Report

CAPITAL ASSET PRICING MODEL - A Study on Indian Stock Markets

INTRODUCTION

Page 1


I. INTRODUCTION

India is one of the fastest developing country in the world with the tenth-largest nominal

GDP and the third-largest purchasing power parity (PPP). Efficient transfer of resources

from those having idle resources to others who have a pressing need for them is achieved

through financial markets. Stated formally, financial markets provide channels for

allocation of savings to investment. The savers and investors are constrained not by their

individual abilities, but by the economy’s ability, to invest and save respectively [5]. An

investment is a monetary asset purchased with the idea that the asset will provide income

in the future or appreciate and be sold at a higher price and it is a commitment of funds

made in expectation of some positive rate of return. The investment process consists of

two tasks; first one is security analysis which focuses on assessing the risk and return

characteristics of the available investment vehicles. The second task is portfolio selection,

which involves choosing the best possible portfolio from the set of feasible portfolios [5].

A portfolio is a bundle or a combination of individual assets or securities. The portfolio

theory provides a normative approach to investors to make decisions to invest their

wealth in assets or securities under risk. It is based on the assumption that investors are

risk-averse. This implies that investors hold well diversified portfolio instead of investing

their entire wealth in a single or a few assets [5] [8]. One important conclusion of the

portfolio theory is that, if the investor of the portfolio theory holds a well diversified

portfolio of assets, then their concerns may be the expected rate of return and risk of the

portfolio, rather than individual assets and the contribution of individual asset to the

portfolio risk. The second assumption of the portfolio theory is that the returns of assets

are normally distributed. This means that the mean and variance analysis is the

foundation of the portfolio decisions [5].

The Capital Assets Pricing Model (CAPM), is used to determine a theoretically

appropriate required rate of return of an asset, if that asset is to be added to an already

well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into

account the asset's sensitivity to non-diversifiable risk represented by the

quantity beta (β). CAPM describes the relationship between risk and expected return and

is used in the pricing of risky securities. This relationship was first proposed

independently by John Lintner, William F. Sharpe and Mossin, by building on the earlier

Page 2


work of Harry Markowitz on diversification and modern portfolio theory. The CAPM

introduced that the expected return of a security or a portfolio equals the rate of return on

a risk-free rate plus a risk premium. This model offers a simple tool for investors to

evaluate their investments. If this expected return does not meet or beat the required

return, then the investment should not be undertaken [5].

II. PROBLEM STATEMENT

Earning maximum returns on investments is definitely the motto for any investor.

Selecting stocks exclusively on the basis of maximization of return is not the only criteria.

The fact that most investors do not place their available funds in few stocks promising

higher returns suggests that other factors must be considered besides returns in selection

process. Investors want to maximize expected return subject to their assessment and

capacity to take risk. The risk associated with the holdings is that the return that is

achieved will be less than the return that was expected. Hence, the study of risk vis-à-vis

returns always holds a great significance, which immensely helps, in key decision-making

process.

Investors thus need to make decisions as to what securities should be held. Estimates

need to be prepared of the return and risk associated with the securities for a certain

period of time. This is known as security analysis and is built around the idea that

investors are concerned with expected return and risk, the two principal properties

inherent in securities.

Thus the return and risk and their measurement using Capital Asset Pricing Model

(CAPM) will be the core of the study undertaken. The attachment of the paramount

importance of these two principal properties, return and risk, inherent in securities with

the analysis of any investment decision makes the study significant.

Page 3


III. OBJECTIVES OF THE STUDY

1. To study the performance of SENSEX and the stocks on BSE SENSEX with

regard to risk and return.

2. To apply the regression model and calculate the alpha, beta, residual values and

the returns (Ri) of the selected stocks.

3. To calculate expected rate of returns (E(Ri)) of the securities using CAPM model.

4. To identify the underpriced/overpriced securities using CAPM model.

IV. SCOPE OF THE STUDY

The study attempts to understand whether the Capital Asset Pricing Model

(CAPM) shows high degree of relevance in Indian stock market or not.

V. METHODOLOGY

Research Design: This study is to analyze the performance of BSE SENSEX with

regard to risk and return, and to identify the underpriced/overpriced securities using

CAPM model.

STEP: 1

Selection of Companies: The economy was classified into different segments in order

to have the clear picture of an Indian economy BSE Sensex listed companies are

considered for this study.

AXIS BANK LARSEN & TOUBRO

BAJAJ AUTO MAHINDRA AND MAHINDRA

BHARAT HEAVY ELECTRICALS MARUTI SUZUKI

BHARATI AIRTEL NTPC

CIPLA OIL AND NATURAL GAS CORPORATION

COAL INDIA RELIANCE INDUSTRIES

GAIL SESA STERLITE LTD.

HERO MOTOCORP STATE BANK OF INDIA

HINDALCO INDUSTRIES SUN PHARMACEUTCAL

HINDUSTAN UNILEVER TATA CONSULTANCY SERVICES

HOUSING DEVELOPMENT FINANCE TATA MOTORS

Page 4


CORPORATION

ICICI BANK TATA POWER

INFOSYS TATA STEEL

ITC WIPRO

HDFC BANK DR.REDDYS LABORATORIES

STEP: 2

Daily share price (01-April-2011 to 31- March- 2014) was collected from the website of

Bombay stock exchange (www.bseindia.com).

STEP: 3

The Daily return (in percentage terms) of the stock and the index is calculated using

MS-EXCEL.

R= LOGe ( Rt / Rt-1 ) * 100

Where , Rt = Current Price of the share

Rt-1= Previous Price of the share

STEP: 4

To find Alpha, Beta and Residual Value of the stock is calculated using MS-EXCEL

through Regression Analysis. Beta is the only measure in the CAPM concept.

STEP: 5

Return and Expected return calculation needs the risk free rate, so we have taken risk free

rate at 8%.

STEP: 6

Return

Ri=+ Rm+e

Expected Return

E[Ri] = Rf + (Rm – Rf)

STEP: 7

Page 5

Where, Rm = Market Return

Rf = Risk Free Rate

= Beta Value

= Alpha Value

e = Residual Value


The Return and Expected returns are compared to find whether the equities are priced

appropriately or not. If the actual price is more than the expected price then the equity is

underpriced. If the actual price is less than the expected price then the equity is

overpriced. If both prices are equal then the equity is priced appropriately.

STEP: 8

H0: Slope of BETA is not significantly different from Zero

H1: Slope of BETA is significantly different from Zero

Hypothesis testing (Z-test) is conducted using MS- EXCEL, to check whether the slope of

Beta varies significantly from Zero or not, with the help of values of Beta () and

Expected return (E(Ri)). Variance is also calculated for Beta and Expected return values

which is used in Z-test. Mean difference is kept at Zero.

VI. LIMITATIONS

As we consider Beta only, the bonus shares issued is not considered.

The dividends issued on the shares are also not taken into account, since the effect

on the return on the share would be minimal.

Since the study concentrates on data from 1st April 2011 the effect if the change in

SENSEX values would not have an impact on the study.

Since the returns the calculated on month wise the Risk free Rate (RF) was

assumed as 8%, which would not give us a realistic picture for the expected

return.

Since it is an academic exercise it may not have totally practical study.

Unfortunately procedure is not very practical since information on investor

expectation is very sketchy.

Page 6


CHAPTER- 1

LITERATURE REVIEW

Page 7


1.0 LITERATURE REVIEW

A study on “Testing the capital asset pricing model (CAPM) – A study of Indian stock

market” by Dr. G. Sudarsana Reddy (2011) is aimed at examining the validity of the

Capital Asset pricing Model in the Indian Stock Market. The study examines historical

monthly average stock prices of 80 companies and historical monthly average values of

market index of BSE 100 for the period June 2000 to May 2007, and the data collected

from NSE and BSE websites. Data analyzed in three steps: one, calculation of beta, alpha

and expected return, two, calculation of relationship between risk and return of the

selected Securities by using Spearmen’s correlation coefficient, and third, testing

hypothesis using Z-test. From the study we can say that there is significant relationship

between risk and return, investors have realized higher return by opting for higher risky

securities, and the validity of CAPM coefficients signifies the implication of the CAPM

in the Indian stock market in determining the required rate of return of risky securities [1].

In the year 2010 Kapil Choudhary and Sakshi Choudhary did study on “Testing Capital

Asset Pricing Model: Empirical Evidences From Indian Equity Market” which examines

the Capital Asset Pricing Model (CAPM) for the Indian stock market using monthly stock

returns from 278 companies of BSE 500 Index listed on the Bombay stock exchange for

the period of January 1996 to December 2009. The findings of this study are not

substantiating the theory’s basic result that higher risk (beta) is associated with higher

levels of return. The model does explain, however, excess returns and thus lends support

to the linear structure of the CAPM equation. The theory’s prediction for the intercept is

that it should equal zero and the slope should equal the excess returns on the market

portfolio. The results of the study lead to negate the above hypotheses and offer evidence

against the CAPM. The tests conducted to examine the nonlinearity of the relationship

between return and betas bolster the hypothesis that the expected return-beta relationship

is linear. Additionally, this study investigates whether the CAPM adequately captures all-

important determinants of returns including the residual variance of stocks. The results

exhibit that residual risk has no effect on the expected returns of portfolios [2].

A research study did by Sylvester Jarlee (2007) “A Test of the Capital Asset Pricing

Model: Studying Stocks on the Stockholm Stock Exchange”, is to study if the CAPM

holds on the Stockholm Stock Exchange, meaning: If higher beta yields higher expected

Page 8


return, If the intercept equals zero/average risk-free rate and slope of SML equals the

average risk premium and If there exist linearity between the stock beta and the expected

return. For this research, monthly stock returns for twenty (28) firms listed on the

Stockholm Stock Exchange are used. The data ranges from January 2001 to December

2006, a period of six years. To test the CAPM in this paper, Author used approach

methods as described by Black, Jensen and Scholes (1972) time-series test as well as

Fama and MacBeth (1973) cross-sectional test [3].

According to a study conducted by Peter Bossaerts, Daniel Kleiman and Charles Plott

(2009) “Price Discovery In Financial Markets: The Case Of The CAPM” explains about

the report on experiments of simple, repeated asset markets in two risky securities and

one risk-free security, set up to test the Capital Asset Pricing Model (CAPM), which

embeds the two most essential principles of modern asset pricing theory, namely,(i)

financial markets equilibrate, (ii) in equilibrium, risk premium are solely determined by

covariance with aggregate risk. Slow, but steady convergence towards the CAPM is

discovered. The convergence process, however, halts before reaching the actual

equilibrium. There is ample evidence that subjects gradually move up in mean-variance

space, in accordance with the CAPM. Yet, adjustment stops as if the remaining trading

time was insufficient to complete all the transactions that are needed to guarantee

improvements in positions. We conjecture that this is due to subjects’ hesitance in the

face of market thinness. Because the convergence process halts, statistical tests reject the

CAPM [4].

Page 9


CHAPTER-2

INDUSTRY ANALYSIS

2.0 INDUSTRY ANALYSIS

Page 10


Efficient transfer of resources from those having idle resources to others who have a

pressing need for them is achieved through financial markets. Stated formally, financial

markets provide channels for allocation of savings to investment. The savers and

investors are constrained not by their individual abilities, but by the economy’s ability, to

invest and save respectively [5]. The financial markets, thus, contribute to economic

development to the extent that the latter depends on the rates of savings and investment.

The financial markets have two major components: Money market and Capital Market.

The Money market is "a market for short term funds with maturity ranging from

overnight to one year and includes financial instruments that are deemed to be close

substitutes of money". It is diversified and has evolved through many stages, from the

conventional platform of Treasury Bills and Call Money to Commercial paper,

Certificates of Deposit, and Repos. The Indian money market consists of the unorganized

sector: moneylenders, indigenous bankers, chit funds; organized sector: Reserve Bank of

India, private banks, public sector banks, development banks and other Non Banking

Financial Companies(NBFCs) such as Life Insurance Corporation of India (LIC), Unit

Trust of India (UTI), the International Finance Corporation, IDBI, and the co-operative

sector[5].

The Capital markets are financial markets for the buying and selling of long-term debt-

or equity-backed securities. These markets channel the wealth of savers to those who can

put it to long-term productive use, such as companies or governments making long-term

investments in the form of Equities, Bonds, Debentures, Fixed Deposits, Provident Funds,

Insurances, Commodities, and Mutual Funds. The capital market attracts people who are

risk oriented. While investing in to capital market one should be careful to judge the

valuation of the stock and understand the complexities involved in the stock price

fluctuations [5].

2.1 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulator for

the securities market in India. It was established in the year 1988 and given statutory

powers on 12 April 1992 through the SEBI Act, 1992. It was officially established by

The Government of India in the year 1988 and given statutory powers in 1992 with

SEBI Act 1992 being passed by the Indian Parliament. SEBI has its Headquarters at the

Page 11


business district of Bandra Kurla Complex in Mumbai, and has Northern, Eastern,

Southern and Western Regional Offices in New Delhi, Kolkata, Chennai, and Ahmedabad

respectively. Controller of Capital Issues was the regulatory authority before SEBI came

into existence; it derived authority from the Capital Issues (Control) Act, 1947. Initially

SEBI was a non statutory body without any statutory power. However in the year of

1995, the SEBI was given additional statutory power by the Government of India through

an amendment to the Securities and Exchange Board of India Act, 1992. In April, 1988

the SEBI was constituted as the regulator of capital markets in India under a resolution of

the Government of India. The SEBI is managed by its members, which consists of

following:

a) The chairman who is nominated by Union Government of India.

b) Two members, i.e. Officers from Union Finance Ministry.

c) One member from The Reserve Bank of India.

d) The remaining 5 members are nominated by Union Government of India; out of

them at least 3 shall be whole-time members [5].

2.1.2 FUNCTIONS AND RESPONSIBILITIES

The Preamble of the Securities and Exchange Board of India describes the basic functions

of the Securities and Exchange Board of India as "to protect the interests of investors in

securities and to promote the development of, and to regulate the securities market and

for matters connected therewith or incidental thereto". SEBI has to be responsive to the

needs of three groups, which constitute the market: The issuer of Securities, The Investor,

and The Market Intermediaries.

