare by the average P/S ratio of the industry.If P/S ratio is undervalue or below the industry average then the share/stock price of that firm is undervalued.Also,if it is above the average P/S ratio then it is overvalued.
         Formula,
           P/S ratio = Market value of equity/Total sales
           P/S ratio = Market price per share/Sales per share

         Advantages of using P/S ratio :
        a) Sales revenue is always positive,so the P/S  ratio is always positive and meaningful even firm is facing  financial truble.This is not in the case of P/E or P/B which are may be negative.
       b) Sales revenues are not easly manipulate as in the cases of EPS and Book value which are maniputated easly.
        c) P/S ratio are not volatile as P/E multiples.This make P/S ratios more reliable in valuation analysis when earnings of the particular year very high or low relative to the long run average.
          d) P/S ratio is used for valuations for start ups and cyclic industries,where records of earnings are not available and P/E ratio is mislead here.It is also used in investment management and partnership companies.

          Disadvantages of using P/S ratio:
            a) High growth in sales does not necessarly indicate high operating profits as measure by earning and cash flow ,Although high sales growth inflate the P/S ratio which is mislead.
         b) P/S ratio include the cost part and does not include the cost part,so high cost part would lead mislead information for analyst.
         

     1.4 EV/EBITDA:
     It is known as Enterprise multiple,it is used to determine the value of the company .It is used for the firms want to search attractive takeover candidates for takeover there firms it is beacuse enterprise multiple consists of equity and debts both which shows clear picture of the firms.Debts part does not consists in P/E ratio.
     Enterprise Multiple =  Enterprise value/EBITDA
          Whereas,Enterprise value = Market value of common stock+Market value of preferred equity+Market value of debts+Minority interest - Cash and Investments

      Advantages of EV/EBITDA:
      a) EV/EBITDA ratio is more useful than P/E ratio beacuse it compare firm with different degrees of financial leverage.
       b) It is useful for the candidate who want to acquire any firm,Enterprise value is better than market capitalization of the firm beacuse it consists of debts parts also.Therefore low Enterprise multiple indicate good takeover deal.
     c) EBITDA is useful in valuing capital intensive businesses with high level of depreciation and amortizations.
         d) EBITDA is usually positive when EPS is not .


 PEG Ratio:
 It is a ratio derived by dividing P/E ratio of the any stock by the growth rate of it's earning for a specified time period.It shows the attractiveness of the stock,lower the PEG ratio indicate the undervalued of the stock and vise a versa.PEG ratio below one would shows the undervalue of the stock or it is cheap.

   Formula,
    PEG Ratio = PE ratio/Annualise EPS growth


Terminal Value Estimations(using price multiple)
1.Terminal value projected at the end of the investment horizone reflect the earning growth that the firm can sustain over the long run beyond that point in time.
       There are two method of calculating Terminal value:
       1.1 Based on fundamental approach:
        Terminal value in year n = (justified leading P/E ratio)*(forecasted earning in year n+1)
        Terminal value in year n = (justified trailing P/E ratio)*(forecasted earning in year n+1)

          Fundamental approach requires estimate of growth rate,required rate of return and payout ratio.


       1.2 Based on comparables approach:
        Terminal value in year n = (benchmark leading P/E ratio)*(forecast earning in year n+1)
        Terminal value in year n = (benchmark trailing P/E ratio)*(forecast earning in year n+1)

         Comparable approach uses market data exclusively.



Economic Value Added(EVA):
it is a measure of company's internal financial performance,calculated by subtracting weight avarage cost of capital(WACC) from it's operating profits after tax(NOPAT).

Formula,
EVA = Net operating profit after tax(NOPAT) - Weighted avarage coast of capital(WACC)

Financial Analysis of the Companies

FINANCIAL ANALYSIS:Meaning

Financial analysis is a process of  evaluating business,projects and  other financials of the business to judge whether the business is viable for investment or not.Basically,it is a tool to judge whether the business is stable,solvent,liquid or profitable enought to invest in or not.

During the analyses of any business,fiancial analyst would focus on the income statements,balance sheets and cash flow statements.In financial analyses there is the predections of companies future performance based on the past performance of the company.

Ratio Analysis:

1.Overview of Ratio analysis:Ratio analysis is a process of calculating financial performance of the company by using various types of ratios like profitability,liquidity,activity,debt ect and determined company's profitability and growth.

In Ratio analysis analyst can compare ratios for the firms and other firm in the industry which is called cross sectional comparison.Also,in ratio analyst compare ratios for a firms over several years which is called time series comparison.

2.Measuring Overall Profitability:The overall profitability of the company is measured by using Return on Equity(ROE).

  ROE = Net income/Shareholder's equity

ROE is a comprehensive indicator of firms performance.It provide information how efficient the manager uses the funds invested by the shareholders to generate the return.

