Rose Anns Biji M

1622084
5 BBA F&A (A)
Fin Sec B

INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

CIA 1
RISK AND RETURN ANALYSIS

Introduction

Risk and Return analysis plays a key role in most decision making process regarding
stocks. Risk refers to the possibility that the actual outcome of an investment will differ
from expected outcome. More specifically, most investors are concerned about the actual
outcome being less than the expected outcome. There are many sources of risk
(systematic and unsystematic risk) such as inflationary risk, market risk, interest rate risk,
business risk, financial risk, operational risk, etc. Return represents the reward for
undertaking investment. The returns of an investment consist of two components: Current
return (mainly in the form of dividends) and Capital return (in the form of increase in
market share price).

Every investor wants to avoid risk and maximize return. In general, risk and return go
hand in hand. If an investor wishes to earn higher returns, then the investor must
appreciate that this will only be achieved by accepting a commensurate increase in risk.
Based on risk and return analysis, high risk gives high returns and low risk gives to low
return.

The main aim of this project is to evaluate the different stocks on the basis of their risk
and return and thus rank them in the order of the desired preference. Furthermore, a
characteristic regression line will be formulated in order to help forecast what the return
of these individual stocks would be in the future.
For the purpose of this project, the index that was chosen is the Nifty50 index. The stocks
that are chosen for this particular project are:

 Tata Consultancy Services Ltd

 Reliance Industries Ltd
 Hindustan Unilever Ltd
 ITC Ltd
 Infosys Ltd

These particular stocks were chosen as they are among the stocks which boast of a very
high market capitalization (among the top 10 high market cap companies). This blue chip
companies have quite some effect on the Nifty50 index which is why I have chosen them
to be analyzed and evaluated.

BRIEF MARKET RELATED PROFILE

Tata Consultancy Services Ltd

TCS had a strong finish to this financial year. Their revenue grew by 8.6% in dollar
terms, 4.4% in rupee. They have added $1.51 billion incremental revenues during the
year and crossed the $19 billion mark in FY’18. Full year operating margin came in at
24.8% and net margin at 21%. The board had recommended a final dividend of ₹ 29 per
share, bringing the total for the year to ₹ 50 per share, which is a payout ratio of 44.3%.
Additionally, the board had also recommended a bonus issue in the ratio of 1:1 during the
year. The Board of Indian IT major Tata Consulting Services (TCS) also approved to buy
back 7,61,90,476 equity shares of Rs 1 face value at Rs 2,100 per share for about Rs 160
billion. Thus, Rs 268 billion of cash has been returned to shareholders in dividends and
buyback during the fiscal. Furthermore, Tata Sons is to participate in second round of
TCS share buyback.

Reliance Industries Ltd

For the year ending March 2018, Reliance Industries has declared an equity dividend of
60.00% amounting to Rs 6 per share. At the current share price of Rs 964.50 this results
in a dividend yield of 0.62%. The company has a good dividend track report and has
consistently declared dividends for the last 5 years. The Mukesh Ambani-led firm logged
its highest-ever quarterly profit of Rs 9,435 crore in Q4, beating street estimates. But the
stock price took a hit (which is evident from the negative return of the stocks calculated
in the later part of this project). This is because the gross refining margins (GRMs) of
$11/bbl were lower than the estimate of 11.4/bbl given by Motilal Oswal. GRMs were
down 4% and 5% on an year-on-year basis and quarter-on-quarter basis, respectively.
Reliance Jio's revenue rose by a meager 4% QoQ compared with 12% growth in
3QFY18) to Rs 7130 crore, mainly due to a sharp decline in average revenue per user,
partly offset by an increase in subscribers.

