Professional Documents
Culture Documents
IIM Lucknow
FM PROJECT REPORT
Submitted to: Prof. Madhumita Chakraborty
Group - 12
Sahil Bansal-ABM09047
Niraj Agarwal-PGP28385
Ashutosh Tripathi-PGP28389
Prashant Kajaria-PGP28405
Contents
Findings of the project ............................................................................................................................ 3
Introduction ............................................................................................................................................ 4
TATA STEEL .............................................................................................................................................. 4
SAIL.......................................................................................................................................................... 4
Bhushan Steel ......................................................................................................................................... 5
Sesa Goa Limited ..................................................................................................................................... 5
Cost of Capital ......................................................................................................................................... 6
Tax Rate................................................................................................................................................... 6
Cost of Equity .......................................................................................................................................... 6
Dividend Discount Model.................................................................................................................... 6
Earnings Capitalisation Model ............................................................................................................ 7
CAPM Model ....................................................................................................................................... 7
Market Beta ........................................................................................................................................ 8
Tata Steel ........................................................................................................................................ 8
Bhushan Steel.................................................................................................................................. 9
SesaGoa......................................................................................................................................... 10
SAIL ................................................................................................................................................ 11
Cost of Debt .......................................................................................................................................... 12
Weighted Average Cost of Capital ........................................................................................................ 13
TEST OF WEAK FORM OF EMH FOR TATA STEEL .................................................................................. 13
WEAK FORM OF EMH ................................................................................................................. 13
Autocorrelation ............................................................................................................................. 13
Method ............................................................................................................................................. 13
Observation and Analysis...................................................................................................................... 13
RUNS Method (Non Parametric Test) ............................................................................................... 13
Autocorrelation Method: .................................................................................................................. 14
Conclusion ............................................................................................................................................. 18
References: ........................................................................................................................................... 19
Appendix ............................................................................................................................................... 19
Daily Data of TATA Steel: .................................................................................................................. 20
Introduction
TATA STEEL
Backed by 100 glorious years of experience in steel making, Tata Steel Ltd is the world's 12th
largest steel company with an annual crude steel capacity of 28 million tonnes. Established in the
year 1907 as Tata Iron & Steel Company Ltd., the company is the first integrated plant in Asia
and diversified steel producer with major operations in India, Europe and South East Asia. They
have manufacturing units in 26 countries and a presence in 50 European and Asian markets. The
company together with their subsidiaries, engages in the manufacture and sale of steel products in
India and internationally.
The company is executing their plan to increase their crude steel capacity from 6.8 million
tonnes per annum to 9.7 million tonnes per annum at their Jamshedpur Works by 2012-13
and it has set a target of achieving an annual production capacity of 100 million tons by
2015. The company is also has major on-going capital projects which include capacity
augmentation of the Jamshedpur plant. The preliminary work on the 6 million tonne per
annum capacity Greenfield steel plant at Kalinganagar, Orissa is in progress.
Tata Steel is also India's second-largest and second-most profitable company in private
sector with turnover of US$ 26.13 billion in FY 2011- 2012, having over 81,000 employees
across five continents and is a Fortune 500 company.
SAIL
Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a
fully integrated iron and steel maker, producing both basic and special steels for domestic
construction, engineering, power, railway, automotive and defence industries and for sale in
export markets. SAIL is also among the five Maharatnas of the country's Central Public
Sector Enterprises. With a turnover of 48,681 crore (US$8.9 billion), the company is among
the top five highest profit earning corporate of the country. With an annual production of 13.5
million metric tons, SAIL is the 14th largest steel producer in the world. Major plants owned
by SAIL are located at Bhilai, Bokaro, Durgapur, Rourkela, Burnpur and Salem and is
investing Rs 21000 crore in West Bengal, to set up a wagon factory. The company has the
distinction of being Indias second largest producer of iron ore and of having the countrys
second largest mines network.
Currently, SAIL, is in the process of modernizing and expanding its production units, raw
material resources and other facilities to maintain its dominant position in the Indian steel
market. The objective is to achieve a production capacity of 26.2 MTPA of Hot Metal from
the base level production of 14.6 MTPA (2006-07 Actual).