In long run the value of equity of any firm is determine by the relationship between ROE and Cost of equity.Those firms that are generating excess of ROE over the Cost of equity should generate market value in excess of Book value. A comparison of ROE and Cost of equity not only deternime the value of the firm but also the future path of profitability.

      2.1 Decomposing Profitability traditional approache:ROE of the company is calculated by using two factors ROA(Return on assets) and Financial leverage.

         ROE = ROA*Financial leverage

                 =     Net income/assets * Assets/shareholders equity

          ROA tells how much profit the company is generating by investing earch rupee of assets invested.

          Financial leverage tells how much ripee of assets the firm is able to deploy for each rupee invested by  its shareholders.

          ROA calculated by using product of two factor:

          ROA= Net income/Sales*Sales/Sales assets

          Net income/Sales ratio is called Net profit margin(NPM) or return on sales(ROS).

          Net profit margin ratio indicate how much company is able keeps as profit for each rupee of sales.

          Sales /Assets ratio is also known as asstes turnover ratio.It indicate how many sales the firm is able to generate for each rupee of asstes.

       2.2 Decomposing Profitability alternative approache:Computation of ROE in this method by using Operating ROA plus Spread multiply by Net financial leverage

            Operating ROA is a measure of how profitably company is able to deploy its operating assets to generate operating profit.

           Spread is the incremental  economic effect from introducing debt into the capital structure.The economic effect is positive as long as the return on operating assets is greater than the cost of borrowing.

                 Net financial leverage is a ratio of net debt to equity provides a measure of NFL. 

                 ROE = Operating ROA+Spread*Net financial leverage

                 Operating ROA = NOPAT/Sales*Sales/Net assets

                 NOPAT measure how profitable firm's sales are from operating prospecting.

       2.3 Terminology of accounting items used in Ratio analyses:

              2.3.1 Net Interest expense after tax = (Interest expense - Interest income)*(1-tax)

              2.3.2 Net Operating Profit after tax(NOPAT) = Net income+Net interest expense after tax

        2.3.3 Operating Working Capital = (Current assets - Cash & Marketable securities)-(Current liabilities-short term debt and current portion of long term debt)

              2.2.4  Net long term assets = (Total long term assets - Non interest bearing long term liabilities)

              2.2.5 Net debts = (Total interest bearing liabilities -Cash & Marketable securities)

              2.2.6 Net assets = Operating Working Assets+Net long term assets

              2.2.7 Net Capital = Net debt + Shareholder's equity

              

3.Assessing Operating Management:The operating management is assess by the  computation of Net profit margin or Retuns on sales(ROS) which shows profitability of company's operating activities.Also, ROS allow analyst to assess the efficiency of firm's operating management.It is assess by using common size income statement in which all lines of item's are expressed as a ratio of sales revenue.

         3.1 Gross Profit Margin:It is percentage of sales revenue deducted all operating expenses interest,taxes,preffered dividend ect from firm's revenue.
                Gross Profit is a indication which shows revenue exceeds direct cost associate with sales.
                Gross Profit = Firm's sales-Cost of sales
               

           3.2 Selling ,General & Administration expenses:These are the expense influence by operating activities of the firm's.A company which is running on the basis og quality and rapid introduction of new products likely to have higher R&D cost relatively to the company competing purely on cost basis.
                 A companies which are building brand image,distribute it's products through full srvice retailers and provide sinificant customer service have higher SG&A expenses.
                A company that sells through warehouse retailers or direct mails and does not provide much customer support.
                   A company's SG&A expenses are also influenced by the efficiencies with which it manages its overhead activities.
               NOPAT maargin provide comprehensive indication of operating performance of a company because it reflects all operating policies and eliminate the the effects of debt policies.
                      

           3.3 Tax expenses:This expense is the most important element of the company.Company uses various tax planning tools to minimise it.
             There are two measure to evaluate firms tax expenses:
             3.3.1 One is Tax expense to sales.
             3.3.2 Other is the ratio of tax expense to earning before tax which is also known as average tax rate

4.Evaluating Investment Management:
 Investment management is evaluate by using Assets turnover ratio.
          4.1Working Capital Management:
          Working Capital is defined as different between Current assets and Current liabilitie
         Operating Working Capital  = (Current assets-Cash & Marketable securities)-(Current liabilities-Short term loans).
           If company want to run it's operation smoothly then there is a certain amount of investment in needed in working capital.Company's credit policies and distribution policies determine the optimum level of account recievable.Also,nature of production process and the need of buffer stock determined the optimum level of invesntory.Normal level of account payable is a routine source of financing for working capital which is determine on the bases of payment practices in an industry.
           There are some ratio's for firms to analyse the Working Capital Management(WCM):
            a)Operating Working Capital to sales ratio = Operating working capital/Sales
            b)Operating Working Capital turnover = Sales/Operating working capital
            c)Account receivable turnover = Sales/Account receivable
            d)Invesntory turnover = Cost of good sold(COGS)/Invesntory
            e)Account payable turnover = Purchase/Account payable
            f)Day's receivable = Account receivable/Average sales per day
           g)Day's inventory = Inventory/Average COGS per day
           h)Day's payable = Account payable/Average purchase per day

