In a market like India which is accustomed to a number of cases where there is a sudden surge in the prices of equities without any significant change in the company?s fundamentals, Crisil has come up with an analysis that addresses few questions that often crop up in the investors? mind whether there is any relationship between the fundamentals of the company and its share price performance.
The study conducted exclusively of companies in the S&P CNX Nifty Index shows that, in an efficient market without significant information asymmetry, the movement of company?s share price would depend on its fundamentals. While share price could deviate from the fundamentals momentarily, in the long run it is the fundamentals that will drive the valuation.
The methodology used in the analysis was the same that it used for IPO grading which takes in to account the business prospects, financial performance, management capability and corporate governance while assessing the fundamentals. With respect to the above factors, Crisil research ranked all the 45 companies (excluding 5 companies in the financial service industry) on a 5-point scale (with 5 being the highest score and 1 the lowest) and then arrived at a composite weighted average score for each company.
The companies ranked in descending order of their scores, were then grouped into different quintiles (group), with nine companies in each quintile.