The issuer of Securities

The Investor

The Market Intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-

executive. It drafts regulations in its legislative capacity, it conducts investigation and

enforcement action in its executive function and it passes rulings and orders in its judicial

capacity. Though this makes it very powerful, there is an appeal process to create

accountability. There is a Securities Appellate Tribunal which is a three-member tribunal

and is presently headed by Mr. Justice J P Devadhar, a former judge of the Bombay High

Page 12


Court; a second appeal lies directly to the Supreme Court. SEBI has taken a very

proactive role in streamlining disclosure requirements to international standards [5].

2.13 POWERS

For the discharge of its functions efficiently, SEBI has been vested with the following

powers:

1. To approve by−laws of stock exchanges.

2. To require the stock exchange to amend their by−laws.

3. Inspect the books of accounts and call for periodical returns from recognized stock

exchanges.

4. Inspect the books of accounts of financial intermediaries.

5. Compel certain companies to list their shares in one or more stock exchanges.

6. Registration brokers.

There are two types of brokers.

Circuit broker

Merchant broker [5].

2.1.4 MAJOR ACHIEVEMENTS

SEBI has enjoyed success as a regulator by pushing systematic reforms aggressively and

successively. SEBI is credited for quick movement towards making the markets

electronic and paperless by introducing T+5 rolling cycle from July 2001 and T+3 in

April 2002 and further to T+2 in April 2003. The rolling cycle of T+2

means, Settlement is done in 2 days after Trade date. SEBI has been active in setting up

the regulations as required under law. SEBI did away with physical certificates that were

prone to postal delays, theft and forgery, apart from making the settlement process slow

and cumbersome by passing Depositories Act, 1996.

SEBI has also been instrumental in taking quick and effective steps in light of the global

meltdown and the Satyam fiasco. In October 2011, it increased the extent and quantity of

disclosures to be made by Indian corporate promoters. In light of the global meltdown, it

liberalised the takeover code to facilitate investments by removing regulatory structures.

In one such move, SEBI has increased the application limit for retail investors to ₹2 lakh,

from ₹1 lakh at present [5].

Page 13


2.2 INDIAN STOCK MARKETS

The stock markets are of two types – the primary market and the secondary market. This

is true for the Indian stock markets as well. Basically the primary market is the place

where the shares are issued for the first time. So when a company is getting listed for the

first time at the stock exchange and issuing shares – this process is undertaken at the

primary market. That means the process of the Initial Public Offering or IPO and the

debentures are controlled at the primary stock market. On the other hand the secondary

market is the stock market where existing stocks are bought and sold by the retail

investors through the brokers. It is the secondary market that controls the price of the

stocks. Generally when we speak about investing or trading at the stock market we mean

trading at the secondary stock market. It is the secondary market where we can invest and

trade in the stocks to get the profit from our stock market investment.

Now these are the broadest classification of the stock markets that is true for any country

as well as India. But the Indian stock markets can be divided into further categories

depending on various aspects like the mode of operation and the diversification in

services. First of the two largest stock exchanges in India can be divided on the basis of

operation. While the Bombay stock exchange (BSE) is a conventional stock exchange

with a trading floor and operating through mostly offline trades, the National Stock

Exchange or NSE is a completely online stock exchange and the first of its kind in the

country. The trading is carried out at the National Stock Exchange through the electronic

limit order book or the LOB. With the immense popularity of the process and online

trading facility other exchanges started to take up the online route including the BSE

where you can trade online as well. But the BSE is still having the offline trading facility

that is carried out at the trading floor of the exchange at its Dalal Street facility.

Apart from these classifications there are also different types of stock market in India and

the classification is made on the type of instrument that is being traded at the market.

Both the Bombay Stock Exchange and the National Stock Exchange have these types of

stock markets.

Equity market or the cash segment – The first type of market is the equity market or the

cash segment where stocks are traded. In this type of trading the buyers of the stocks

Page 14


book a buying order with a bid price and the order is executed through the broker at a

negotiated ask price offered by the sellers at the market. In most cases the deal is closed

or the stocks are brought at the best available ask price. In this type of trading the buyer

pays the entire amount of the value of the stocks that is determined by multiplying the

number stocks with the current price of the stock. Once the buyer pays the entire amount

along with the brokerage and taxes of the transaction the stocks are deposited to the DP

account of the buyer. This chapter analyze the performance of BSE SENSEX with regard

to risk and return, and to identify the underpriced/overpriced securities using CAPM

model; furthermore, brief interpretations are followed at each section [6].

2.3 S&P BSE SENSEX

Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd.), is

Asia’s first & fastest Stock Exchange with the speed of 200 micro second and one of

India’s leading exchange groups. Over the past 139 years, BSE has facilitated the growth

of the Indian corporate sector by providing it an efficient capital-raising platform. BSE

provides an efficient and transparent market for trading in equity, debt instruments,

derivatives, mutual funds. It also has a platform for trading in equities of small-and-

medium enterprises (SME).

More than 5000 companies are listed on BSE making it world's No. 1 exchange in terms

of listed members. The companies listed on BSE Ltd command a total market

capitalization of USD 1.24 Trillion as of March 2014. It is also one of the world’s leading

exchanges (3rd largest in March 2014) for Index options trading [5].

The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of

BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major

stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras. The BSE

National Index was renamed BSE-100 Index from 14 October 1996 and since then, it is

being calculated taking into consideration only the prices of stocks listed at BSE. BSE

launched the dollar-linked version of BSE-100 index on 22 May 2006. BSE launched two

new index series on 27 May 1994: The 'BSE-200' and the 'DOLLEX-200'. BSE-500

Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU

Index, DOLLEX-30 and the country's first free-float based index - the BSE Tech Index.

Page 15


Over the years, BSE shifted all its indices to the free-float methodology (except BSE-PSU

index). BSE disseminates information on the Price-Earnings Ratio, the Price to Book

Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major

indices. The values of all BSE indices are updated on real time basis during market hours

and displayed through the BOLT system, BSE website and news wire agencies. All BSE

Indices are reviewed periodically by the BSE Index Committee. This Committee which

comprises eminent independent finance professionals frames the broad policy guidelines

for the development and maintenance of all BSE indices. The BSE Index Cell carries out

the day-to-day maintenance of all indices and conducts research on development of new

indices. Popularly known as BSE. SENSEX is significantly correlated with the stock

indices of other emerging markets [5].

Figure 2.1 Returns on S&P BSE SENSEX

S&P BSE SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-

Weighted" methodology of 30 component stocks representing large, well-established and

financially sound companies across key sectors. The base year of S&P BSE SENSEX was

taken as 1978-79. S&P BSE SENSEX today is widely reported in both domestic and

international markets through print as well as electronic media. It is scientifically

designed and is based on globally accepted construction and review methodology. Since

September 1, 2003, S&P BSE SENSEX is being calculated on a free-float market

capitalization methodology. The "free-float market capitalization-weighted" methodology

Page 16


is a widely followed index construction methodology on which majority of global equity

indices are based; all major index providers like MSCI, FTSE, STOXX, and Dow Jones

use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade.

Right from early nineties, the stock market witnessed heightened activity in terms of

various bull and bear runs. In the late nineties, the Indian market witnessed a huge frenzy

in the 'TMT' sectors. More recently, real estate caught the fancy of the investors. S&P

BSE SENSEX has captured all these happenings in the most judicious manner. One can

identify the booms and busts of the Indian equity market through S&P BSE SENSEX. As

the oldest index in the country, it provides the time series data over a long period of time

(from 1979 onwards). Small wonder, the S&P BSE SENSEX has become one of the most

prominent brands in the country. For the analysis of the performance of CAPM, BSE

SENSEX stocks are taken which are explained below, as performance of the select 30

stocks gives the exact overview of an Indian equity market as well as Indian economy [5].

2.3.1 AXIS BANK LIMITED

Axis Bank Limited (formerly UTI Bank) is the third largest private sector bank in India. It

offers financial services to customer segments covering Large and Mid-Corporates,

MSME, Agriculture and Retail Businesses. Axis Bank (erstwhile UTI Bank) opened its

registered office in Ahmedabad and corporate office in Mumbai in December 1993. Axis

Bank began its operations in 1994, after the Government of India allowed new private

banks to be established. The Bank was promoted in 1993 jointly by the Administrator of

the Unit Trust of India (UTI-I), Life Insurance Corporation of India(LIC), General

Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance

Company, The Oriental Insurance Corporation and United India Insurance Company. The

Unit Trust of India holds a special position in the Indian capital markets and has

promoted many leading financial institutions in the country. As of 2012, Axis Bank

Revenue is ₹340 billion (US$5.8 billion), Operating income is ₹94

billion (US$1.6 billion) , Net income is ₹52 billion (US$880 million) and Total assets are

₹3.4 trillion (US$58 billion)[5].

Page 17


2.3.2 CIPLA LIMITED

Cipla Limited is a pharmaceutical company based in Mumbai, India. Cipla makes drugs

to treat cardiovascular disease, arthritis, diabetes, weight control, depression and many

other health conditions. On 31 March 2013, its market capitalisation was INR 305 billion

(US$ 5.6 billion), making it India's 41st largest publicly traded company by market value.

It was founded by Dr. Khwaja Abdul Hamied as 'The Chemical, Industrial &

Pharmaceutical Laboratories' in 1935 in Mumbai. The name of the Company was

changed to 'Cipla Limited' with effect from 20 July 1984, wherein the word Cipla came

from the first letters of each word in the old name 'The Chemical, Industrial

& Pharmaceutical Laboratories'. In the year 1985, US FDA approved the company's bulk

drug manufacturing facilities. In 1994, Cipla launched Deferiprone, the world’s first oral

iron chelator. In 2001, Cipla offered medicines (antiretrovirals) for HIV treatment at a

fractional cost (less than $350 per year per patient). In 2012, the company slashed prices

of three life-saving cancer drugs by 50-64%. In 2013, it increased its stake in its South

African joint venture CIPLA Medpro from 50% to 100% stake for INR 27 billion to

strengthen its position in the African continent. Cipla Medpro is the third largest South

African pharmaceutical company and it was founded in 1993. As of year ending 2012-

13 , CIPLA ltd. Revenue is ₹85.01 billion (US$1.4 billion) , Total equity are ₹90.19

billion (US$1.5 billion), Net income is ₹20.95 billion (US$360 million) and Total assets

are ₹116.58 billion (US$2.0 billion)[5].

2.4.3 BHARAT HEAVY ELECTRICALS LIMITED (BHEL)

BHEL owned by Government of India, is a power plant equipment manufacturer and

operates as engineering and manufacturing company based in New Delhi, India. BHEL

was established in 1964. Heavy Electrical (India) Ltd was merged with BHEL in

1974. The company has been earning profits continuously since 1971-72 and paying

dividends since 1976-77In 1982, it entered into power equipments, to reduce its

dependence on the power sector. It developed the capability to produce a variety of

electrical, electronic and mechanical equipments for all sectors, including transmission,

transportation, oil and gas and other allied industries. In 1991, it was converted into a

public limited company. By the end of 1996, the company had handed over 100 Electric

Locomotives to Indian Railway and installed 250 Hydro-sets across India. As of June

2011, it had cumulatively installed generating capacity of over 8,500 MW outside of

Page 18


India in 21 countries, including Malaysia, Iraq, UAE, Egypt and New Zealand. As of year

ending 2012-13, Revenue is ₹50,156 Crores (US$ 9.23 billion), Total equity are ₹30,533

Crores (US$ 5.62 billion) Net income is 6,615 Crores (US$ 1.22 billion) and Total assets

are ₹71,753 Crores (US$ 13.21 billion)[5].

2.3.4 STATE BANK OF INDIA (SBI)

SBI is a multinational banking and financial services company based in India. It is

a government-owned corporation with its headquarters in Mumbai, Maharashtra. As of

December 2013, it had assets of US$388 billion and 17,000 branches, including 190

foreign offices, making it the largest banking and financial services company in India by

assets. The roots of the State Bank of India lie in the first decade of the 18th century,

when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June

1806. The Bank of Bengal was one of three Presidency banks, the other two being

the Bank of Bombay (incorporated on 15 April 1840) and the Bank of

Madras (incorporated on 1 July 1843). Pursuant to the provisions of the State Bank of

India Act of 1955, the Reserve Bank of India, which is India's central bank, acquired a

controlling interest in the Imperial Bank of India. On 1 July 1955, the Imperial Bank of

India became the State Bank of India. In 2008, the government of India acquired the

Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the

RBI is the country's banking regulatory authority. In 1959, the government passed the

State Bank of India (Subsidiary Banks) Act, which made eight state banks associates of

SBI. A process of consolidation began on 13 September 2008, when the State Bank of

Saurashtra merged with SBI. SBI has acquired local banks in rescues. The first was the

Bank of Behar (est. 1911), which SBI acquired in 1969, together with its 28 branches.

The next year SBI acquired National Bank of Lahore (est. 1942), which had 24 branches.

Five years later, in 1975, SBI acquired Krishnaram Baldeo Bank.. In 1985, SBI acquired

the Bank of Cochin in Kerala. SBI was the acquirer as its affiliate, the State Bank of

Travancore, already had an extensive network in Kerala. SBI is a regional banking

behemoth and has 20% market share in deposits and loans among Indian commercial

banks [5].

Page 19


2.2.5 HDFC BANK LIMITED

HDFC Bank is an Indian financial services company based in Mumbai; it was

incorporated in August 1994. It was promoted by Housing Development Finance

Corporation Limited (HDFC), India's largest housing finance company. It was among the

first companies to receive an 'in principle' approval from the Reserve Bank of India

(RBI) to set up a bank in the private sector. The Bank started operations as

a scheduled commercial bank in January 1995 under the RBI's liberalization policies.

On 26 February 2000, Times Bank Limited owned by The Times Group (Bennett,

Coleman & Co.) was merged with HDFC Bank Ltd. This was the first merger of two

private banks in India. Shareholders of Times Bank received 1 share of HDFC Bank for

every 5.75 shares of Times Bank. On 23 May 2008, HDFC Bank acquired Centurion

Bank of Punjab taking its total branches to more than 1,000. The amalgamated bank

emerged with a base of about ₹1,22,000 crore and net advances of about ₹89,000 crore.