        4.2Long Term Assets Management:
        It another are of investment management concerns the utilization of company's long term assets.It is useful to define the firm's investment in long term assets.
           Net long term assets = (Total long term assets - Non interest bearing long term liabilities)
          Long term assets generally consists of Net property,Plant & equipment,Intangible assets(goodwill & oth assets),Non interest bearing long term liabilities ( deffered taxes).
           The efficiency which firm's use it's long term assets is measured by the ratio:
            a)Net long term assets turnover = Sales/Net long term assets
            b)Net property,pant&equipment(PP&E) turnover = Sales/Net PP&E

5.Evaluating Financial Management(Financial leverage):
Financial leverage enable firm's to have assets larger than it's equity.Firms can develop it's equity through borrowing and creation of other liabilities like account payable ,accrued liabilities and deferred taxes.
Financial leverage helps firm's to increase it's ROE.
Some firms carry large cash and invest in marketable securities.This helps firms to reduce net debts because firms can pay down its debts by using its cash and short term investment.
Financial leverage helps shareholder's but it incrases aslo risk of not fulfilling commitment of paying liabilities which have pre mature payments terms.

      5.1 Current liabilities and Short term liquidity:
          There are following ratios are useful in evaluating the risk of Current liabilities and also to measure the firms ability to repay its current liabilities:
          a) Current ratio = Current assets/Current liabilities
          b) Quik ratio = Cash + Short term investment + Account receivable/Current liabilities
          c) Cash ratio = Cash + Marketable Securities/Current liabilities
          d) Operating Cash flow = Cash flow from operations/Current liabilities
         
           The Current ratio,Quik ratio and Cash ratio helps firms to compare its short term assets that can be used to repay the current liabilities.
            Operating cash flow focus on the ability of the firms operation to generate the resources needed to repay its Current liabilities(CL).

            Analyst view that  a Current ratio(CR) is more than 1 ,which indicate firm can cover its Current liabilities from cash realized from its Current assets.Also,firm face liquidity problem even when CR>1 beacuse some of Current liabilities of firms is not easly liquidate.
              Quik ratio and Cash ratio helps firms to analyse its ability to cover its Current liabilities from liquid assets.Quik ratio assume that account receivable are liquid ,credit worthiness of customer is good or Recievable are collected in short period.


      5.2 Debt and Long term solvency:
      Benefits of Debt financing:
      a) Debt is cheaper than equity promises predefined payments to debt holders
      b) In most countries Interest is tax deductible whereas dividend to the shareholder are not tax deductible.
      c)Debt financing impose dicipline on firms management and motivate it to reduce its wasteful expenditure      d)It is easier for the management to communicate their proprietary information on the firms stratergies and prospects to private lenders than to public capital market,such communication reduces a firm cost of capital.
       Limitations of debts financing:
      a) If firm is depend too much on debts financing ,it would face financial distress if it default on interest and principle payments.
       b) Debt holders also impose convenants to the firms restricting the firms operating,investing and financial decisions.
       c) It would be the costly affairs for the shareholders.

        If operating cash flow of the firm is highly volatile and its capital expenditure needed are unpredictable then it may have to rely on equity financing.Also, managers attitude toward risk and financial flexibility also determine a firms debts policies.

        Ratios to evaluate Capital structure:
        1.Libilities to equity = Total libilities/Shareholders equity
      2.Debts to equity = Short+long term debts/Shareholders equity (it provide indication of how much rupees of debts financing the firm is using for each rupee invested by its shareholders)
        
        3.Net debt to equity ratio = Short+long debt - Cash & marketable securities/Shareholders equity (it measure the firms borrowings)
        4.Debt to Capital ratio = Short+Long debts/Debts(S+L)+equity (it measure debts as a proportion of total assets.)
    5.Net debts to net capital ratio = interest bearing liabilities(IBL)-cash&market securities/IBL-Cash&market securities +Shareholder's equity

6.Operating Metrics:Industry wise
     6.1 Automobiles
          a) Segment wise sales monthly in Units and growth CPLY
          b) Revenue per vehical
          c) PBDIT per vehical
          d) Inventory management technology
       
       6.2 Cement
           a) Gross realizationper ton CPLY
           b) Energy per ton CPLY
           c) Capacity utilization CPLY
           d) PBDIT per ton CPLY
         
        6.3 Steel or any mining cos
            a) Realization per ton CPLY
            b) Capacity utilization CPLY
            c)Energy cost per ton CPLY
            d)PBDIT per ton
            e) Production/no of employees