Hindustan Unilever Ltd

Hindustan Unilever, India’s largest consumer goods company, delivered a double-digit

volume growth for the second consecutive quarter, much ahead of street estimates. The
company yesterday reported 14.2 per cent increase in its standalone net profit to Rs 1,351
crore for the fourth quarter ended March 31, driven by a strong double digit volume
growth. HUL's net sales during the quarter under review stood at Rs 9,003 crore
compared to Rs 8,773 crore in the same quarter previous fiscal. Market experts attribute
the growth in the past two quarters to the implementation of the Goods and Services Tax
(GST) and low base in the previous year due to demonetisation. This news alone caused a
movement on the NSE, where the stock opened at Rs 1,530, then soared to its 52-week
high of Rs 1,542.40, up 2.58 per cent over its previous closing price. For the year ending
March 2018, Hindustan Unilever has declared an equity dividend of 2000.00%
amounting to Rs 20 per share. At the current share price of Rs 1688.00, it results in a
dividend yield of 1.18%.

ITC Ltd

Shares of ITC plunged after the GST Council on Monday raised the cess on cigarettes to
take away an estimated Rs 5,000 crore annual ‘windfall’ manufacturers could have
reaped from lower GST rates. The Goods and Services tax (GST) Council raised the cess
on cigarettes to address an anomaly under the new regime that had resulted in lower tax
incidence than before. This is seen as negative for ITC and some brokerages have
downgraded the stock. FMCG major ITC is expected to post mid single-digit growth in
net profit and sales for the March quarter. Sales volume of the cigarette business is also
likely to grow slower in low single digit. For the year ending March 2018, ITC has
declared an equity dividend of 515.00% amounting to Rs 5.15 per share. At the current
share price of Rs 272.50, it results in a dividend yield of 1.89%.
Infosys Ltd

Attractive valuations, high dividend yield potential, multiple margin levers and finally, a
new CEO at work, are a few triggers that made brokerages up Infosys shares. India's
second-largest IT player reported a 37.6 per cent sequential growth in net profit at Rs
5,129 crore for the December quarter. The number came in much higher than the Rs
3,599 crore as penciled in by analysts. The company management has maintained its
2017-18 sales growth guidance at 5.5-6.5 per cent in constant currency (CC) terms. It
also kept its EBIT margins guidance unchanged at 23-25 per cent. Furthermore, a total of
113,043,478 equity shares were bought back under the buyback at a price of Rs1,150 per
equity share on December 2017. For the year ending March 2018, Infosys has declared an
equity dividend of 515.00% amounting to Rs 25.75 per share. At the current share price
of Rs 1284.00 this results in a dividend yield of 2.01%.

STATISTICAL MEASURES FOR THE FIVE SCRIPS

We would be analyzing these 5 stocks using their respective data from 1st April 2017 to
30th March 2018 through the lens of the following four statistical measures: Return of
individual stock, standard deviation, beta and coefficient of determination.

Rate of return is the proportion of profit earned from an investment during a periodic
interval of time, expressed as a percentage. In this case, we took the daily rate of return
over the course of the past financial year and then used the average of all these daily rates
of return for the purpose of the analysis.

The standard deviation is a statistic that measures the dispersion of a dataset relative to its
mean. Standard deviation is one of the key fundamental risk measures. A large dispersion
indicates how much the return on the fund is deviating from the expected normal returns.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in

comparison to the market as a whole. Beta represents the tendency of a security's returns
to respond to swings in the market.

A security's beta should only be used when a security has a high R-squared value
(coefficient of determination) in relation to the benchmark. The R-squared measures the
percentage of a security's historical price movements that could be explained by
movements in a benchmark index.
After prior calculation (which is done on the Excel workbook attached), the following
values have been derived for each of the scrips

Stock particulars Return Standard deviation Beta Coefficient of determination

TCS 0.07688 1.332160953 0.39841 0.035368077
RELIANCE -0.0911 3.509117836 1.10841 0.039452199
HINDUNILVR 0.15754 1.122957247 0.78467 0.193067105
ITC -0.0272 1.567600657 1.06552 0.182692265
INFY 0.05731 1.433314108 0.70703 0.096219474

With respect to the returns provided by the above stocks, Hindustan Unilever ranks first
with almost a 15% rate of return, followed by TCS (around 7%) and Infosys (around 5
%). ITC and Reliance are giving negative returns with ITC giving a return of -2% and
Reliance giving a return of –9%.