Bhushan Steel
Bhushan Steel Ltd formerly known as Bhushan Steel & Strips Ltd is a globally renowned and one of
the leading players in the steel industry. Backed by more than two decades, of experience in steel
making, Bhushan steel is now Indias 3rd largest Secondary Steel Producer Company with an existing
steel production capacity of 2 million tonnes per annum. Bhushan Power and Steel Limited has
seven plants at four locations Chandigarh, Derabassi in Punjab, Bangihatti, near Dankuni in West
Bengal, and Thelkoloi in Orissa
BSL uses advanced technology and replenishes the same as and when required. This has led to the
Khopoli plant has given a tremendous boost of 425000 MT per annum to BSLs total production
capacity. This led to gross sales increasing 8-fold over a period of six years.
Its biggest expansion is in Orissa it has signed an agreement with the Government of Orissa for
setting up of a three million tonnes capacity steel plant at Meramandali in Dhenkanal district, and as
part of its total integration of the steel value chain, Bhushan Steel is in the process of setting up a
power plant and an advanced hot rolling plant on 1,618 acres (6.55 km2) at Meramandali in
Dhenkanal district near Angul, at a cost of 5,200crore and its subsequent backward integration and
expansion to 4 million tonnes.
Cost of Capital
The cost of capital is the rate of return that capital could be expected to earn in an
alternative investment of equivalent risk. It is used to evaluate new projects of a
company as it is the minimum return that investors expect for providing capital to the
company, thus setting a benchmark that a new project has to meet.
The Cost of Capital comprises of the cost of debt and cost of equity. The overall cost of
capital of a company may be calculated as the weighted average of these two costs.
Tata steels capital structure comprises both debt and equity. Hence, WACC would be an
ideal method to calculate its cost of capital. The WACC is calculated as:
WACC= Kd*(1-T)*Wd+ Ke*We
Where:
Kd= cost of debt
Ke= cost of equity
Wd= weight of debt
We= weight of equity
T= tax rate
Tax Rate
Flat tax rate for Indian companies is 30%. For Indian companies, income is taxed at a flat
rate of 30%. Another way to derive the tax rate is to find out the taxes paid by the firm as a
percentage of its revenue. However this method is not recommended and hence we use the
statutory tax rate for WACC calculations.
T = 30%
Cost of Equity
The Cost of Equity may be calculated using the following methods
`
This model may not provide us the correct cost of equity as:
1. The dividend for all the companies has not been stable and has varied in the past few
years.
2. The dividend for the companies is not expected to follow any constant growth rate in
the future years as well.
Company
Tata Steel
Bhushan Steel
SesaGoa
Sail
Growth Rate
0.035
0.035
0.035
0.035
Ke (DPS)
6.148162
4.665006
5.5592
5.626316
Company
E1
P0
Ke(EPS)
Tata Steel
Bhushan Steel
SesaGoa
Sail
67.07
47.7
19.24
8.25
453.1
409.44
194.25
94.05
14.80247
11.65006
9.904762
8.77193
CAPM Model
Since CAPM is the superior method of determining Ke, We use the value determined by this
method rather than DDM and ECM. The problem with the formulas used in DDM and ECM
is that they have an underlying assumption of regular future growth which is at best an
approximation. Second, errors inevitably creep into the estimate of g.
To estimate the cost of equity using the CAPM method, we need the following variables
1. Risk Free Rate: In 2010, the Indian government did not have a bond whose maturity
date was 2030. Hence we take the risk free rate as the current yield on the 30-year
Indian Government bonds which is 7.8%. This is chosen because this is the closest
approximation of Tata Steels valuation period which is we have taken as 20 years.
Rf = 7.8%
2. Market Return Rate: We consider the market return rate as the average return on the
BSE Sensex over the last 10 years is 2002 to 2012 (optimum time period).
Rm=12%
Market Beta
Beta analyzes the market volatility of Tata Steels stocks. To have a correct measurement of
Beta, we take the market returns and Tata steel returns for last six years.