         6.4 Constructions
             a) Order book position last 3 quarters
             b) Order book inflow last 3 quarters
             c) Sales to order book position last 3 quarters

         6.5 Telecom 
            a) Average revenue per user last 6 quarters
            b) Average revenue per minutes last 6 quarters
            c) Minutes of utilization last 6 quarters
            d) Voice and Non voice revenue last 6 quarters
            e) GSM and CDMA last 6 quarters

         6.6 Chemicals 
            a) Realization per ton last 6 quarters
            b) Capacity utilization last 6 quarters

          6.7 Retail
             a)Average revenue per sq ft last 6 quarters
             b) No of foot fall last 6 quarters
             c)Segmental revenue last 6 quarters
             d) COnversion ratio last 6 quarters

          6.8 Oil and Gass
             a) Gross refining margin last 6 quarters
             b)Reserve/Production ratio last 3 years
             c) Production/Reserve ratio last 3 years
             d) Reserve replacement ratio last 3 years 

            6.9 Banking
               a) Net interest margin last 6 quarters
               b)NPA last 6 quarters
               c) C/D ratio quarters
               d) Business per employee last 3 years
               e) Profit per employee last 3 years
                f) Profitability per branches last 6 quarters
               g) Capital adequacy ratio last 3 years
          


 ASSESSING SUSTAINABLE GROWTH RATE
Sustainable Growth Rate(SGR):Meaning
It is a measurement of the firm which shows that how much firm can grow without borrowing money any more or means sustain growth rate without financial leverage.
It is aslo term as a rate which firm can grow while keeping its profitabilitiy and financial policies unchanged.
SGR is evaluate by using formula:
    SGR = ROE(Return on equity) * (1-Dividend payout)

Dividend payout ratio is calculated as:
   Dividend payout ratio = Cash dividend / Net income


CASH FLOW ANALYSES:
1.Cash Fow Analyses:Overview:
  Cahs flow statement is one of the most important statements of every business,which is analyse by Financial analyst in order to make future business planning.The three important parts of Cash flow statement are Operating activity,Financing activity and Investing activity which being analyse in order to generate future prospects of the business.
    1.1 Operating activites:This part consists cash generate by the firms from sales of good and services after paying for the cost of inputs and operations.
  1.2 Investing activities:This part shows the cash paid for capital expenditure,Intercorporate investments,Acquisitions and cash recieved fro sales of long term assets.
     1.3 Financial activities:It shows the cash raised from or paid to firms stakeholders and Debt holder's.

Cash flow statements provides the quality of informations in the firms income statements and balance sheets.


2. Formates of Cash Flow Statements:There are two types of Cash flow formates as follows
    2.1 Direct Cash flow formates:This types of formates use by very small numbers of firms,In this types of formate operating cash reciepts and disbursement are reported directly.
   
    2.2 Indirect Cash flow formates: This formate is mostly use by the most of the firms and there managers and analyst for there analyses puposes.Here firm derived their operating cash flow ny making adjustments to Net income.It links cash flow statement with firms Income statements and Blance sheet.
  

3.Fund Flow Statements:
 Fund flow statement is prepared by the comany to analyse the chage in the financial position of the company specially change in working capital position of the company.
It is useful for the aanlyst to know how to convert the Fund flow flow satement into Cash flow statement.
Working capital from operations consists of following items:
   a)Increase or Decrease in Receivable
   b)Increase or Decrease in Invesntory
   c)Increase or Decrease in Current assets exclude cash & cash equivalent
   d)Increase or Decrease in Payable
   e)Increase or Decrease in other Current liabilities excluding debt,Notes payable.


4.Analysing Cash flow Statements on the bases of following parameters:
    4.1 How strong id the firms internal cash flow generation?
         a)Is the cash flow from operation is positive or negative?
         b)If it is negative why?
         c)Is it because the company is growing?
         d)Is it beacuse its operations are unprofitable ?
         e)Is it having difficulty in managing it working capital properly?
        
     4.2 Does th company have the ability to meet its short term financial obligation?
          a)Such as interest payments from its operating cash flow?
          b)Can it continue to meet its obligations without reduction its operating flexibility?
          
     4.3 How much cash did the company invest in growth?
         a)Are this investment consistent with its business stratergies?
         b)Did the company use internal cash flow to finance growth or did it rely on external financing?
   
     4.4 Did the company pay didvident fro the internal free cash flow or it rely on external  financing?

    4.5 If the company have to fund its dividend from thr external sources,is the company's dividend policy sustainable?
     4.6 What types of external financing does company rely on?
         a) Equity,Short term debt or long term debts?
         b) Is the financing consistent with the companies overall business risk?
     
      4.7 Does the company have excess cash flow after making capital investments?
         a) Is it a lone term trend?
         b) what does the management have to deploy the free cash flow?