With respect to the risk that these particular stocks are exposed to, Hindustan Unilver
ranks first again with the lowest risk of just a standard deviation of 1.12. Next up is TCS
with standard deviation of 1.33 and then Infosys with standard deviation of 1.43. ITC
exposes the investors to much more risk with a standard deviation of 1.56 and Reliance
seems to be the most risky of them all with a standard deviation of 3.5.

A higher Beta value is always preferred especially now when the markets (especially the
Nifty50) is expected to increase. But the very low correlation of determination makes us
hesitant to use this Beta value as it might not be the most accurate and reliable data value.
But only considering the Beta value, it shows that Reliance and ITC might be very
sensitive stocks with beta value exceeding 1. That means that the proportionate increase
in stock return would be more than the increase in the market return. Hindustan Unilever
and Infosys also are sensitive stocks whereas TCS is not a very sensitive stock. But the
very low coefficient of determination undermines the beta value as the relative change
can be explained only by a meager 3% to 19% level of accuracy.

After the following analysis, one can conclude that the ranking of the above share are as
below:

Stock particulars Ranking

HINDUNILVR 1
TCS 2
INFY 3
ITC 4
RELIANCE 5
CHARACTERISTIC REGRESSION LINE FOR THE SCRIPS

A characteristic line is a line formed using regression analysis that summarizes a

particular security's systematic risk and rate of return. The characteristic line is created by
plotting a security's return at various points in time and then drawing a line of "best fit".
This represents systematic risk determined by regressing historical share prices against
the overall market over the time period.

The vertical intercept of the regression line, termed the alpha factor (a) measures the
average percentage movement in share price if there is no movement in the market. It
represents the amount by which an individual share price is greater or less than the
market's systemic risk would lead us to expect.

The slope of our regression line in relation to the horizontal axis is the beta factor. This
calibrates the volatility of an individual share price relative to market movements.

Ri refers to the return of the individual stock whereas Rm refers to the market return. Thus
the formula would look like this:

Ri = Alpha + Beta*Rm ( + error term)

If past is anything to go by, Indian market has gained on five instances out of eight years
before General Elections were held since 1989. The next General election is to be
conducted in the year 2019 and hence this could suggest the market return to be positive
especially if the BJP government is to remain in power. There has been some recovery in
earnings in the last two quarters, and it is to be around 20 per cent for next fiscal. This
will drive Nifty to 11,800 levels for the year to March 2019. Furthermore, recovery in
private capital expenditure is on the anvil with encouraging manufacturing PMI and
factory output numbers. There are also signs of a pickup in the rural economy which is
reflected in improving volume growth in rural India reported by FMCG companies,
improving sales of tractors and automobiles and expanding agri/tractor financing loan
book of NBFCs.

For the purpose of forecasting, I have decided to forecast the market return for the month
of April 2019. After going through a few articles on forecasting the market return of the
Nifty50, I have come about the value of the market return for the month March 2019 as
3.001771231. (Calculations done on the Excel workbook attached)
 Return for the individual stock
Stock particulars Characteristic Regression Line
(March 2019)
TCS 0.06135 +0.39641*Rm = 1.257294716
RELIANCE -0.13426 +1.10841*Rm = 3.19293428
HINDUNILVR 0.12697+ 0.7866*Rm = 2.482365121
ITC -0.06867+ 1.06552*Rm = 3.129781532
INFY 0.02977 + 0.70703*Rm = 2.152131342

As we are forecasting the Nifty50 index to rise in the year 2019, the stocks with a higher
Beta value are shown to give a higher return than those stocks with lower Beta value. For
example, Reliance was ranked as fifth among these five stocks for the current financial
year but in the next financial year, as the markets are expected to rise, Reliance returns
are also expected to rise quite significantly giving the highest return among them all (due
to its very high Beta value). The same goes for ITC which has the second highest beta
value and thus the second highest expected rate of return. Whereas Hindustan Unilever,
Infosys and TCS are forecasted to have considerably lower returns due to the fact that
their Beta value is low. But due to the low coefficient of determination, the Beta value
cannot be regarded with much weight and so this forecast cannot be said to be very
reliable.

Thus, through this project, we have analysed and evaluated five different stocks from the
Nifty50 index on the basis of their risk and return, ranked them accordingly and even
forecasted what their future return would be using a Characteristic Regression Line.