The balance sheet size of the combined entity is more than ₹1,63,000 crore. . HDFC

Bank is the fifth largest bank in India by assets. It is the largest bank in India by market

capitalization as of 24 February 2014. As on Jan 2 2014, the market cap value of HDFC

was around USD 26.88B, as compared to Credit Suisse Group with USD 47.63B. The

bank was promoted by the Housing Development Finance Corporation, a premier housing

finance company (set up in 1977) of India. As of 31 March 2013, the bank had assets of

INR 4.08. For the fiscal year 2012-13, the bank has reported net profit of ₹69 billion, up

31% from the previous fiscal year. Its customer base stood at 28.7 million customers on

31 March 2013 [5].

2.3.6 OIL AND NATURAL GAS CORPORATION LIMITED (ONGC)

ONGC is an Indian multinational oil and gas company headquartered in Dehradun, India.

It is a Public Sector Undertaking (PSU) of the Government of India, under the

administrative control of the Ministry of Petroleum and Natural Gas. It is India's

largest oil and gas exploration and production company. It produces around 69% of

India's crude oil(equivalent to around 30% of the country's total demand) and around 62%

of its natural gas. On 31 March 2013, its market capitalisation was ₹2.6 trillion (US$

48.98 billion), making it India's second largest publicly traded company. In a government

survey for FY 2011-12, it was ranked as the largest profit making PSU in India. ONGC

Page 20

http://en.wikipedia.org/wiki/Indian_rupee


has been ranked 357th in the Fortune Global 500 list of the world's biggest corporations

for the year 2012. It is ranked 22nd among the Top 250 Global Energy Companies

by Platts. ONGC was founded on 14 August 1956 by Government of India, which

currently holds a 69.23% equity stake. It is involved in exploring for and exploiting

hydrocarbons in 26 sedimentary basins of India, and owns and operates over

11,000 kilometers of pipelines in the country. Its international subsidiary ONGC Videsh

currently has projects in 15 countries. ONGC has discovered 6 of the 7 commercially-

producing Indian Basins, in the last 50 years, adding over 7.1 billion tonnes of In-place

Oil & Gas volume of hydrocarbons in Indian basins. Against a global decline of

production from matured fields, ONGC has maintained production from its brownfields

like Mumbai High, with the help of aggressive investments in various IOR (Improved Oil

Recovery) and EOR (Enhanced Oil Recovery) schemes. ONGC has many matured fields

with a current recovery factor of 25-33%. Its Reserve Replacement Ratio for between

2005 and 2013 has been more than one. During FY 2012-13, ONGC had to share the

highest ever under-recovery of ₹494.2 million (an increase of ₹49.6 billion over the

previous financial year) towards the under-recoveries of Oil Marketing Companies

(IOC, BPCL and HPCL). As of year ending 2012, Revenue is US$ 27.6 billion, Operating

Income is US$ 5.4 billion , Profit is US$ 3.8 billion , Total equity worth of US$

25.74 billion and Total assets are US$ 43.01 billion [5].

2.3.7 HERO MOTOCORP LTD.

Hero Motocorp formerly Hero Honda, is an Indian motorcycle and scooter manufacturer

based in New Delhi, India. The company is the largest two wheeler manufacturer in the

world. In India, it has a market share of about 46% share in 2-wheeler category. On 31

March 2013, the market capitalisation of the company was ₹ 308 billion (USD 5.66

billion). Hero Honda started in 1984 as a joint venture between Hero Cycles of India

and Honda of Japan. In 2010, when Honda decided to move out of the joint venture, Hero

Group bought the shares held by Honda. Subsequently, in August 2011 the company was

renamed Hero MotoCorp with a new corporate identity. In June 2012, Hero

Motocorp approved a proposal to merge the investment arm of its parent Hero Investment

Pvt. Ltd. into the automaker. The decision comes after 18 months of its split from Honda

Motors. “Hero” is the brand name used by the Munjal brothers for their flagship

company, Hero Cycles Ltd. A joint venture between the Hero Group and Honda Motor

Page 21


Company was established in 1984 as the Hero Honda Motors Limited at Dharuhera,

India. Munjal family and Honda group both owned 26% stake in the Company. As of

year ending 2012-13, Revenue is ₹241.66 billion (US$4.1 billion), Operating Income is

₹33.22 billion (US$560 million), Net income is ₹21.18 billion (US$360 million) and

Total assets are ₹53.08 billion (US$900 million) [5].

2.3.8 INFOSYS

Infosys (formerly Infosys Technologies) is an Indian multinational that provides business

consulting, technology, engineering and outsourcing services. It is headquartered

in Bangalore, Karnataka. Infosys is the third-largest India-based IT services company by

2012 revenues, and the second largest employer of H-1B visa professionals in the United

States, as of 2012. On 31 March 2014, its market capitalisation was $30.95 billion,

making it India's fifth largest publicly traded company.The company was incorporated as

"Infosys Consultants Pvt Ltd." with a capital of Rs 10000 (roughly $167) in Model

Colony, Pune as the registered office and signed its first client, Data Basics Corporation,

in New York. In 1983, the company's corporate headquarters was relocated to Bangalore.

As of year ending 2013-14, Revenue is US$ 8.4 billion, Operating Income is US$

1.98 billion, Profit is US$ 1.75 billion, Total equity is US$ 8.33 billion and Total assets

are US$ 9.53 billion[5].

2.3.9 RELIANCE INDUSTRIES LIMITED (RIL)

RIL is an Indian conglomerate company holding, headquartered in Mumbai Maharashtra,

India. The company operates in five major segments: exploration and production, refining

and marketing, petrochemicals, retail and telecommunications. RIL is the second-

largest publicly traded company in India by market capitalisation and is the second largest

company in India by revenue after the state-run Indian Oil Corporation. The company is

ranked No. 107 on the Fortune Global 500 list of the world's biggest corporations, as of

2013. RIL contributes approximately 14% of India's total exports. As of year ending

2013-14, Revenue is US$ 73.10 billion, Operating Income is US$ 7.14 billion, Net

Income is US$ 3.86 billion, Total equity is US$ 31.66 billion and Total assets are US$

58.67 billion[5].

Page 22


2.3.10 TATA POWER

Tata power is an Indian electric utility company based in Mumbai, Maharashtra, India

and is part of the Tata Group. The core business of the company is to generate, transmit

and distribute electricity. With an installed electricity generation capacity of about

8500 MW, it is India's largest private power producer. At the end of August 2013, its

market capitalisation was $2.74 billion (₹ 182 billion).The firm started as the Tata

Hydroelectric Power Supply Company in 1911, which amalgamated with the Andhra

Valley Power Supply Company in 1916. It commissioned India’s first large hydro-

electric project in 1915 in Khopoli for 72 MW. Then second and third power plants were

installed in Bhivpuri (78 MW) in 1919 and Bhira (300 MW) in 1922. As on year ending

2013, Revenue is ₹330254 million (US$5.6 billion), Operating Income is ₹64447 million

(US$1.1 billion) and Net Income is ₹12766 million (US$220 million) [5].

2.3.11 HINDALCO INDUSTRIES LTD.

Hindalco is an aluminium manufacturing company and is a subsidiary of the Aditya Birla

Group. Its headquarters is at Mumbai, Maharashtra, India. The company has annual sales

of US$ 15 billion and employs around 20,000 people. It is listed in the Forbes Global

2000 at 895th rank. Its market capitalisation by the end of May 2013 was US$ 3.4

billion. Hindalco is one of the world's largest aluminium rolling companies and one of the

biggest producers of primary aluminium in Asia. The Hindustan Aluminium Corporation

Limited was established in 1958 by the Aditya Birla Group. In 1962 the company began

production in Renukoot in Uttar Pradesh making 20 thousand metric tons per year of

aluminium metal and 40 thousand metric tons per year of alumina. In 1989 the company

was restructured and renamed Hindalco. As on year ending 2013, Revenue is ₹812.05

billion (US$14 billion), Net Income is ₹30.27 billion (US$510 million), an Total assets

are ₹1014.02 billion (US$17 billion) [5].

2.3.12 TATA STEEL LIMITED

Tata Steel Limited (formerly Tata Iron and Steel Company Limited (TISCO)) is

an Indian multinational steel-making company headquartered in Mumbai, Maharashtra,

India, and a subsidiary of the Tata Group. It was the 12th largest steel producing company

in the world in 2012, with an annual crude steel capacity of 23.8 million tonnes, and the

Page 23


second largest private-sector steel company in India (measured by domestic production)

with an annual capacity of 9.7 million tonnes after SAIL.

Tata Steel has manufacturing operations in 26 countries, including Australia, China,

India, the Netherlands, Singapore, Thailand and the United Kingdom, and employs

around 80,500 people. Its largest plant is located in Jamshedpur, Jharkhand. In 2007 Tata

Steel acquired the UK-based steel maker Corus which was the largest international

acquisition by an Indian company till that date. It was ranked 471st in the 2013 Fortune

Global 500 ranking of the world's biggest corporations. It was the seventh most valuable

Indian brand of 2013 as per Brand Finance. On February 12, 2012 Tata Steel completed

100 years of steel making in India. TISCo is a worldwide steel industry founded in 1907

by Dorabji Tata. The company is situated in Mumbai. TISCo stands for Tata Iron and

Steel Company Limited. Tata Iron and Steel Company was established by Dorabji

Tata on August 25, 1907, as part of his father Jamsetji's Tata Group. By 1939 it operated

the largest steel plant in the British Empire. The company launched a major

modernization and expansion program in 1951. Later in 1958, the program was upgraded

to 2 Million metric tonnes per annum (MTPA) project. By 1970, the company employed

around 40,000 people at Jamshedpur, with a further 20,000 in the neighbouring coal

mines. In 1971 and 1979, there were unsuccessful attempts to nationalise the company. In

1990, it started expansion plan and established its subsidiary Tata Inc. in New York. The

company changed its name from TISCO to Tata Steel in 2005. As on year ending 2012,

Revenue is US$ 24.67 billion , Operating Income is US$ 1.48 billion, Profit is

US$ 1.00 billion , Total equity is US$ 8.19 billion and Total assets are

US$ 27.34 billion [5] .

2.3.13 LARSEN & TOUBRO LIMITED

L&T is an Indian multinational conglomerate headquartered in Mumbai, India. It was

founded by Danish engineers and funding. The company has business interests in

engineering, construction, manufacturing goods, information technology and financial

services, and also has an office in the Middle East and other parts of Asia. L&T is India's

largest engineering and construction company. Considered to be the "bellwether of India's

engineering & construction sector", L&T was recognized as the Company of the Year in

Economic Times 2010 awards. As on year ending 2012, Revenue is US$ 13.6 Billion,

Page 24


Operating Income is US$ 1.39774 Billion, Net Income is US$ 952.638 Million, Total

equity is US$ 6.6818 Billion and Total assets are US$ 27.34 billion [5].

2.2.14 MAHINDRA & MAHINDRA LIMITED (M&M)

M&M is an Indian multinational automobile manufacturing corporation headquartered in

Mumbai. It is one of the largest vehicle manufacturers by production in India and the

largest seller of tractors across the world. It is a part of Mahindra Group, an Indian

conglomerate. It was ranked as the 10th most trusted brand in India, by The Brand Trust

Report, India Study 2014. It was ranked 21st in the list of top companies of India

in Fortune India 500 in 2011. Its major competitors in the Indian market include Maruti

Suzuki, Tata Motors, Ashok Leyland, Toyota, Hyundai, Mercedes-Benz (Merc) and

others. Mahindra & Mahindra was set up as a steel trading company in 1945 in

Ludhiana as Mahindra & Mohammed by brothers K.C. Mahindra and J.C. Mahindra

and Malik Ghulam Mohammed. After India gained independence and Pakistan was

formed, Mohammed emigrated to Pakistan. The company changed its name to Mahindra

& Mahindra in 1948. It eventually saw business opportunity in expanding into

manufacturing and selling larger MUVs, starting with assembly under licence of

the Willys Jeep in India. Soon established as the Jeep manufacturers of India, the

company later commenced manufacturing light commercial vehicles (LCVs) and

agricultural tractors. Today, Mahindra & Mahindra is a key player in the utility vehicle

manufacturing and branding sectors in the Indian automobile industry with its

flagship UV Scorpio and uses India's growing global market presence in both the

automotive and farming industries to push its products in other countries. Over the past

few years, the company has taken interest in new industries and in foreign markets. They

entered the two-wheeler industry by taking over Kinetic Motors in India. M&M also has

controlling stake in REVA Electric Car Company and acquired South Korea's SsangYong

Motor Company in 2011. In the 2010-11 M&M entered in micro drip irrigation with the

takeover of EPC Industries' Ltd, Nasik. As on year ending 2013, Revenue is 691₹

billion (US$12 billion), Net Income is 41 billion₹ (US$700 million) and Total assets are

712 billion₹ (US$12 billion) [5].

Page 25


2.2.15 TATA MOTORS LIMITED

Tata Motors Limited (formerly TELCO, short for Tata Engineering and Locomotive

Company) is an Indian multinational automotive manufacturing company headquartered

in Mumbai, Maharashtra, India and a subsidiary of the Tata Group. Its products include

passenger cars, trucks, vans, coaches, buses, construction equipment and military

vehicles. It is the world's seventeenth-largest motor vehicle manufacturing company,

fourth-largest truck manufacturer and second-largest bus manufacturer by volume.

Tata Motors' principal subsidiaries include the British premium car maker Jaguar Land

Rover (the maker of Jaguar, Land Rover and Range Rover cars) and the South Korean

commercial vehicle manufacturer Tata Daewoo. Tata Motors has a bus manufacturing

joint venture with Marco polo S.A. (Tata Marco polo), a construction equipment

manufacturing joint venture with Hitachi (Tata Hitachi Construction Machinery), and a

joint venture with Fiat which manufactures automotive components and Fiat and Tata

branded vehicles.

Founded in 1945 as a manufacturer of locomotives, the company manufactured its first

commercial vehicle in 1954 in collaboration with Daimler-Benz AG, which ended in

1969. Tata Motors entered the passenger vehicle market in 1991 with the launch of

the Tata Sierra, becoming the first Indian manufacturer to achieve the capability of

developing a competitive indigenous automobile. In 1998, Tata launched the first fully

indigenous Indian passenger car, the Indica, and in 2008 launched the Tata Nano, the

world's most affordable car. Tata Motors acquired the South Korean truck

manufacturer Daewoo Commercial Vehicles Company in 2004 and purchased Jaguar

Land Rover from Ford in 2008. As of the year ending 2012, Revenue US$ 32.23 billion,

Operating income US$ 3.06 billion, Total equity US$ 6.44 billion, Profits

US$ 2.28 billion, and Total assets US$ 28.05 billion[5].