Tata Steel
0.3
y = 1.7021x - 0.006
0.2
0.1
-0.15
-0.1
0
-0.05
0
-0.1
-0.2
-0.3
-0.4
Bhushan Steel
tata steel
0.05
0.1
0.15
Bhushan Steel
1
y = 1.4407x + 0.0159
0.8
0.6
0.4
Bhushan Steel
0.2
0
-0.2
-0.1
0.1
0.2
-0.2
-0.4
SesaGoa
Sesagoa
-0.15
SAIL
-0.1
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
-0.05-0.05 0
-0.1
-0.15
-0.2
y = 1.3735x + 0.0072
Sesagoa
Linear (Sesagoa)
0.05
0.1
0.15
SAIL
0.25
y = 1.3985x - 0.0033
0.2
0.15
0.1
SAIL
0.05
-0.15
-0.1
0
-0.05-0.05 0
Linear (SAIL)
0.05
0.1
0.15
Linear (SAIL)
-0.1
-0.15
-0.2
-0.25
Company
Tata Steel
Bhushan Steel
SesaGoa
Sail
Rm
12%
12%
12%
12%
Rf
7.8%
7.8%
7.8%
7.8%
Ke
1.702
1.44
1.373
1.398
0.14948
0.13848
0.13567
0.13672
Cost of Debt
Company
Tata Steel
Bhushan Steel
SesaGoa
Sail
Total Debt
59796.67
21350.97
3741.34
17360.59
Interest
1925.42
1046.27
420
983.99
Kd
0.032199452
0.049003394
0.06789
0.056679525
CAPM BV
0.081300213
0.07242991
0.12222066
0.112607202
CAPM MV
0.084648823
0.076925351
0.133758415
0.109658631
EDM
0.069151676
0.039444663
0.085179677
0.064337419
DDM
0.028169019
0.015394001
0.046790545
0.040397932
The Serial Correlation Coefficient measures the relationship between the values of a random
variable at time t and its value in the previous period. Autocorrelations are reliable measures
for testing of dependence/independence of random variables in a series. If no autocorrelations
arefound in a series then the series is considered random. The study used return to investors
in BSESensex derived from the log transformation of the price ratio to convert the data
intocontinuously compounded rates than using discrete compounding. It is given by R=
ln(Pt/Pt-1)The closing rates of the past 1250 trading days are selected for the study.
Method
If the random walk theorem to prevail, the stock prices should vary around a constant mean
with constant variance and should be probabilistically independent. The independence can be
tested using Auto Correlation Function which shows the pattern of auto correlations present
in the time series as well as the extent to which current values of the series are related to
various lags of the past data.
In an efficient market, the testing hypothesis is defined as
H0 = Auto correlation is Zero against an alternate hypothesis of
H1= Auto correlation is non- zero
consecutive positive and negative returns is tabulated and compared against its sampling
distribution under the random walk hypothesis. A run is defined as the repeated occurrence of the
same value or category of a variable. It is indexed by two parameters, which are the type of the run
and the length. Stock price runs can be positive, negative, or have no change. The length is how
often a run type occurs in succession.
In an efficient market, the testing hypothesis is defined as:
H0 = Auto correlation is Zero against an alternate hypothesis of
H1= Auto correlation is non- zero.
Runs Test
tatasteel
a
Test Value
bhusansteel
sesagoa
sail
nifty
.0015
.0223
.0133
.0028
.0044
41
41
42
38
38
38
38
37
41
41
Total Cases
79
79
79
79
79
Number of Runs
44
39
42
40
50
.807
-.327
.377
-.100
2.168
.420
.743
.706
.920
.030
Here it is seen that at 95% Confidence Interval, the observed Z value lies in the range of
(1.65, 1.65). Hence, we do not reject H0. This means that all the companies are efficient in the weak
form of market. This implies that the past or historical data doesnt aid in predicting the future or
current market outcome.
