Here's a blog post on Fundamental Analysis and the CANSLIM Technique
with examples from the Indian stock market:
Fundamental Analysis and the CANSLIM Technique: A Guide for Indian
Investors
Investing in stocks can be overwhelming, but using the right techniques can
increase your chances of making profitable decisions. Two of the most effective
approaches are Fundamental Analysis and the CANSLIM technique, both of
which help investors identify quality stocks with high growth potential. In this
blog, we will break down these strategies and explore how they apply to the
Indian stock market.
What is Fundamental Analysis?
Fundamental analysis involves evaluating a company's financial health,
business model, industry position, and macroeconomic factors to
determine its intrinsic value. The key factors include:
1. Financial Metrics
Return on Equity (ROE) – Measures how efficiently a company
generates profits from shareholders' funds. A higher ROE is preferred.
Return on Capital Employed (ROCE) – Indicates how well a company
utilizes its capital to generate earnings.
Operating Profit Margin (OPM) – Shows the percentage of revenue
remaining after covering operating costs.
Debt-to-Equity Ratio – A lower ratio suggests lower financial risk.
2. Growth Indicators
Revenue and Earnings Growth – Companies with consistent sales and
profit growth indicate long-term sustainability.
Free Cash Flow Growth – Positive free cash flow shows a company's
ability to expand and reward shareholders.
3. Valuation Metrics
Price-to-Earnings Ratio (P/E) – Compares stock price to earnings per
share.
Price-to-Book Ratio (P/B) – Compares stock price to book value.
Dividend Yield – Indicates how much a company pays out in dividends
relative to its stock price.
4. Market and Industry Trends
Sector Growth – Some industries, such as IT, banking, and FMCG, have
shown consistent growth in India.
Competitive Advantage (Moat) – Companies with strong brand value,
patents, or unique business models tend to outperform competitors.
Example from the Indian Market
Infosys (NSE: INFY) – Infosys has strong revenue growth, healthy ROE
(~30%), and consistent free cash flow, making it a fundamentally strong
stock.
What is the CANSLIM Technique?
Developed by William O’Neil, the CANSLIM strategy focuses on selecting
stocks with strong earnings growth, market leadership, and institutional backing.
1. C - Current Quarterly Earnings Growth
The company should have an EPS (Earnings Per Share) growth of at
least 25% in the latest quarter.
Example: Tata Elxsi (NSE: TATAELXSI) has shown strong quarterly EPS
growth driven by its expansion in automotive and AI-driven software
solutions.
2. A - Annual Earnings Growth
The company should have an annual EPS growth of at least 25% over
the last three years.
Example: Divi’s Laboratories (NSE: DIVISLAB) has exhibited robust
annual growth in earnings, benefiting from the pharmaceutical boom.
3. N - New Product, Service, or Management
Stocks of companies introducing innovative products, services, or
leadership changes tend to perform well.
Example: Tata Power (NSE: TATAPOWER) has gained investor interest
due to its focus on renewable energy and EV charging
infrastructure.
4. S - Supply and Demand
Stocks with high trading volumes and institutional buying are preferred.
Example: IRCTC (NSE: IRCTC) saw strong demand when it was listed,
driven by its monopoly in online railway ticketing.
5. L - Leader or Laggard
Invest in industry leaders with a high Relative Strength (RS) Rating
of 80 or more.
Example: HDFC Bank (NSE: HDFCBANK) is a leader in the banking
sector with consistent growth and superior financial performance.
6. I - Institutional Sponsorship
Stocks should be owned by mutual funds, foreign investors (FIIs), or
domestic institutions (DIIs).
Example: Avenue Supermarts (NSE: DMART) (owner of D-Mart) has
seen growing institutional ownership due to its strong retail business
model.
7. M - Market Direction
Even the best stocks struggle in a bear market. Always check Nifty 50
and Sensex trends before making investments.
Final Thoughts: Combining Fundamental Analysis and CANSLIM for
Indian Stocks
While Fundamental Analysis helps identify strong businesses, CANSLIM
ensures that the timing of entry is optimal. Investors should combine both
approaches to maximize returns.
Stock Picks Based on Both Strategies
Infosys (NSE: INFY) – Strong fundamentals with consistent revenue
growth.
Divi’s Laboratories (NSE: DIVISLAB) – High EPS growth and
institutional interest.
Tata Power (NSE: TATAPOWER) – Expansion in renewable energy makes
it a promising long-term bet.
By following a disciplined approach and avoiding overvalued or weak stocks,
investors can increase their chances of success in the Indian stock
market.
Fundamental Analysis-Based Stock Picks
1. Reliance Industries (NSE: RELIANCE)
a. Why? Market leader in diversified sectors (telecom, retail, energy).
b. Key Metrics:
ROCE: ~12-15%
Strong cash flow from Jio and Retail business.
Expansion into green energy, a high-growth sector.
2. TCS (NSE: TCS)
a. Why? India’s IT giant with consistent earnings growth.
b. Key Metrics:
ROE: ~40% (high efficiency in capital utilization).
Strong free cash flow generation.
Dividend-paying, stable investment option.
3. Asian Paints (NSE: ASIANPAINT)
a. Why? Dominant player in India's paint industry with a strong
economic moat.
b. Key Metrics:
Operating Profit Margin (OPM): ~18-20%.
Zero debt company with stable cash flow.
Consistently growing market share.
4. Bajaj Finance (NSE: BAJFINANCE)
a. Why? Leader in the NBFC sector with high growth potential.
b. Key Metrics:
ROE: ~22-24%.
Strong loan book growth, increasing digital penetration.
Strong institutional interest and stock price appreciation.
CANSLIM-Based Stock Picks
1. L&T Technology Services (NSE: LTTS)
C: EPS growth >25% (driven by global digital engineering services
demand).
A: Annual revenue and profit growing at 20%+ CAGR.
N: Strong R&D in AI, 5G, and IoT solutions.
S: High demand from institutional investors.
2. Deepak Nitrite (NSE: DEEPAKNTR)
C: Strong EPS growth from chemical sector boom.
A: Consistent revenue growth of ~30% YoY.
N: Expanding into specialty chemicals, a high-margin business.
M: Outperformed broader market with strong price momentum.
3. Tata Motors (NSE: TATAMOTORS)
C: JLR and EV segment boosting profits significantly.
A: Turned profitable after restructuring; EV sales up 50% YoY.
N: Leading India’s electric vehicle revolution.
S: Institutional investors increasing stake due to EV potential.
4. Hindustan Aeronautics Limited (NSE: HAL)
C: EPS growth >30% (defense sector boom).
A: Strong order book from government contracts.
N: Increased defense spending and self-reliance initiatives
(Atmanirbhar Bharat).
S: Strong buying from FIIs and DIIs in 2023-24.
Key Takeaways for Indian Investors
Fundamental Analysis: Best for long-term wealth creation (Infosys, TCS,
Reliance, Bajaj Finance).
CANSLIM: Helps identify breakout stocks early (Deepak Nitrite, Tata
Motors, HAL).
Market Timing Matters: Even the best stocks fail in a weak market, so
follow Nifty and Sensex trends before investing.
Would you like insights on sector-specific stocks, such as pharma, banking,
or renewable energy? 🚀