2.3.16 HINDUSTAN UNILEVER LIMITED (HUL)

HUL is an Indian consumer goods company based in Mumbai, Maharashtra. It is owned

by Anglo-Dutch Company Unilever which owns a 67% controlling share in HUL. HUL's

products include foods, beverages, cleaning agents and personal care products.HUL was

established in 1933 as Lever Brothers India Limited and, in 1956, became known as

Page 26


Hindustan Lever Limited, as a result of a merger between Lever Brothers, Hindustan

Vanaspati Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India

and employs over 16,500 workers, whilst also indirectly helping to facilitate the

employment of over 65,000 people. The company was renamed in June 2007as

"Hindustan Unilever Limited”. Hindustan Unilever's distribution covers over 2 million

retail outlets across India directly and its products are available in over 6.4 million outlets

in the country. As per Nielsen market research data, two out of three Indians use HUL

products. As of year ending 2012 revenue is ₹221 billion (US$3.8 billion), Net income is

₹.26.91 billion (US$460 million) [5].

2.3.17 ITC LIMITED

ITC is an Indian conglomerate headquartered in Kolkata, West Bengal. Its diversified

business includes five segments: Fast Moving Consumer Goods (FMCG), Hotels,

Paperboards & Packaging, Agri Business & Information Technology. In 2012-13, the

company had an annual turnover of US$ 8.31 billion and a market capitalisation of US$

45 billion. It employs over 25,000 people at more than 60 locations across India and is

part of Forbes 2000 list.ITC claims that it is the only company in the world of comparable

dimensions to be Carbon Positive, Water Positive and Solid Waste Recycling Positive. As

of year ending 2013 Revenue is ₹.45,102 Crores (US$ 8.31 billion), Operating income is

₹.11,106 Crores (US$ 2.05 billion) , Net income is ₹. 7,608 Crores (US$ 1.40 billion),

Total assets are ₹. 35,353 Crores (US$ 6.51 billion) and Total equity are worth ₹.23,158

Crores (US$ 4.27 billion) [5].

2.3.18 COAL INDIA LIMITED (CIL)

CIL is an Indian state-controlled coal mining company headquartered in Kolkata, West

Bengal, India. It is the largest coal producer company in the world and contributes around

81% of the coal production in India. It produced 452 million tonnes of coal during FY

2012–13 and earned a revenue of ₹.882.81 billion from sale of coal in the same financial

year. Union Government of India owns 61% of the shares in CIL and controls the

operations of CIL through Ministry of Coal. In April 2011, CIL was conferred

the Maharatna status by the Union Government of India. On 31 March 2013, its market

capitalisation was ₹.1.952 trillion (US $35.9 billion) making it India's 5th most valuable

company by market value. As of year ending 2012, Revenue is ₹.770.49

Page 27


billion (US$13 billion), Operating income is ₹.249.72 billion (US$4.2 billion), Profit is

₹.173.56 billion (US$3.0 billion), Total assets are ₹.1215.65 billion (US$21 billion),

Total equity are worth ₹.484.72 billion (US$8.2 billion) [5].

2.3.19 BAJAJ AUTO LIMITED

Bajaj Auto Limited is an Indian two-wheeler and three-wheeler manufacturing

company. Bajaj Auto manufactures and sells motorcycles, scooters and auto rickshaws.

Bajaj Auto is a part of the Bajaj Group. It was founded by Jamnalal Bajaj in Rajasthan in

the 1930s. It is based in Pune, Mumbai, with plants in Chakan (Pune), Waluj

(near Aurangabad) and Pantnagar in Uttarakhand. The oldest plant at Akurdi (Pune) now

houses the R&D centre 'Ahead'. Bajaj Auto is the world's third-largest manufacturer of

motorcycles and the second-largest in India. It is world’s largest three-wheeler

manufacturer. On 31 March 2013, its market capitalisation was ₹.520 billion (US$9.57

billion), making it India's 23rd largest publicly traded company by market value.

The Forbes Global 2000 list for the year 2012 ranked Bajaj Auto at 1,416. Bajaj Auto

came into existence on 29 November 1945 as M/s Bachraj Trading Corporation Private

Limited. It started off by selling imported two- and three-wheelers in India. In 1959, it

obtained a licence from the Government of India to manufacture two-wheelers and three-

wheelers and it became a public limited company in 1960. In 1970, it rolled out its

100,000th vehicle. In 1977, it sold 100,000 vehicles in a financial year. In 1985, it started

producing at Waluj near Aurangabad. In 1986, it sold 500,000 vehicles in a financial year.

In 1995, it rolled out its ten millionth vehicles and produced and sold one million vehicles

in a year. With the launch of motorcycles in 1986, the company has changed its image

from a scooter manufacturer to a two-wheeler manufacturer. As of year ending 2012,

Revenue is ₹208 billion (US$3.5 billion) and Net income is ₹ 42.77 billion [5].

2.3.20 DR. REDDY'S LABORATORIES LTD

Dr. Reddy's Laboratories Ltd is a pharmaceutical company based in Hyderabad, Andhra

Pradesh, India. The company was founded by Anji Reddy, who had previously worked in

the publicly owned Indian Drugs and Pharmaceuticals Limited, of Hyderabad, India. Dr.

Reddy's manufactures and markets a wide range of pharmaceuticals in India and overseas.

The company has over 190 medications, 60 active pharmaceutical ingredients (APIs) for

drug manufacture, diagnostic kits, critical care, and biotechnology products. Dr. Reddy's

Page 28


began as a supplier to Indian drug manufacturers, but it soon started exporting to other

less-regulated markets that had the advantage of not having to spend time and money on

a manufacturing plant that would gain approval from a drug licensing body such as

the U.S. Food and Drug Administration (FDA). By the early 1990s, the expanded scale

and profitability from these unregulated markets enabled the company to begin focusing

on getting approval from drug regulators for their formulations and bulk drug

manufacturing plants in more-developed economies. This allowed their movement into

regulated markets such as the US and Europe. By 2007, Dr. Reddy's had six FDA plants

producing active pharmaceutical ingredients in India and seven FDA-inspected and ISO

9001 (quality) and ISO 14001 (environmental management) certified plants making

patient-ready medications – five of them in India and two in the UK In 2010, the family-

controlled Dr Reddy's denied that it was in talks to sell its generics business in India to US

pharmaceutical giant Pfizer, which, had been suing the company for alleged patent

infringement after Dr Reddy's announced that it intended to produce a generic version

of atorvastatin, marketed by Pfizer as Lipitor, an anti-cholesterol medication. Reddy's was

already linked to UK pharmaceuticals multinational Glaxo Smithkline. As of year ending

2012, Revenue is $2.1 billion and Net income is $300 million [5].

2.3.21 NTPC LIMITED

NTPC Limited (formerly known as National Thermal Power Corporation Limited) is a

Central Public Sector Undertaking (CPSU) under the Ministry of Power, Government of

India, engaged in the business of generation of electricity and allied activities. It is a

company incorporated under the Companies Act 1956 and a "Government Company"

within the meaning of the act. The headquarters of the company is situated at New Delhi.

NTPC's core business is generation and sale of electricity to state-owned power

distribution companies and State Electricity Boards in India. The company also

undertakes consultancy and turnkey project contracts that comprise of engineering,

project management, construction management and operation and management of power

plants. The company has also ventured into oil and gas exploration and coal mining

activities. It is the largest power company in India with an electric power generating

capacity of 42,964 MW. Although the company has approx. 18% of the total national

capacity it contributes to over 27% of total power generation due to its focus on operating

its power plants at higher efficiency levels (approx. 83% against the national PLF rate of

Page 29


78%).It was founded by Government of India in 1975, which held 75% of its equity

shares on 31 March 2013 (after divestment of its stake in 2004, 2010 and 2013). As of

year ending 2013, Revenue is ₹73904 Crores (US$ 12.34 billion) and Net income is

₹13834 Crores (US$ 2.31 billion) [5].

2.3.22 TATA CONSULTANCY SERVICES LIMITED

Tata Consultancy Services Limited (TCSL) is a multinational information technology

(IT) service, consulting and business Solutions Company headquartered in India.TCS

operates in 46 countries. It is a subsidiary of the Tata Group and is listed on the Bombay

Stock Exchange and the National Stock Exchange of India. TCS is the largest Indian

company by market capitalization and is the largest India-based IT services company by

2013 revenues.TCS is now placed among the ‘Big 4’ most valuable IT services brands

worldwide. TCS is ranked 40th overall in the Forbes World's Most Innovative Companies

ranking, making it both the highest-ranked IT services company and the top Indian

company. It is the world's 10th largest IT services provider, measured by revenues. At a

Consultancy Services Ltd (TCS) was founded in 1968 by a division of Tata Sons

Limited. Its early contracts included providing punched card services to sister company

TISCO (now Tata Steel), working on an Inter-Branch Reconciliation System for

the Central Bank of India, and providing bureau services to Unit Trust of India. As of

year ending 2013, Revenue is US$ 13.44 billion, Operating Income is US$ 3.12 billion,

Profit is US$ 2.59 billion, Total Assets are US$ 9.58 billion, and Total Equity are

worth US$ 7.66 billion[5].

2.3.23 MARUTI SUZUKI INDIA LIMITED

Maruti Suzuki India Limited commonly referred to as Maruti and formerly known

as Maruti Udyog Limited is an automobile manufacturer in India. It is a subsidiary of

Japanese automobile and motorcycle manufacturer Suzuki. As of November 2012, it had

a market share of 37% of the Indian passenger car market. Maruti Suzuki manufactures

and sells a complete range of cars from the entry level Alto, to the hatchback Ritz, A-

Star, Swift, Wagon R, Zen and sedans DZire, Kizashi and SX4, in the 'C'

segment Eeco, Omni, Multi Purpose vehicle Suzuki Ertiga and Sports Utility

vehicle Grand Vitara. Originally, 74% of the company was owned by the Indian

government, and 26% by Suzuki of Japan. As of May 2007, the government of India sold

Page 30


its complete share to Indian financial institutions and no longer has any stake in Maruti

Udyog. As of year ending 2013, Revenue is ₹432.72 billion(US$7.4 billion) and Net

income is ₹24.69 billion (US$420 million)[5].

2.3.24 BHARTI AIRTEL LIMITED

Bharti Airtel Limited, commonly known as Airtel, is an Indian multinational

telecommunications Services Company headquartered in New Delhi, India. It operates in

20 countries across South Asia, Africa, and the Channel Islands. Airtel has a GSM

network in all countries in which it operates, providing 2G, 3G and 4G services

depending upon the country of operation. Airtel is the world's second largest mobile

telecommunications company by subscribers; with over 275 million subscribers across 20

countries as of July 2013 it is the largest cellular service provider in India, with 192.22

million subscribers as of August 2013. Airtel is the Second largest in-country mobile

operator by subscriber base, behind China Mobile. Airtel is the largest provider of mobile

telephony and second largest provider of fixed telephony in India, and is also a provider

of broadband and subscription television services. It offers its telecom services under the

"airtel" brand, and is headed by Sunil Bharti Mittal. Bharti Airtel is the first Indian

telecom service provider to achieve Cisco Gold Certification. It also acts as a carrier for

national and international long distance communication services. The company has a

submarine cable landing station at Chennai, which connects the submarine cable

connecting Chennai and Singapore. As of year ending 2013, Revenue is 809.22₹

billion (US$14 billion), Operating income 248.62 billion₹ (US$4.2 billion), Profit 22.67₹

billion (US $390 million), Total assets are 432.72 billion₹ (US$7.4 billion), Total equity

are worth of 1273.7 billion₹ (US$22 billion)[5].

2.3.25 HOUSING DEVELOPMENT FINANCE CORPORATION

LIMITED

Housing Development Finance Corporation Limited (HDFC) is an Indian Financial

conglomerate based in Mumbai, India. It is a major player for housing finance in India. It

also has a presence in banking, life and general insurance, asset management, venture

capital and education loans. It was founded in 1977 as the first specialised Mortgage

Company in India. HDFC was promoted by the Industrial Credit and Investment

Page 31


Corporation of India, Hasmukhbhai Parekh played a key role in the foundation of this

company. In 2000, HDFC Asset Management company launched its mutual fund

schemes. In the same year, IRDA granted registration to HDFC Standard Life Insurance,

as the first private sector life insurance company in India. As of year ending 2012,

Revenue is US$ 3.44 Billion and Net income is US$ 1.17 Billion [5].

2.2.26 ICICI BANK

ICICI Bank is an Indian multinational banking and financial services company

headquartered in Mumbai. It is the second largest bank in India by assets and by market

capitalization, as of 2014. It offers a wide range of banking products and financial

services to corporate and retail customers through a variety of delivery channels and

through its specialized subsidiaries in the areas of investment, life, non-life

insurance, venture capital and asset management. The Bank has a network of 3,539

branches and 11,162 ATMs in India, and has a presence in 19 countries.

ICICI Bank is one of the Big Four banks of India, along with State Bank of India, Punjab

National Bank and Bank of Baroda. The bank has subsidiaries in the United Kingdom,

Russia, and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri

Lanka, Qatar and Dubai International Finance Centre; and representative offices in United

Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The

company's UK subsidiary has also established branches in Belgium and Germany.

In March 2013, Operation Red Spider showed high-ranking officials and some employees

of ICICI Bank involved in money laundering. After a government inquiry, ICICI Bank

suspended 18 employees and faced penalties from the Reserve Bank of India in relation to

the activity. As of year ending 2012, Revenue is US$ 13.52 billion, Operating income is

US$ 2.12 billion, Profit is US$ 1.60 billion, Total assets are US$98.99 billion, and Total

equity are worth US$12.62 billion[5].

2.3.27 GAIL (INDIA) LIMITED

GAIL (India) Limited is the largest state-owned natural gas processing and distribution

company in India, It is headquartered in New Delhi. It has following business segments:

Natural Gas, Liquid Hydrocarbon, Liquefied petroleum gas Transmission, Petrochemical,

Page 32


City Gas Distribution, Exploration and Production, GAILTEL and Electricity Generation.