Autocorrelation Method:
Tata Steel:
Box-Ljung Statistic
Autocorrel
Std. Errora
ation
Lag
Value
Sig.b
df
Partial
Autocorrel Std. Error
ation
0.119
0.11
1.156
0.282
0.119
0.113
0.043
0.11
1.313
0.519
0.03
0.113
0.108
0.109
2.295
0.514
0.101
0.113
0.107
0.108
3.268
0.514
0.084
0.113
-0.029
0.108
3.34
0.648
-0.058
0.113
-0.247
0.107
8.683
0.192
-0.262
0.113
-0.041
0.106
8.835
0.265
-0.008
0.113
-0.115
0.105
10.035
0.263
-0.102
0.113
-0.064
0.105
10.408
0.318
0.023
0.113
10
-0.056
0.104
10.694
10
0.382
0.014
0.113
11
-0.191
0.103
14.132
11
0.226
-0.191
0.113
12
0.005
0.102
14.134
12
0.292
0.003
0.113
13
-0.13
0.102
15.769
13
0.262
-0.149
0.113
14
-0.154
0.101
18.113
14
0.202
-0.168
0.113
15
0.044
0.1
18.306
15
0.247
0.121
0.113
16
-0.012
0.099
18.321
16
0.305
-0.037
0.113
From the above table we that the autocorrelation values are almost 0 and the consistency is
maintained in the lags. Additionally, the test results lead us to accept the null hypothesis H0 that
autocorrelation doesnt exist. This further implies that the market is efficient in the weak form.
Bhushan Steel:
Lag
Autocorrelation
Std.
a
Error
Box-Ljung Statistic
Value
df
Sig.
Partial
Autocorrelation
Std.
Error
0.149
0.11
1.813
0.178
0.149
0.113
0.051
0.11
2.025
0.363
0.029
0.113
0.036
0.109
2.134
0.545
0.025
0.113
-0.225
0.108
6.46
0.167
-0.241
0.113
-0.037
0.108
6.581
0.254
0.03
0.113
0.029
0.107
6.656
0.354
0.052
0.113
0.003
0.106
6.657
0.465
0.014
0.113
0.022
0.105
6.701
0.569
-0.042
0.113
-0.069
0.105
7.138
0.623
-0.082
0.113
10
-0.03
0.104
7.219
10
0.705
0.014
0.113
11
-0.131
0.103
8.835
11
0.637
-0.125
0.113
12
-0.07
0.102
9.306
12
0.677
-0.03
0.113
13
0.096
0.102
10.191
13
0.678
0.096
0.113
14
-0.096
0.101
11.103
14
0.678
-0.125
0.113
15
-0.061
0.1
11.473
15
0.718
-0.097
0.113
16
0.137
0.099
13.371
16
0.645
0.156
0.113
From the above table we that the autocorrelation values are almost 0 and the consistency is
maintained in the lags. Moreover, the test results lead us to accept the null hypothesis H0 that
autocorrelation doesnt exist. This further implies that the market is efficient in the weak form.
Hence, the past records are futile to predict the current prices.
Sesagoa:
Box-Ljung Statistic
Lag
Autocorrelation
Std.
a
Error
Value
df
Sig.
Partial
Autocorrelation
Std.
Error
-0.01
0.11
0.008
0.927
-0.01
0.113
-0.103
0.11
0.889
0.641
-0.103
0.113
0.015
0.109
0.908
0.824
0.013
0.113
0.204
0.108
4.448
0.349
0.196
0.113
-0.106
0.108
5.414
0.367
-0.103
0.113
-0.021
0.107
5.452
0.487
0.016
0.113
-0.042
0.106
5.609
0.586
-0.069
0.113
-0.024
0.105
5.662
0.685
-0.065
0.113
0.071
0.105
6.119
0.728
0.111
0.113
10
0.148
0.104
8.137
10
0.615
0.14
0.113
11
0.002
0.103
8.137
11
0.701
0.043
0.113
12
-0.214
0.102
12.525
12
0.404
-0.207
0.113
13
-0.028
0.102
12.598
13
0.479
-0.092
0.113
14
-0.076
0.101
13.166
14
0.514
-0.175
0.113
15
0.013
0.1
13.184
15
0.588
0.045
0.113
16
-0.023
0.099
13.237
16
0.655
0.095
0.113
From the above table we that the autocorrelation values are almost 0 and the consistency is
maintained in the lags. Moreover, the test results lead us to accept the null hypothesis H0 that
autocorrelation doesnt exist. This further implies that the market is efficient in the weak form.
Hence, the past records are futile to predict the current prices.
SAIL:
Box-Ljung Statistic
Lag
Autocorrelation
Std.
a
Error
Value
df
Sig.
Partial
Autocorrelation
Std.
