Fundamental Analysis is 29 marks in NISM Series XV — the largest topic in the syllabus, ahead of valuation at 24 and more than technical analysis and regulation combined. It is also the broadest, which is why candidates who study it late tend to run out of time.
The EIC framework
The top-down approach, and the backbone of the whole topic:
Economy → Industry → Company
You assess the macroeconomic environment first, then the industry's structure and prospects, then the individual company within it. The logic is that a good company in a declining industry in a weak economy is fighting three headwinds, and the first two are outside its control.
The alternative is bottom-up, starting from the company and paying less attention to the macro backdrop. The exam expects you to know both and to recognise which is being described — "begins at macro factors and identifies sectors and stocks based on those" is top-down.
Economy analysis
The macro variables that drive corporate profits: GDP growth, inflation, interest rates, exchange rates, fiscal and monetary policy, and the business cycle.
Two relationships worth being able to state:
- A weaker domestic currency makes imports more expensive and exports more competitive — so it helps an exporter and hurts an importer.
- Consumer confidence is low during a downturn, and cyclical businesses feel it first.
PESTLE — political, economic, social, technological, legal and environmental — appears as a framework for organising these factors, and questions often ask which category a given factor belongs to.
Industry analysis
Porter's five forces is the framework the exam returns to most:
| Force | What raises it |
|---|---|
| Threat of new entrants | Low barriers to entry — little capital, no licensing, no skill requirement |
| Bargaining power of suppliers | Few suppliers, or high switching costs |
| Bargaining power of buyers | Concentrated buyers, undifferentiated product |
| Threat of substitutes | Substitutes offering equal or better quality, price or convenience |
| Competitive rivalry | Many similar players, slow growth, high exit barriers |
Entry barriers are directly examinable — capital requirements, skill requirements and licensing requirements all qualify. So is the threat of substitutes, which is high when the substitute offers better quality, a better price or better ease of use.
Also learn the industry life cycle: pioneering, growth, maturity, decline. A business at the mature stage grows slowly and typically distributes more of its profit, which links straight into dividend discount valuation.
Company analysis
Two halves, and the exam tests both.
Qualitative — the part candidates skip and then lose marks on:
- Pricing power. A company that can raise prices without losing customers has it. Most businesses are price takers rather than price makers, because in a competitive industry a rival's price cut forces everyone to follow.
- Brand. A strong brand "suspends the price-value thought" — the customer stops comparing on price alone.
- Management quality. Corporate governance is assessed on integrity, ethics, transparency and accountability, not on profitability. And a proper succession plan matters because it ensures continuity when top management changes.
- Moat — the durable advantage: brands, scale, a licence, a network, switching costs.
Quantitative — reading the financial statements. The balance sheet is a snapshot at a point in time, while the P&L and cash flow statements cover a period. That distinction is asked directly.
Quality of earnings
The idea that reported profit and real profit can differ.
High-quality earnings are backed by operating cash flow, repeatable, and free of one-off gains. Warning signs include profit that does not convert into cash, receivables growing much faster than sales, frequent changes in accounting policy, and heavy reliance on "other income".
An auditor who cannot verify part of the financials issues a qualified opinion or a disclaimer — which is itself a signal about earnings quality, and appears in the paper.
How to study 29 marks
Do not read this topic once. It is frameworks plus judgement, and frameworks only stick when you apply them.
Work in this order:
- EIC and the macro variables — get the direction of each relationship right (rates up, what happens; currency weaker, who benefits).
- Porter's five forces and entry barriers — be able to reproduce all five and say what raises each.
- The industry life cycle and what a mature business does with its profit.
- Qualitative company factors — pricing power, brand, governance, succession. This is the part most candidates under-prepare.
- Reading statements and earnings quality.
Remember NISM XV carries 25% negative marking, so on a judgement question you cannot narrow down, eliminate first and only then commit.
Practise all 108 Fundamental Analysis questions free on ScoreSetu, each with a worked explanation and a memory hook. Then take a full-length timed mock scored to the real 60% pass mark.
Next, the topic that follows it: financial ratios every research analyst must know and DCF valuation explained.