GAIL has been conferred with the Maharatnastatus on 1 Feb 2013, by the Government of

India. Only six other Public Sector Enterprises (PSEs) enjoy this coveted status amongst

all central CPSEs. GAIL (India) Limited was incorporated in August 1984 as a Central

Public Sector Undertaking (PSU) under the Ministry of Petroleum & Natural Gas

(MoP&NG). The company used to be known as Gas Authority of India Limited. It is

India's principal gas transmission and marketing company. The company was initially

given the responsibility of construction, operation & maintenance of the Hazira –

Vijaypur – Jagdishpur (HVJ) pipeline project. It was one of the largest cross-country

natural gas pipeline projects in the world. This 1800-kilometre-long pipeline was built at

a cost of ₹17 billion (US$290 million) and it laid the foundation for development of

market for natural gas in India. GAIL commissioned the 2,800 kilometres (1,700 mi)

Hazira-Vijaipur-Jagdishpur (HVJ) pipeline in 1991. Between 1991 and 1993,

three liquefied petroleum gas (LPG) plants were constructed and some regional pipelines

acquired, enabling GAIL to begin its gas transportation in various parts of India. As of

year ending 2013, Revenue is ₹473 billion (US$8.0 billion) and Net income ₹40

billion (US$680 million)[5].

2.3.28 SUN PHARMACEUTICAL INDUSTRIES LIMITED

Sun Pharmaceutical Industries Limited is a multinational pharmaceutical company

headquartered in Mumbai, Maharashtra that manufactures and sells pharmaceutical

formulations and active pharmaceutical ingredients (APIs) primarily in India and the

United States. The company offers formulations in various therapeutic areas, such

ascardiology, psychiatry, neurology, gastroenterology and diabetology. It also provides

APIs such as warfarin, carbamazepine, etodolac, and clorazepate, as well as anticancer,

steroids, peptides, sex hormones, and controlled substances. Sun Pharmaceuticals was

established by Mr. Dilip Shanghvi in 1983 in Vapi with five products to

treat psychiatry ailments. Cardiology products were introduced in 1987 followed

by gastroenterology products in 1989. Today it is the largest chronic prescription

company in India and a market leader in psychiatry, neurology, Cardiology,

Orthopaedics, ophthalmology, gastroenterology and nephrology. The 2014 acquisition

of Ranbaxy will make the company the largest pharmaceutical company in India, the

largest Indian pharmaceutical company in the US, and the 5th largest speciality generic

Page 33

http://en.wikipedia.org/wiki/Indian_rupee


company globally. As of the year ending 2013, Revenue is ₹120.05 billion

(US$2.0 billion), and Net income is ₹36.72 billion (US$620 million)[5].

2.3.29 WIPRO LIMITED

Wipro Limited (formerly Western India Products Limited]) is a multinational IT

Consulting and System Integration services company headquartered in Bangalore,

Karnataka, India. As of March 2014, the company has 146,000 employees servicing over

900 large enterprise corporations with a presence in 61 countries. On 31 March 2014, its

market capitalisation was approximately ₹1.27 trillion ($20.8 billion), making it one of

India's largest publicly traded company. Azim Premji is a major shareholder in Wipro

with over 50% of shareholding.

To focus on core IT Business, it demerged its non-IT businesses into a separate company

named Wipro Enterprises Limited with effect from 31 March 2013. The demerged

company offers consumer care, lighting, healthcare and infrastructure engineering and

contributed to approx. 10% of the revenues of Wipro Limited in previous financial year.

As of the year ending to 2013, Revenue is ₹437.6 billion (US$7.3 billion), Operating

income is ₹89.3 billion (US$1.49 billion), Profit is ₹78.4 billion (US$1.3 billion, Total

assets are ₹502.3 billion (US$8.37 billion) and Total equity are worth of ₹344.9 billion

(US$5.75 billion)[5].

2.3.30 SESA STERLITE

Sesa Sterlite, a Vedanta Group company is one of the world's largest global diversified

natural resource majors, with operations across zinc-lead-silver, oil & gas, iron ore,

copper, aluminium and commercial power. For more than five decades, it has been

engaged in exploration, mining and processing of iron ore. The company was founded in

1954, as Scambi Economici SA Goa. Since then, it has grown to be one among the top

low-cost producers of iron ore in the world. During 1991-1995, it diversified into the

manufacture of pig iron and metallurgical coke. It has also developed indigenous and

environment-friendly technology for producing high quality metallurgical coke. In 2007,

it became a majority-owned subsidiary of Vedanta Resources Plc, listed on the London

Stock Exchange, when Vedanta acquired 51% controlling stake from Mitsui & Co., Ltd.

In June 2009, Sesa Goa Limited acquired VS Dempo & Co. Private Limited (now Sesa

Page 34

http://en.wikipedia.org/wiki/Wipro#cite_note-NPHistory-1


Resources Limited) along with its fully owned subsidiary Dempo Mining Corporation

(now Sesa Mining Corporation Limited) and 50% equity in Goa Maritime Private

Limited. In 2011, Sesa acquired 51% stake in Western Cluster Limited, Liberia. Sesa Goa

Limited’s operations are located predominantly in Goa and Karnataka, with offices in

various locations across India. Its head office in India in Panaji, Goa, while its Liberia

office is in Monrovia and China office is in Shanghai. As on year ending 2010, Revenue

is ₹62.84 billion and Net income is ₹26.29 billion [5].

Page 35


CHAPTER-3

THEORITICAL BACKGROUND

Page 36


3.0 THEORITICAL BACKGROUND

3.1 CAPM

The Capital Assets Pricing Model, denoted CAPM, describes the relationship between

risk and expected return and is used in the pricing of risky securities [5]. This relationship

was first proposed independently by John Lintner, William F. Sharpe and Mossin, which

can be represented by the following linear equation:

E [Ri] = R f +β (Rm -Rf)

Where, Rf = Risk free rate of return

β = Beta Value

Rm = Market Return

(Rm –Rf) = Market premium.

The CAPM introduced that the expected return of a security or a portfolio equals the rate

of return on a risk-free rate plus a risk premium. This model offers a simple tool for

investors to evaluate their investments. If this expected return does not meet or beat the

required return, then the investment should not be undertaken [5].

The CAPM is a ceteris paribus model. It is only valid within a special set of assumptions,

which are mainly listed below.

All the investors are risk averse; they will maximize the expected utility of their

end of period wealth.

All the investors use the same expected return and covariance matrix of stock

return to form the optimal risky portfolio. That is referred to as homogenous

expectations (beliefs) about asset returns.

A fixed risk-free rate exists, and allows the investors to borrow or lend unlimited

amounts to the same interest rate.

Page 37


There are a definite number of stocks and their quantities are fixed within the one

period world.

All stocks are perfectly divisible and priced in a perfectly competitive market.

There are no market imperfections. Implication: there are no taxes, regulations, or

trading costs.

There is no uncertainty about expected inflation; or, alternatively all security

prices fully reflect all changes in future inflation expectations.

Capital markets are in equilibrium. That is, all investment decisions have been

made and there is no further trading without new information.

Some of the above assumptions are clearly unrealistic. However, the assumptions are not

as restrictive as it appears initially and some of them can be relaxed without altering the

basic nature of the model.

The market portfolio in CAPM is the unanimously desirable risky portfolio which

contains all risky assets. Thus return on market portfolio is weighted average of return of

all risky assets in the market and in theory it should contain, besides ordinary shares, all

assets, like art objects, commodities, and real estates and so on[5].

This model presents a very simple theory that delivers a simple result. The theory says

that the only reason an investor should earn more, on average, by investing in one stock

rather than another is that one stock is riskier. Not surprisingly, the model has come to

dominate modern financial theory. It's not entirely clear. The big sticking point is beta.

When professors Eugene Fama and Kenneth French looked at share returns on the New

York Stock Exchange, the American Stock Exchange and NASDAQ between 1963 and

1990, they found that differences in betas over that lengthy period did not explain the

performance of different stocks. The linear relationship between beta and individual stock

returns also breaks down over shorter periods of time. These findings seem to suggest that

CAPM may be wrong.

Page 38


While some studies raise doubts about CAPM's validity, the model is still widely used in

the investment community. Although it is difficult to predict from beta how individual

stocks might react to particular movements, investors can probably safely deduce that a

portfolio of high-beta stocks will move more than the market in either direction, or a

portfolio of low-beta stocks will move less than the market.

This is important for investors - especially fund managers - because they may be

unwilling to or prevented from holding cash if they feel that the market is likely to fall. If

so, they can hold low-beta stocks instead. Investors can tailor a portfolio to their

specific risk-return requirements, aiming to hold securities with betas in excess of 1 while

the market is rising, and securities with betas of less than 1 when the market is falling [5].

Not surprisingly, CAPM contributed to the rise in use of indexing - assembling a portfolio

of shares to mimic a particular market - by risk averse investors. This is largely due to

CAPM's message that it is only possible to earn higher returns than those of the market as

a whole by taking on higher risk (beta).

However in practice it is impossible to construct a market proxy which contains all assets

and thus, all the commonly used market indices roughly replicate the market. The total

risk of a portfolio can be measured by the variance of its return. In a more general

situation of a portfolio p consists of n shares and any individual share ‘i’ has a weightage

of Xi in the portfolio, then the total risk can be expressed as follows:

2p = n

t=1 Xi2 + (n

t=i Xi i)2 2

m

i-e 2p = 2

ep + p2

2m

Total Risk = Unsystematic Risk + Systematic Risk

If CAPM holds, then investors should hold diversified portfolios and the systematic risk

or non-diversifiable risk will be the only risk which will be of importance to the investors.

The other part of the risk, known as the diversifiable risk or unsystematic risk will be

reduced to nil by holding a diversified portfolio.

Page 39


Thus beta, which is a measure of the non-diversifiable risk in a portfolio, is most

important for investors, from the point of view CAPM theory. In case the CAPM holds in

the market, an investor will no longer require any sophisticated portfolio selection

technique to select his portfolio.

He will choose a mix between risk-free rate and the market portfolio based on his utility

function. In other words optimal investment decision will be simply to buy the market

portfolio. This investment decision is independent from the decision about how to finance

the investment i.e. whether to lend or borrow at the risk-free rate.

Ideally, if CAPM holds, there will not be any identifiable inefficiency in the market and

all securities will lie on the security market line (no security can be found which is

wrongly priced). However, such a situation is not realistic even in a highly developed and

efficient capital market as in the United States. But on an average, if the inefficiencies in

the market are not extreme, the assumptions of the CAPM can be approximately valid

even in a realistic situation. In such a situation majority of the securities (assets) in the

market will be efficiently priced. Thus even though it is known that no market in the

world is efficient in a perfect sense, empirical tests of CAPM can still give meaningful

results[5].

Thus capital asset pricing model, almost always referred to as the CAPM, is a centerpiece

of modern financial economics. The model gives us a precise prediction of the

relationship that we should observe between the risk of an asset and its expected return.

This relationship serves two vital functions. First, it provides a benchmark rate of return

for evaluating possible investments. For example, if we are analyzing securities, we might

be interested in whether the expected return we forecast for a stock is more or less than its

“fair” return given its risk.

Second, the model helps us to make an educated guess as to the expected return on assets

that have not yet been traded in the marketplace. The capital asset pricing model is a set

of predictions concerning equilibrium expected returns on risky assets [5].

Page 40


3.2 BETA (β)

Beta (β) of a portfolio is a ratio describing the correlated volatility of an asset in relation

to the volatility of the benchmark that the asset is being compared to. This benchmark is

generally the overall financial market and is often estimated via the application of

representative indices, such as the S&P 500. "Beta measures systematic risk based on

how returns can move with the overall market.” Some interpretations of beta are

explained in the following table:

Table 3.1: Beta Ratio Interpretation

Value of

BetaInterpretation

β < 0 Asset generally moves in the opposite direction as compared to the index.

β = 0 Movement of the asset is uncorrelated with the movement of the

benchmark

0 < β < 1 Movement of the asset is generally in the same direction as, but less than

the movement of the benchmark

β = 1 Movement of the asset is generally in the same direction as, and about the

same amount as the movement of the benchmark

β > 1 Movement of the asset is generally in the same direction as, but more

than the movement of the benchmark

It measures the part of the asset ＇ s statistical variance that cannot be removed by the

diversification provided by the portfolio of many risky assets, because of the correlation of its

returns with the returns of the other assets that are in the portfolio. Beta can be estimated for

individual companies using regression analysis against a stock market index. The beta coefficient

is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset＇s

statistical variance that cannot be mitigated by the diversification provided by the portfolio of

many risky assets, because it is correlated with the return of the other assets that are in the

portfolio. Beta can be estimated for individual companies using regression analysis against a stock

market index. The formula for the Beta of an asset within a portfolio is

Page 41


Where, ra =rate of return of the asset,

rp = rate of return of the portfolio,

Cov(ra,rp) = covariance between the rates of return.

In the CAPM formulation, the portfolio is the market portfolio that contains all risky

assets, and so the Rp terms in the formula are replaced by m, the rate of return of the

market [5].

3.3. ALPHA ()

Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the

return in excess of the compensation for the risk borne, and thus commonly used to

assess active managers' performances. Often, the return of a benchmark is subtracted in

order to consider relative performance, which yields Jensen's alpha.

Besides an investment manager simply making more money than a passive strategy, there

is another issue: although the strategy of investing in every stock appeared to perform

better than 75 percent of investment managers (see index fund), the price of the stock

market as a whole fluctuates up and down, and could be on a downward decline for many

years before returning to its previous price.

The passive strategy appeared to generate the market-beating return over periods of 10

years or more. This strategy may be risky for those who feel they might need to withdraw

their money before a 10-year holding period, for example. Thus investment managers

who employ a strategy which is less likely to lose money in a particular year are often

chosen by those investors who feel that they might need to withdraw their money sooner.

Investors can use both alpha and beta to judge a manager's performance. If the manager

has had a high alpha, but also a high beta, investors might not find that acceptable,

because of the chance they might have to withdraw their money when the investment is

Page 42


doing poorly. These concepts not only apply to investment managers, but to any kind of

investment [5].

3.4 RESIDUAL VALUE (e)

Errors and residuals are two closely related and easily confused measures of the

deviation of an observed value of an element of a statistical sample from its "theoretical

value". The error (or disturbance) of an observed value is the deviation of the observed

value from the (unobservable) true function value, while the residual of an observed value

is the difference between the observed value and the estimated function value [5].

3.5 SECURITY MARKET LINE

We can view the expected return–beta relationship as a reward-risk equation. The beta of

a security is the appropriate measure of its risk because beta is proportional to the risk that

the security contributes to the optimal risky portfolio.