Error
0.071
0.11
0.415
0.52
0.071
0.113
0.122
0.11
1.643
0.44
0.117
0.113
0.02
0.109
1.677
0.642
0.004
0.113
0.116
0.108
2.828
0.587
0.102
0.113
-0.094
0.108
3.586
0.61
-0.113
0.113
-0.025
0.107
3.642
0.725
-0.037
0.113
0.056
0.106
3.923
0.789
0.084
0.113
-0.006
0.105
3.926
0.864
-0.019
0.113
0.039
0.105
4.062
0.907
0.051
0.113
10
0.081
0.104
4.665
10
0.912
0.076
0.113
11
-0.118
0.103
5.969
11
0.875
-0.172
0.113
12
-0.15
0.102
8.106
12
0.777
-0.142
0.113
13
-0.171
0.102
10.942
13
0.616
-0.141
0.113
14
-0.315
0.101
20.703
14
0.109
-0.316
0.113
15
-0.006
0.1
20.706
15
0.146
0.133
0.113
16
-0.073
0.099
21.246
16
0.169
-0.001
0.113
From the above table we that the autocorrelation values are almost 0 and the consistency is
maintained in the lags. Moreover, the test results lead us to accept the null hypothesis H0 that
autocorrelation doesnt exist. This further implies that the market is efficient in the weak form.
Hence, the past records are futile to predict the current prices.
Conclusion
We have calculated cost of capital of four steel organisations viz. Tata Steel, Sail India, Bhushan Steel
and SesaGoa of Vedanta. For cost of equity we have used DDM model, EDM model and CAPM
model. Using EDM and DDM model the cost of equity is coming lesser than risk free interest rate
which is absurd so we have rejected these results and we accepted the results of CAPM model. For
cost of debt we have used total debt value and interest. After getting cost of equity and cost of debt,
we have calculated cost of capital using WACC in which we have used market value of equity.
In efficiency test, auto correlation is coming to be zero so historical data doesnt help in predicting
the current prices so there is no scope of making excess money thus all the four organisations are
efficient in weak form of market. Additionally this is also substantiated by runs test that null
hypothesis is correct that autocorrelation is zero.
References:
1)
2)
3)
4)
5)
6)
7)
8)
Nseindia.com
Tatasteel.com
Bhushansteel.com
Sesagoa.com
Sail.co.in
Capitaline.com
Google.com/finance
Brealey, Myers, Allen, Mohanty (2007), Principles of Corporate Finance, McGrawHill
Publications
Appendix
Tata Steel
BOOK VALUE
MARKET
VALUE
TOTAL DEBT
Beta
Rm
Rf
Risk premium
Ke
interest
Kd
EPS
DPS
g
MP per share
Ke (EPS)
Ke(DPS)
31-03-2013
43061
Bhusan Steel
31-03-2013
7572.72
Sesagoa
31-03-2013
15118.21
Sail
31-032013
40273.16
45685.62
8825.27
16882.27 38847.63
59796.67
21350.97
3741.34 17360.59
1.702
1.44
1.373
1.398
0.12
0.12
0.12
0.12
0.078
0.078
0.078
0.078
0.042
0.042
0.042
0.042
0.149484
0.13848
0.135666 0.136716
1925.42
1046.27
420
983.99
0.03219945 0.049003394
0.06789 0.0566795
67.07
47.7
19.24
8.25
11.998823
4.77
3.999996
1.9998
0.035
0.035
0.035
0.035
453.1
409.44
194.25
94.05
14.8024719 11.65005862 9.904761905 8.7719298
6.14816222 4.665005862
5.5592 5.6263158
CAPM BV
CAPM MV
EDM
DDM
TATA
STEEL
368.33
354.25
344.12
351.41
347.27
Log Returns
Return Actual
-0.016927234
-0.012599945
0.009104202
-0.005146849
-0.00543646
-0.03823
-0.0286
0.021184
-0.01178
-0.01244
320.63
316.04
324.41
321.4
328.01
-0.006262102
0.01135218
-0.004048361
0.008841212
-0.00143231
-0.01244
0.026484
-0.00928
0.020566
-0.00329
505.91
471.24
452.22
439.47
441.81
-0.030831117
-0.017892382
-0.012420532
0.002306308
0
-0.06853
-0.04036
-0.02819
0.005325
0