Qualitative Analysis- I

Most of the fundamental analysis is concentrated on the quantitative side and the quality of the management is overlooked. Most of the league had been won without this imperative part of the analysis. This game play was transformed by a widely acclaimed investor and author, Philip Fisher, founder of Fisher & Co. Philip Fisher stressed more on the nature of how the management is run and promoter’s or CEOs loyalty to the firm more than the financials of the business. In fact Warren Buffet was driven by procedures of Graham, he was full of Graham and nothing of Fisher. After the work of Fisher “Common Stocks and Uncommon Profits“, which gradually shifted his views on the behavior of executives, in fact Warren became 85% of Graham and 15% of Fisher.

The qualitative analysis is bifurcated due to its hugeness.

Understanding the business and models:

More than 6000 companies are listed on the BSE, NSE combined. Fortunately, investors are not compelled to analyze every stock in the screen. Simple questions help you to understand the even the most significant bit of running the business. Selecting the plain and penetrable industry will be the starting point of the analysis. Never forget that stocks are the derivatives of the underlying business.

  • What companies do and how they do it?
  • How many customers do they operate with and why people opt their products or the rendered service?
  • How much of them do this?
  • Who all are the top competitors and in what terms they hold high standards?

The checklist hits bottom until your filter convinces you to stay with the stock eternally. Top-down approach is what needs so much of understanding the economics of the business and industry analysis, lastly the business.

Know the parameters:

Certain parameters explicitly discloses the efficiency of the business. In case of retail- foot fall per store, Banking- Net interest income, NPAs, Adequacy ratio, Telecom- Revenue per user, Hotels- Room tariffs etc. The intricates of the business will be disclosed by the closest competitor, they might reveal details of the other and a survey with the employees will totally open up various horizons of the business.

Competitive advantage:

When comparing stocks, the margin of choosing the other will gradually narrow, again widen the gap can be done by giving a thought about the competitive advantage of the business.

Brand:

FMCG companies should constantly be expanding their portfolio of products in order to stay afloat. Shoe brands which are not predominantly making footwears with recycled plastics which throws green light. Watches have now become a luxury wear should sustain the game of class and status symbol. Every hand made products has an idiosyncratic value which no other machine made products can deliver. Nestle’s maggi is a classic example of brands ruling market for a long time and differentiating the company from the peers.

Long Track Record:

Even in the quantitative analysis the past performance occupies a huge volume in valuing. Although the performance previous year performance shown exorbitant numbers future is still uncertain. One thing to be noted is how the company survived recessions, financial distress and other factors pressing them to shut. If a business existed for 100 years, the business would have undergone innumerable cycles of ups and downs- that’s an experienced and data stuffed institution which knows how to react to every down turns. For example SBI, the bank has been in operation for 2 centuries and has built a huge empire in most of the year of double digit growth- had seen dot com bubble, Great depression, Financial crisis, Pandemic, World war I & II.

Clean Management:

Tata and Infosys are a living testimony to the importance of ethical behavior. Time and again their brands have strengthened due to this single factor- Ethics. Most of the research report lacks to present the character and trustworthiness of the promoter group. ICICI Bank’s report failed to mention promoter’s legality, days lately they were accused of money laundering with VideoCon. How the board members are treated, Does the board have people like Mistry of Tata or the directors act in linearity.

Acquisitions & takeovers:

In the moto of expansion, companies believe in aggressive expand inorganic growth. Tata power is today’s example of making deals on deals with no days off. Even though the company is expanding and stands out with immense production power the price went nowhere because of its heavy side of liability. The business expansion would work at most of the times, stepping into another kind of business may lead to “Di-Worse-ification” Peter Lynch says.

Monopoly & Market Share:

This is again a function of strong brands or the product becoming a brand itself. In the lucrative business of insurance, LIC dominates even having ICICI Lombard as its counterpart. In Cigarettes, ITC holds more than 82% of market share. Adhesives, its Pidilite. Monopoly is a moat which is built around the business from any other participant to break through.

Strength, Weakness, Opportunity, Threat:

Balance sheet tells you the financial strength points, Income statement shows revenue and margin growth. Restrengthen points which come under all the 4 segments, repeat the process until you get convinced. The concise manner of representing a business model is given by SWOT analysis. While strength and Weaknesses are internal to the company, Opportunities and Threats deals with the external environment of the business. Looking into websites like Moneycontrol, may seem to influence your list and exaggerate threats and minor fluctuations.

Corporate Governance:

In simple terms “Telling the truth” in all aspects of the stint. Warren buffet quotes it all day,

Look for three things in a person, integrity, energy and intelligence in management, if they don’t have the first, the other two will kill you.

As said, Warren accepts his mistakes in the corporate world, by Letter and in person with the huge audience.

ITC, Amul brought up their farmers together and to add up HDFC and TATAs. Quality of independent directors is overlooked, many of the reports fail to utter a point on the relationship between the performing and the dormant directors. The report of SJVN clearly states that the constituents are linked no way personally and had not known each other before. The remuneration to the independent directors and directors who are the spouses of the active members. Corporate governance is a huge topic which will surely be discussed.

The second part of qualitative analysis consists of:

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