Risk-averse investors measure the risk of the optimal risky portfolio by its variance. In

this world we would expect the reward or the risk premium on individual assets, to

depend on the contribution of the individual asset to the risk of the portfolio. The beta of a

stock measures the stock’s contribution to the variance of the market portfolio. Hence we

expect, for any asset or portfolio, the required risk premium to be a function of beta.

The CAPM confirms this intuition, stating further that the security’s risk premium is

directly proportional to both the beta and the risk premium of the market portfolio; that is,

the risk premium equals [E(Rm) – Rf].

The expected return–beta relationship can be portrayed graphically as the security market

line (SML) in Figure 3.1. Because the market beta is 1, the slope is the risk premium of

the market portfolio. At the point on the horizontal axis where beta is 1 (which is the

market portfolio’s beta) we can read off the vertical axis the expected return on the

market portfolio.

It is useful to compare the security market line to the capital market line. The CML

graphs the risk premiums of efficient portfolios (i.e., portfolios composed of the market

Page 43


and the risk-free asset) as a function of portfolio standard deviation. This is appropriate

because standard deviation is a valid measure of risk for efficiently diversified portfolios

that are candidates for an investor’s overall portfolio.

The SML, in contrast, graphs individual asset risk premiums as a function of asset risk.

The relevant measure of risk for individual assets held as parts of well-diversified

portfolios is not the asset’s standard deviation or variance; it is, instead, the contribution

of the asset to the portfolio variance, which we measured by the asset’s beta. The SML is

valid for both efficient portfolios and individual assets.

The security market line provides a benchmark for the evaluation of investment

performance. Given the risk of an investment, as measured by its beta, the SML provides

the required rate of return necessary to compensate investors for both risk as well as the

time value of money.

Figure 3.1 Security Market Line (SML)

Because the security market line is the graphic representation of the expected Return–beta

relationship, “fairly priced” assets plot exactly on the SML; that is, their expected returns

Page 44


are commensurate with their risk. Given the assumptions we made at the start of this

section, all securities must lie on the SML in market equilibrium.

Nevertheless, the CAPM may be of use in the money-management industry. Suppose that

the SML relation is used as a benchmark to assess the fair expected return on a risky

asset. Then security analysis is performed to calculate the return actually expected.

If a stock is perceived to be a good buy, or underpriced, it will provide an expected return

in excess of the fair return stipulated by the SML. Underpriced stocks therefore plot

above the SML: Given their betas, their expected returns are greater than dictated by the

CAPM. Overpriced stocks plot below the SML. The difference between the fair and

actually expected rates of return on a stock is called the stock’s alpha, denoted ‘α’ [5].

3.6 CAPITAL MARKET LINE (CML)

Capital Market Line (CML) is the tangent line drawn from the point of the risk-free asset

to the feasible region for risky assets. The tangency point M represents the market

portfolio, so named since all rational investors (minimum variance criterion) should hold

their risky assets in the same proportions as their weights in the market portfolio.

The CML results from the combination of the market portfolio and the risk-free asset (the

point L). All points along the CML have superior risk-return profiles to any portfolio on

the efficient frontier, with the exception of the Market Portfolio, the point on the efficient

frontier to which the CML is the tangent. From a CML perspective, this portfolio is

composed entirely of the risky asset, the market, and has no holding of the risk free asset,

i.e., money is neither invested in, nor borrowed from the money market account. Addition

of leverage (the point R) creates levered portfolios that are also on the CML[5].

Page 45


Figure 3.2 Capital Market Line (CML)

Page 46


CHAPTER-4

DATA ANALYSIS

Page 47


4.0 DATA ANALYSIS

The process of evaluating data using analytical and logical reasoning to examine each

component of the data provided. This form of analysis is just one of the many steps that

must be completed when conducting a research experiment. For the analysis of the stock

price in Sensex, daily share price was collected from the website of Bombay stock

exchange [7]. The Daily return (in terms of percentage) of the shares and the index is

calculated using below mentioned formula and it is applied in MS-EXCEL.

R= LOGe ( Rt / Rt-1 ) * 100

Where , Rt = Current Price of the share

Rt-1= Previous Price of the share

4.1 CALCULATION OF MARKET RETURN (Rm)

Return on market portfolio is also calculated by taking first and last day return of the year

using above mentioned formula out of daily returns. The Rm is calculated for 1year (01-

April-2013 to 31-March-2014), 2year (01-April-2012 to 31-March-2014), and 3year (01-

April-2011 to 31-March-2014) return on market. The risk-free rate (R f) represents the

interest an investor would expect from an absolutely risk-free investment over a specified

period of time. Generally average T-bill rate for 3 months are taken as risk free rate [8].

The average t-bill rate is 8%.

4.2 REGRESSION ANALYSIS

Regression analysis is a statistical process for estimating the relationships among

variables. It includes many techniques for modelling and analyzing several variables,

when the focus is on the relationship between a dependent variable and one or

more independent variables. More specifically, regression analysis helps one understand

how the typical value of the dependent variable changes when any one of the independent

variables is varied, while the other independent variables are held fixed [5]. Calculation of

regression analysis will help us to get the Beta, Alpha and Residual value.

Page 48


Table 4.1 Alpha, Beta and Residual values

S.NO SHARES ALPHA BETA RESIDUAL

1 AXIS BANK -0.01059 1.535544 0.537712

2 BAJAJ AUTO 0.014438 0.737253 0.372102

3 BHEL -0.15123 1.622856 7.28459

4 BHARATI AIRTEL -0.01413 0.951411 0.597828

5 CIPLA 0.006533 0.468113 0.332894

6 COAL INDIA -0.01617 0.638861 0.519513

7 DR. REDDY's LABORATRIES 0.02304 0.440162 0.306181

8 GAIL (INDIA) -0.01742 0.635025 0.385112

9 HDFC BANK -0.07469 1.054323 6.716553

10 HDFC LTD. 0.004135 1.075318 0.266154

11 HERO MOTOCORP 0.015072 0.631688 0.476478

12 HINDALCO LTD. -0.03583 1.451236 0.702224

13 HUL 0.03984 0.476134 0.413856

14 ICICI -0.0058 1.558988 0.296063

15 INFOSYS -0.00556 0.805005 0.588485

16 ITC 0.032601 0.682341 0.290796

17 L&T -0.02567 1.27986 0.792379

18 MAHINDRA & MAHINDRA 0.011109 0.925037 0.388346

19 MARUTHI SUZUKI 0.018737 0.799259 0.552048

20 NTPC -0.03236 0.726139 0.552048

21 ONGC -0.00234 0.878868 0.455797

22 RIL -0.01581 1.157202 0.258779

23 SBI -0.0306 1.253038 0.417828

24 SESA STERLITE -0.03731 1.298529 0.846829

25 SUN PHARMACEUTICALS 0.009757 0.596703 1.534488

26 TCS 0.028172 0.737861 0.428488

27 TATA MOTORS -0.08077 1.782513 7.272414

28 TATA POWER -0.16885 1.165677 14.09323

29 TATA STEEL -0.03818 1.369855 0.520674

30 WIPRO 0.0024 0.632783 0.489063

Page 49


Figure 4.1 Alpha values of the shares

ANALYSIS:

Alpha is the return in excess of the compensation for the risk borne, and thus commonly

used to assess active managers' performances. Figure 3.1 indicates that HUL, ITC and

TCS have high alpha value whereas Tata Power, BHEL and Tata Motors have the lowest

alpha value. ONGC and WIPRO have the alpha value close to zero.

Page 50


Figure 4.2 Beta values of the shares

ANALYSIS:

The beta coefficient describes how the expected return of a stock or portfolio is correlated

to the return of the financial market as a whole. An asset with a beta of 0 means that its

price is not at all correlated with the market; that asset is independent. A positive beta

means that the asset generally follows the market. A negative beta shows that the asset

inversely follows the market; the asset generally decreases in value if the market goes up

and vice versa. In Figure 4.2 Tata Motors, BHEL and ICICI have high beta value and Dr.

Reddy’s, CIPLA and HUL have lowest of beta value.

Page 51


Figure 4.3 Residual values of the shares

ANALYSIS:

Residuals are the deviation of an observed value of an element of a statistical

sample from its "theoretical value". Figure 4.3 indicates that Tata Power, BHEL and Tata

motors have high residual value and RIL, HDFC and ITC have the lowest residual value.

4.3 CALCULATION OF RETURN [Ri]

Returns are calculated using the formula which is given below in MS-EXCEL, for the

market return (Rm) of 1 year, 2 year and 3 year respectively.

Ri= + Rm+e

Table 4.2 Return for the period of 1 year (Rm)

S.NO STOCKS ALPHA BETA Rm RESIDUAL Ri

1 AXIS BANK -0.01059 1.535544 7 0.537712 11.2759278

2 BAJAJ AUTO 0.014438 0.737253 7 0.372102 5.54731026

3 BHEL -0.15123 1.622856 7 7.28459 18.4933524

4 BHARATI AIRTEL -0.01413 0.951411 7 0.597828 7.24356892

5 CIPLA 0.006533 0.468113 7 0.332894 3.616215

6 COAL INDIA -0.01617 0.638861 7 0.519513 4.97537163

Page 52


7 DR. REDDY's 0.02304 0.440162 7 0.306181 3.41035188

8 GAIL (INDIA) -0.01742 0.635025 7 0.385112 4.81286529

9 HDFC BANK -0.07469 1.054323 7 6.716553 14.0221211

10 HDFC LTD. 0.004135 1.075318 7 0.266154 7.79751505

11 HERO MOTOCORP 0.015072 0.631688 7 0.476478 4.91336776

12 HINDALCO LTD. -0.03583 1.451236 7 0.702224 10.8250485

13 HUL 0.03984 0.476134 7 0.413856 3.78663628

14 ICICI -0.0058 1.558988 7 0.296063 11.2031841

15 INFOSYS -0.00556 0.805005 7 0.588485 6.21796063

16 ITC 0.032601 0.682341 7 0.290796 5.09978368

17 L&T -0.02567 1.27986 7 0.792379 9.72572495

18 M & M 0.011109 0.925037 7 0.388346 6.87471223

19 MARUTHI SUZUKI 0.018737 0.799259 7 0.552048 6.16559515

20 NTPC -0.03236 0.726139 7 0.552048 5.60266432

21 ONGC -0.00234 0.878868 7 0.455797 6.60553396

22 RIL -0.01581 1.157202 7 0.258779 8.34338531

23 SBI -0.0306 1.253038 7 0.417828 9.15849188

24 SESA STERLITE -0.03731 1.298529 7 0.846829 9.89922056

25 SUN PHARMA. 0.009757 0.596703 7 1.534488 5.72116797

26 TCS 0.028172 0.737861 7 0.428488 5.62168735

27 TATA MOTORS -0.08077 1.782513 7 7.272414 19.669233

28 TATA POWER -0.16885 1.165677 7 14.09323 22.0841284

29 TATA STEEL -0.03818 1.369855 7 0.520674 10.0714839

30 WIPRO 0.0024 0.632783 7 0.489063 4.92094649

ANALYSIS:

Table 4.2 indicates that the Tata Power, Tata Motors and BHEL have done well in the

market. Dr. Reddys, CIPLA and HUL have the lowest returns when compared to others.

This can be interpreted that Pharmaceutical, Automobile, IT and FMCG industries have

generated lower returns due to recession. Banking and Infrastructure industries have done

considerably well in the market.

Page 53




1 AXIS BANK -0.01059 1.535544 10 0.537712 15.88256

2 BAJAJ AUTO 0.014438 0.737253 10 0.372102 7.759069

3 BHEL -0.15123 1.622856 10 7.28459 23.36192

4 BHARATI AIRTEL -0.01413 0.951411 10 0.597828 10.0978

5 CIPLA 0.006533 0.468113 10 0.332894 5.020553

6 COAL INDIA -0.01617 0.638861 10 0.519513 6.891956

7 DR. REDDY's 0.02304 0.440162 10 0.306181 4.730837

8 GAIL (INDIA) -0.01742 0.635025 10 0.385112 6.71794

9 HDFC BANK -0.07469 1.054323 10 6.716553 17.18509

10 HDFC LTD. 0.004135 1.075318 10 0.266154 11.02347

11 HERO MOTOCORP 0.015072 0.631688 10 0.476478 6.808432

12 HINDALCO LTD. -0.03583 1.451236 10 0.702224 15.17876

13 HUL 0.03984 0.476134 10 0.413856 5.215039

14 ICICI -0.0058 1.558988 10 0.296063 15.88015

15 INFOSYS -0.00556 0.805005 10 0.588485 8.632975

16 ITC 0.032601 0.682341 10 0.290796 7.146807

17 L&T -0.02567 1.27986 10 0.792379 13.5653

18 M & M 0.011109 0.925037 10 0.388346 9.649822

19 MARUTHI SUZUKI 0.018737 0.799259 10 0.552048 8.563371

20 NTPC -0.03236 0.726139 10 0.552048 7.781083

21 ONGC -0.00234 0.878868 10 0.455797 9.242139

22 RIL -0.01581 1.157202 10 0.258779 11.81499

23 SBI -0.0306 1.253038 10 0.417828 12.91761

24 SESA STERLITE -0.03731 1.298529 10 0.846829 13.79481

25 SUN PHARMA. 0.009757 0.596703 10 1.534488 7.511278

26 TCS 0.028172 0.737861 10 0.428488 7.835271

27 TATA MOTORS -0.08077 1.782513 10 7.272414 25.01677

28 TATA POWER -0.16885 1.165677 10 14.09323 25.58116

29 TATA STEEL -0.03818 1.369855 10 0.520674 14.18105

30 WIPRO 0.0024 0.632783 10 0.489063 6.819296

ANALYSIS:

Page 54


Table 4.3 indicates that the Tata Power, Tata Motors and BHEL have done well in the

market. Dr. Reddys, CIPLA and HUL have the lowest returns when compared to others.

The table indicates that Pharmaceutical, Automobile, IT and FMCG industries have

generated lower returns due to recession. Banking and Infrastructure industries have done

considerably well in the market. Tata group stocks have done exceptionally well in the

market.



1 AXIS BANK -0.01059 1.535544 6 0.537712 9.740384

2 BAJAJ AUTO 0.014438 0.737253 6 0.372102 4.810057

3 BHEL -0.15123 1.622856 6 7.28459 16.8705

4 BHARATI AIRTEL -0.01413 0.951411 6 0.597828 6.292158

5 CIPLA 0.006533 0.468113 6 0.332894 3.148102

6 COAL INDIA -0.01617 0.638861 6 0.519513 4.33651

7 DR. REDDY's 0.02304 0.440162 6 0.306181 2.97019

8 GAIL (INDIA) -0.01742 0.635025 6 0.385112 4.177841

9 HDFC BANK -0.07469 1.054323 6 6.716553 12.9678

10 HDFC LTD. 0.004135 1.075318 6 0.266154 6.722197

11 HERO MOTOCORP 0.015072 0.631688 6 0.476478 4.28168

12 HINDALCO LTD. -0.03583 1.451236 6 0.702224 9.373812

13 HUL 0.03984 0.476134 6 0.413856 3.310502

14 ICICI -0.0058 1.558988 6 0.296063 9.644196

15 INFOSYS -0.00556 0.805005 6 0.588485 5.412956

16 ITC 0.032601 0.682341 6 0.290796 4.417443

17 L&T -0.02567 1.27986 6 0.792379 8.445865

18 M & M 0.011109 0.925037 6 0.388346 5.949676

19 MARUTHI SUZUKI 0.018737 0.799259 6 0.552048 5.366337

20 NTPC -0.03236 0.726139 6 0.552048 4.876525

21 ONGC -0.00234 0.878868 6 0.455797 5.726666

22 RIL -0.01581 1.157202 6 0.258779 7.186183

23 SBI -0.0306 1.253038 6 0.417828 7.905454

24 SESA STERLITE -0.03731 1.298529 6 0.846829 8.600692

Page 55


25 SUN PHARMA. 0.009757 0.596703 6 1.534488 5.124465

26 TCS 0.028172 0.737861 6 0.428488 4.883826

27 TATA MOTORS -0.08077 1.782513 6 7.272414 17.88672

28 TATA POWER -0.16885 1.165677 6 14.09323 20.91845

29 TATA STEEL -0.03818 1.369855 6 0.520674 8.701629

30 WIPRO 0.0024 0.632783 6 0.489063 4.288163

ANALYSIS:

Table 4.4 indicates that the Tata Power, Tata Motors and BHEL have performed well not

only during short term but also for the long term and it have also generated good returns.

Dr. Reddy’s, CIPLA and HUL have the lowest returns when compared to others. The

table indicates that Pharmaceutical, Automobile, IT and FMCG industries have generated

lower returns. Although automobile industries are not doing well in the market, Tata

motors is an exception. Banking and Infrastructure industries have done considerably well

in the market. Tata group stocks have done exceptionally well in the market.

Page 56


Figure 4.4 Comparison of 1yr, 2 yr and 3 yr return of the shares

ANALYSIS:

Figure 4.4 indicates that the Tata Power, Tata Motors and BHEL have performed well not

only during short term but also for the long term. Dr. Reddy’s, CIPLA and HUL have the

lowest returns when compared to others. The Figure indicates that Pharmaceutical,

Automobile, IT and FMCG industries have generated lower returns. Banking and

Infrastructure industries have done considerably well in the market. Tata group stocks

have done exceptionally well in the market. The stock of all the company follows the

same trend over the 1year, 2 year and 3 year.

4.4 CALCULATION OF EXPECTED RETURN E[Ri]

Expected return E[Ri] are calculated using the CAPM formula which is given below in

MS-EXCEL, for the market return (Rm) of 1 year, 2 year and 3 year respectively.

E[Ri]= Rf + (Rm – Rf)

Table 4.5 Expected Return for the period of 1year (Rm)

S.NO STOCKS Rf BETA Rm Rm - Rf E[Ri]

1 AXIS BANK 8 1.535544 7 -1 6.4644562

2 BAJAJ AUTO 8 0.737253 7 -1 7.2627471

3 BHEL 8 1.622856 7 -1 6.3771435

Page 57


4 BHARATI AIRTEL 8 0.951411 7 -1 7.0485892

5 CIPLA 8 0.468113 7 -1 7.5318873

6 COAL INDIA 8 0.638861 7 -1 7.3611386

7 DR. REDDY's 8 0.440162 7 -1 7.5598383

8 GAIL (INDIA) 8 0.635025 7 -1 7.3649753

9 HDFC BANK 8 1.054323 7 -1 6.9456767

10 HDFC LTD. 8 1.075318 7 -1 6.924682

11 HERO MOTOCORP 8 0.631688 7 -1 7.3683119

12 HINDALCO LTD. 8 1.451236 7 -1 6.5487636

13 HUL 8 0.476134 7 -1 7.5238656

14 ICICI 8 1.558988 7 -1 6.4410117

15 INFOSYS 8 0.805005 7 -1 7.1949951

16 ITC 8 0.682341 7 -1 7.317659

17 L&T 8 1.27986 7 -1 6.7201403

18 M & M 8 0.925037 7 -1 7.0749633

19 MARUTHI SUZUKI 8 0.799259 7 -1 7.2007414

20 NTPC 8 0.726139 7 -1 7.2738606

21 ONGC 8 0.878868 7 -1 7.1211317

22 RIL 8 1.157202 7 -1 6.8427979

23 SBI 8 1.253038 7 -1 6.7469618

24 SESA STERLITE 8 1.298529 7 -1 6.7014711

25 SUN PHARMA. 8 0.596703 7 -1 7.4032968

26 TCS 8 0.737861 7 -1 7.2621389

27 TATA MOTORS 8 1.782513 7 -1 6.2174866

28 TATA POWER 8 1.165677 7 -1 6.8343226

29 TATA STEEL 8 1.369855 7 -1 6.630145

30 WIPRO 8 0.632783 7 -1 7.3672167

ANALYSIS:

Table 4.5 indicates that the expected return of Dr. Reddy’s, CIPLA, WIPRO and HUL

have high returns when compared to others, while Tata motors, BHEL, ICICI Bank and

Axis Bank have low return. The table indicates that Pharmaceutical, IT and FMCG

industries have high return. Banking sector have low return


Page 58



1 AXIS BANK 8 1.535544 10 2 11.07108752 BAJAJ AUTO 8 0.737253 10 2 9.474505713 BHEL 8 1.622856 10 2 11.24571294 BHARATI AIRTEL 8 0.951411 10 2 9.902821595 CIPLA 8 0.468113 10 2 8.93622536 COAL INDIA 8 0.638861 10 2 9.277722797 DR. REDDY's 8 0.440162 10 2 8.880323328 GAIL (INDIA) 8 0.635025 10 2 9.270049499 HDFC BANK 8 1.054323 10 2 10.1086467

10 HDFC LTD. 8 1.075318 10 2 10.150635911 HERO MOTOCORP 8 0.631688 10 2 9.2633762912 HINDALCO LTD. 8 1.451236 10 2 10.902472713 HUL 8 0.476134 10 2 8.9522687214 ICICI 8 1.558988 10 2 11.117976615 INFOSYS 8 0.805005 10 2 9.6100098916 ITC 8 0.682341 10 2 9.364681917 L&T 8 1.27986 10 2 10.559719318 M & M 8 0.925037 10 2 9.8500733319 MARUTHI SUZUKI 8 0.799259 10 2 9.5985171220 NTPC 8 0.726139 10 2 9.4522788421 ONGC 8 0.878868 10 2 9.7577366522 RIL 8 1.157202 10 2 10.314404123 SBI 8 1.253038 10 2 10.506076424 SESA STERLITE 8 1.298529 10 2 10.597057825 SUN PHARMA. 8 0.596703 10 2 9.1934063526 TCS 8 0.737861 10 2 9.4757222327 TATA MOTORS 8 1.782513 10 2 11.565026928 TATA POWER 8 1.165677 10 2 10.331354829 TATA STEEL 8 1.369855 10 2 10.7397130 WIPRO 8 0.632783 10 2 9.2655666

ANALYSIS:

Table 4.6 indicates that the expected return of Dr. Reddy’s, CIPLA, WIPRO and HUL

have high returns when compared to others, while Tata motors, BHEL, ICICI Bank and

Page 59


Axis Bank have low return. The table indicates that Pharmaceutical, IT and FMCG

industries have high return. Banking sector have low return



1 AXIS BANK 8 1.535544 6 -2 4.92891247

2 BAJAJ AUTO 8 0.737253 6 -2 6.52549429

3 BHEL 8 1.622856 6 -2 4.75428708

4 BHARATI AIRTEL 8 0.951411 6 -2 6.09717809

5 CIPLA 8 0.468113 6 -2 7.06377469

6 COAL INDIA 8 0.638861 6 -2 6.72227721

7 DR. REDDY's 8 0.440162 6 -2 7.11967668

8 GAIL (INDIA) 8 0.635025 6 -2 6.72995051

9 HDFC BANK 8 1.054323 6 -2 5.89135331

10 HDFC LTD. 8 1.075318 6 -2 5.849364063

11 HERO MOTOCORP 8 0.631688 6 -2 6.736623713

12 HINDALCO LTD. 8 1.451236 6 -2 5.097527295

13 HUL 8 0.476134 6 -2 7.047731284

14 ICICI 8 1.558988 6 -2 4.882023416

15 INFOSYS 8 0.805005 6 -2 6.389990107

16 ITC 8 0.682341 6 -2 6.6353181

17 L&T 8 1.27986 6 -2 5.440280672

18 M & M 8 0.925037 6 -2 6.149926674

19 MARUTHI SUZUKI 8 0.799259 6 -2 6.401482884

20 NTPC 8 0.726139 6 -2 6.547721159

21 ONGC 8 0.878868 6 -2 6.242263354

22 RIL 8 1.157202 6 -2 5.685595887

23 SBI 8 1.253038 6 -2 5.493923578

24 SESA STERLITE 8 1.298529 6 -2 5.40294225

25 SUN PHARMA. 8 0.596703 6 -2 6.806593647

26 TCS 8 0.737861 6 -2 6.524277766

27 TATA MOTORS 8 1.782513 6 -2 4.434973131

28 TATA POWER 8 1.165677 6 -2 5.66864522

29 TATA STEEL 8 1.369855 6 -2 5.260289986

30 WIPRO 8 0.632783 6 -2 6.734433395

Page 60


ANALYSIS:

Table 4.7 indicates that the expected return Dr. Reddy’s, CIPLA, Sun Pharmaceutical and

HUL are high not only during short term but also for the long term. Tata motors, BHEL,

ICICI Bank and Axis Bank have low return when compared to others. The table indicates

that Pharmaceutical, Automobile, IT and FMCG industries have high returns. Banking

sector have low return.

Figure 4.5 Comparison of 1yr, 2 yr and 3 yr Expected return of the shares

ANALYSIS:

Figure 4.5 indicates that the expected return Dr. Reddy’s, CIPLA, Sun Pharmaceutical

and HUL are high not only during short term but also for the long term. Tata motors,

BHEL, ICICI Bank and Axis Bank have low return when compared to others. The figure

indicates that Pharmaceutical, Automobile, IT and FMCG industries have high returns.

Banking sector have low return.

4.5 COMPARISON OF RETURN [Ri] AND EXPECTED RETURN

E[Ri]

Page 61


The Return and Expected returns are compared to find whether the equities are priced

appropriately or not. If the actual price is more than the expected price then the equity is

overpriced. If the actual price is less than the expected price then the equity is

underpriced. If both prices are equal then the equity is priced appropriately.

Table 4.8 Comparison of Ri & E(Ri) for 1 year (Rm)

S.NO STOCKS Ri E(Ri) PRICING

1 AXIS BANK 11.2759278 6.4644562 Under Priced

2 BAJAJ AUTO 5.54731026 7.2627471 Over Priced

3 BHEL 18.4933524 6.3771435 Under Priced

4 BHARATI AIRTEL 7.24356892 7.0485892 Appropriately Priced

5 CIPLA 3.616215 7.5318873 Over Priced

6 COAL INDIA 4.97537163 7.3611386 Over Priced

7 DR. REDDY’s 3.41035188 7.5598383 Over Priced

8 GAIL (INDIA) 4.81286529 7.3649753 Over Priced

9 HDFC BANK 14.0221211 6.9456767 Under Priced

10 HDFC LTD. 7.79751505 6.924682 Under Priced

11 HERO MOTOCORP 4.91336776 7.3683119 Over Priced

12 HINDALCO LTD. 10.8250485 6.5487636 Under Priced

13 HUL 3.78663628 7.5238656 Over Priced

14 ICICI 11.2031841 6.4410117 Under Priced

15 INFOSYS 6.21796063 7.1949951 Over Priced

16 ITC 5.09978368 7.317659 Over Priced

17 L&T 9.72572495 6.7201403 Under Priced

18 M & M 6.87471223 7.0749633 Appropriately Priced

19 MARUTHI SUZUKI 6.16559515 7.2007414 Over Priced

Page 62


20 NTPC 5.60266432 7.2738606 Over Priced

21 ONGC 6.60553396 7.1211317 Appropriately Priced

22 RIL 8.34338531 6.8427979 Under Priced

23 SBI 9.15849188 6.7469618 Under Priced

24 SESA STERLITE 9.89922056 6.7014711 Under Priced

25 SUN PHARMA. 5.72116797 7.4032968 Over Priced

26 TCS 5.62168735 7.2621389 Over Priced

27 TATA MOTORS 19.669233 6.2174866 Under Priced

28 TATA POWER 22.0841284 6.8343226 Under Priced

29 TATA STEEL 10.0714839 6.630145 Under Priced

30 WIPRO 4.92094649 7.3672167 Over Priced

Figure 4.6 Comparison of Ri & E(Ri) of 1 year(Rm)

ANALYSIS:

Figure 4.6 indicates that the Tata power, Tata Motors, BHEL have high difference in the

return and expected return in the list of Underpriced stocks as they generated high return

than they expected, while Dr. Reddy’s, CIPLA, WIPRO and HUL have high difference in

the return and expected return in the list of overpriced stocks, as they generated low

return when compared to others. Mahindra & Mahindra, Bharati Airtel and ONGC are the

Page 63


priced appropriately. Banking sectors shares are underpriced and IT sector shares are

overpriced.







5 CIPLA 5.020553 8.9362253 Over Priced

6 COAL INDIA 6.891956 9.27772279 Over Priced

7 DR. REDDY's 4.730837 8.88032332 Over Priced

8 GAIL (INDIA) 6.71794 9.27004949 Over Priced

9 HDFC BANK 17.18509 10.1086467 Under Priced

10 HDFC LTD. 11.02347 10.1506359 Under Priced

11 HERO MOTOCORP 6.808432 9.26337629 Over Priced


13 HUL 5.215039 8.95226872 Over Priced


15 INFOSYS 8.632975 9.61000989 Over Priced

16 ITC 7.146807 9.3646819 Over Priced

17 L&T 13.5653 10.5597193 Under Priced


Page 64


19 MARUTHI SUZUKI 8.563371 9.59851712 Over Priced

20 NTPC 7.781083 9.45227884 Over Priced

21 ONGC 9.242139 9.75773665 Appropriately Priced

22 RIL 11.81499 10.3144041 Under Priced

23 SBI 12.91761 10.5060764 Under Priced

24 SESA STERLITE 13.79481 10.5970578 Under Priced

25 SUN PHARMA. 7.511278 9.19340635 Over Priced

26 TCS 7.835271 9.47572223 Over Priced

27 TATA MOTORS 25.01677 11.5650269 Under Priced

28 TATA POWER 25.58116 10.3313548 Under Priced

29 TATA STEEL 14.18105 10.73971 Under Priced

30 WIPRO 6.819296 8.0048 Over Priced

Figure 4.7 Comparison of Ri & E(Ri) of 2 years (Rm)

ANALYSIS:

Figure 4.7 indicates that the Tata power, Tata Motors, BHEL have high difference in the

return and expected return in the list of Underpriced stocks as they generated high return

than they expected, while Dr. Reddy’s, CIPLA, WIPRO and HUL have high difference in

the return and expected return in the list of overpriced stocks, as they generated low

return when compared to others. Mahindra & Mahindra, Bharati Airtel and ONGC are the

Page 65


priced appropriately. Banking sectors shares are underpriced and IT sector shares are

overpriced.







5 CIPLA 3.148102 7.06377469 Over Priced6 COAL INDIA 4.33651 6.72227721 Over Priced7 DR. REDDY's 2.97019 7.11967668 Over Priced8 GAIL (INDIA) 4.177841 6.72995051 Over Priced9 HDFC BANK 12.9678 5.89135331 Under Priced

10 HDFC LTD. 6.722197 5.849364063 Under Priced11 HERO MOTOCORP 4.28168 6.736623713 Over Priced


13 HUL 3.310502 7.047731284 Over Priced


15 INFOSYS 5.412956 6.389990107 Over Priced16 ITC 4.417443 6.6353181 Over Priced17 L&T 8.445865 5.440280672 Under Priced

Page 66



19 MARUTHI SUZUKI 5.366337 6.401482884 Over Priced20 NTPC 4.876525 6.547721159 Over Priced21 ONGC 5.726666 6.242263354 Appropriately Priced

22 RIL 7.186183 5.685595887 Under Priced23 SBI 7.905454 5.493923578 Under Priced24 SESA STERLITE 8.600692 5.40294225 Under Priced25 SUN PHARMA. 5.124465 6.806593647 Over Priced26 TCS 4.883826 6.524277766 Over Priced27 TATA MOTORS 17.88672 4.434973131 Under Priced28 TATA POWER 20.91845 5.66864522 Under Priced29 TATA STEEL 8.701629 5.260289986 Under Priced30 WIPRO 4.288163 6.734433395 Over Priced

Figure 4.8 Comparison of Ri & E(Ri) of 3 year( Rm)

ANALYSIS:

Figure 4.8 indicates that the Tata power, Tata Motors, BHEL and HDFC Bank have the

high difference between the return and expected return in the list of Underpriced stocks as

they generated high return than they expected, while Dr. Reddy’s, CIPLA and HUL have

the high difference in the return and expected return in the list of overpriced stock, as they

Page 67


generated low return when compared to others. Mahindra & Mahindra, Bharati Airtel and

ONGC are the priced appropriately. Banking sectors, Infrastructure and Manufacturing

Industries shares are underpriced. IT and Automobile sector shares are overpriced.

4.6 HYPOTHESIS

Hypothesis testing (Z-test) is conducted using MS- EXCEL, Z-test is a statistical test used

in interference which determines if the difference between a sample mean and population

mean is large enough to be statistically significant. In order for the Z-test to be reliable

certain conditions must be met. The most important is that since the Z-test uses the

population mean and population standard deviations, must be known. Testing is

conducted to check whether the slope of Beta varies significantly from Zero or not, with

the help of values of Beta () and Expected return (E(Ri)). Variance is also calculated for

Beta and Expected return values which is used in Z-test. Mean difference is kept at Zero.

H0 (NULL HYPOTHESIS): Slope of BETA is not significantly different from Zero

H1 (ALTERNATE HYPOTHESIS): Slope of BETA is significantly different from Zero

Table 4.11 Variance of Beta & E(Ri) of 1 year (Rm)

S.NO STOCKS BETA E(Ri)

1 AXIS BANK 1.535544 6.4644562

2 BAJAJ AUTO 0.737253 7.2627471

3 BHEL 1.622856 6.3771435

4 BHARATI AIRTEL 0.951411 7.0485892

5 CIPLA 0.468113 7.5318873

6 COAL INDIA 0.638861 7.3611386

Page 68


7 DR. REDDY's LABORATRIES 0.440162 7.5598383

8 GAIL (INDIA) 0.635025 7.3649753

9 HDFC BANK 1.054323 6.9456767

10 HDFC LTD. 1.075318 6.924682

11 HERO MOTOCORP 0.631688 7.3683119

12 HINDALCO LTD. 1.451236 6.5487636

13 HUL 0.476134 7.5238656

14 ICICI 1.558988 6.4410117

15 INFOSYS 0.805005 7.1949951

16 ITC 0.682341 7.317659

17 L&T 1.27986 6.7201403

18 MAHINDRA & MAHINDRA 0.925037 7.0749633

19 MARUTHI SUZUKI 0.799259 7.2007414

20 NTPC 0.726139 7.2738606

21 ONGC 0.878868 7.1211317

22 RIL 1.157202 6.8427979

23 SBI 1.253038 6.7469618

24 SESA STERLITE 1.298529 6.7014711

25 SUN PHARMACEUTICALS 0.596703 7.4032968

26 TCS 0.737861 7.2621389

27 TATA MOTORS 1.782513 6.2174866

28 TATA POWER 1.165677 6.8343226

29 TATA STEEL 1.369855 6.630145

30 WIPRO 0.632783 7.3672167

VARIANCE 0.144864 0.14486386

Table 4.12 Z-Test for Beta & E(Ri) of 1 year (Rm)

z-Test: Two Sample for Means

Variable 1 Variable 2

Mean 0.978919 7.021081

Known Variance 0.144864 0.144864

Observations 30 30

Hypothesized Mean Difference 0

Z -61.4834

Page 69


P(Z<=z) one-tail 0

z Critical one-tail 1.644854

P(Z<=z) two-tail 0

z Critical two-tail 1.959964

ANALYSIS:

Table 4.12, the calculated Z value (Z= -61.4834) is lesser than the critical value of Z, the

critical value of Z should lies between -3 and +3. Therefore, according to Z-test H0 is

rejected and H1 is accepted. Hence the slope of BETA is significantly different from zero.

CHAPTER- 5

SUMMARY OF FINDINGS

Page 70


FINDINGS

Based on the study conducted on “Capital Asset Pricing Model (CAPM) - A Study on

Indian Stock Markets”, the following findings are made.

The Capital Assets Pricing Model describes the relationship between risk and

expected return and is used in the pricing of risky securities.

Regression analysis was applied to the select date based on which Beta, Alpha and

Residual values were found. Alpha is the return in excess of the compensation for the

risk borne. Hindustan Unilever Ltd has high Alpha factor (0.03984) indicating good

return and Tata Power has the lowest (-0.16885) indicating low returns.

Analysis of Beta value which is a measure of market risk shows that Tata Motors has

the highest beta factor (1.782513) and Dr. Reddy’s Laboratories has the lowest of beta

factor (0.440162).

Residuals are the unexplained deviations and the Tata Power has the highest residual

value (14.09323) where as Reliance Industries Ltd. has the lowest residual value

(0.258779).

The returns calculated for one year, two years and three years period shows that Tata

Power, Tata Motors and BHEL have shown superior performance in the market.

Whereas Dr. Reddys, CIPLA and HUL have given the lowest returns for all the one

year, two years and three years periods as compared to others.

Pharmaceutical, Automobile, IT and FMCG industries have generated lower returns

due to recession.

Page 71


Banking and Infrastructure industries have done considerably well in the market.

Tata group stocks have done exceptionally well in the market compared all others.

Based on the calculation of expected return, Dr. Reddy’s, CIPLA, WIPRO and HUL

have high expected returns while Tata motors, BHEL, ICICI Bank and Axis Bank

have low returns.

Pharmaceutical, IT and FMCG industries have high expected returns where as

banking sector has the low return due to low risk.

Tata power, Tata Motors, BHEL have given higher returns than the expected return

indicating that these are the underpriced securities.

Dr. Reddy’s, CIPLA, WIPRO and HUL have given low returns as compared to the

expected return representing that these are overpriced securities.

The returns generated by Mahindra & Mahindra, Bharati Airtel and ONGC are almost

equal to expected return and hence it shows that these securities have been priced

appropriately.

Overall banking sectors shares are underpriced and IT sector shares are overpriced.

The results of hypothesis to check whether the slope of Beta varies significantly from

Zero or not, reveal that the slope of BETA is significantly different from zero.

Page 72


CHAPTER- 6

CONCLUSION AND SUGGESTIONS

Page 73


CONCLUSION

The Capital Asset Pricing Model introduced that the expected return of a security or a

portfolio equals the rate of return on a risk-free rate plus a risk premium. This model

offers a simple tool for investors to evaluate their investments. If the expected return does

not meet or beat the required return, then the investment is not worthwhile to take it up.

Though some studies have raised doubts about CAPM's validity, the model is still widely

used in the investment community. While it is difficult to predict from beta how

individual stocks might react to particular movements, investors can probably safely

assume that a portfolio of high-beta stocks will move more than the market in either

direction, or a portfolio of low-beta stocks will move less than the market. CAPM helps

to benchmark the rate of return for evaluating possible investments and helps the

Investors to customize portfolio to their specific risk-return requirements.

The Present study on “Capital Asset Pricing Model - A Study on Indian Stock Markets”

an attempt has been made to analyse the performance of stocks on BSE SENSEX with

regard to risk and return. The CAPM theory is used to identify the securities that are

overpriced or underpriced through the difference in return and expected return. The study

shows high degree of relevance of CAPM in calculation of required rate of return in

Indian stock market. Therefore, investors can integrate the performance of their portfolio

to the market developments, investors can opt for risky securities to get high returns, and

investors can establish trade-off between their risks and return preferences by applying

the CAPM. This model helps the Investors to customize portfolio to their specific risk-

return requirements, aiming to hold securities with betas in excess of 1 while the market

is rising, and securities with betas of less than 1 when the market is falling.

The analysis of data has shown that Tata power, Tata Motors, BHEL have given higher

returns than the expected return indicating that these are the underpriced securities. Dr.

Reddy’s, CIPLA, WIPRO and HUL have given low returns as compared to the expected

return representing that these are overpriced securities. The returns generated by

Mahindra & Mahindra, Bharati Airtel and ONGC are almost equal to expected return and

Page 74


hence it shows that these securities have been priced appropriately. Overall banking

sectors shares are underpriced and IT sector shares are overpriced.

SUGGESTIONS

In the present research work an attempt is made to under the CAPM theory and the

application of this theory to Indian stock markets with special reference to BSE Sensex.

Based on the thorough analysis of data collected for a period three years, the following

suggestions are made:

The CAPM introduced that the expected return of a security or a portfolio equals the

rate of return on a risk-free rate plus a risk premium. This model offers a simple tool

for investors to evaluate their investments. If this expected return does not meet or

beat the required return, then the investment is not worthwhile to take it up.

Though some studies have raised doubts about CAPM's validity, the model is still

widely used in the investment community. Although it is difficult to predict from beta

how individual stocks might react to particular movements, investors can probably

safely assume that a portfolio of high-beta stocks will move more than the market in

either direction, or a portfolio of low-beta stocks will move less than the market.

This model helps the Investors to customize portfolio to their specific risk-return

requirements, aiming to hold securities with betas in excess of 1 while the market is

rising, and securities with betas of less than 1 when the market is falling.

Beta a measure of the non-diversifiable risk in a portfolio is most important for

investors, from the point of view CAPM theory. Investors will choose a mix between

risk-free rate and the market portfolio based on his utility function.

This model helps to benchmark the rate of return for evaluating possible investments.

For example, if we are analyzing securities, we might be interested in whether the

expected return we forecast for a stock is more or less than its “fair” return given its

risk.

Page 75


By applying the CAPM theory we can identify the Underpriced/overpriced securities

and this helps investors in great deal to select the securities that have performed really

well to make good profits.

BIBLOGRAPHY & ANNEXURES

Page 76


BIBLOGRAPHY

I. RESEARCH PAPERS

[1] Sudarsana. G. Reddy (2011), Testing the capital asset pricing model (CAPM) – A

study of Indian stock market, International Journal Of Research In Commerce,

Economics & Management ,Vol. 1, Issue 3, ISSN 2231-4245, 40-46.

[2] Kapil Choudhary and Sakshi Choudhary (2010), Testing Capital Asset Pricing

Model: Empirical Evidences From Indian Equity Market, Eurasian Journal of Business

and Economics 2010, 3 (6), 127-138.

[3] Sylvester Jarlee (2007), A Test of the Capital Asset Pricing Model: Studying Stocks

on the Stockholm Stock Exchange, Bachelor Thesis In Economics, Västerås, Sweden.

[4] Peter Bossaerts, Daniel Kleiman and Charles Plott (2009), Price Discovery In

Financial Markets: The Case Of The CAPM, California Institute of technology, 1-45.

II. WEBSITES

[5]http://en.wikipedia.org/

[6] http://www.investopedia.com/terms/p/portfolio.asp

[7] http://www.bseindia.com/markets/equity/EQReports

[8] http://www.investopedia.com/terms/r/risk-freerate.asp

Page 77

Report

Documents

portfolio risk

portfolio decisions

portfolio selection

expected return

returns of assets

best possible portfolio

expected rate of return

assets sensitivity