JAIPURIA INSTITUTE OF MANAGEMENT, LUCKNOW

Analysis of Risk and Return

(Assignment)

Sector: FMCG Industry

Submitted To:
Dr. Saima Rizwi

Submitted By:
Feroz Ahmad (JIML-11-057) Bhola Bhakta (JIML-11-FS-021) Kushal Bhardwaj (JIML-11-075) Gaurav Saraswat (JIML-11-060) Bhagwati Prasad Gupta (JIML-11-044) DATE: January 10, 2012

ACKNOWLEDGEMENT

We are grateful to our respected instructor Dr. Saima Rizvi for giving us an opportunity to understand the financial analysis of FMCG Industry. Through this project we came to learn that how to look at the problem from a Managers perspective. We would like to present our gratitude to Saima Mam for the successful completion of the project which would not have been possible without his continuous help and guidance.

CONTENTS
INTRODUCTION ................................................................................................................................ 4 COLGATE PALOMOLIVE ...................................................................Error! Bookmark not defined.
DABUR INDIA LTD. ...........................................................................Error!

Bookmark not defined.

GODREJ CONSUMER PRODUCTS LTD ................................................Error! Bookmark not defined.

HINDUSTAN UNILEVER LTD ITC LTD

.............................................................Error! Bookmark not defined.

...........................................................................................Error! Bookmark not defined. ...16-17

COMPARISON AMONG BETA 5 COMPANIES .14 Risk & Return Of The Companies

INTRODUCTION
Risk and Return
The project assigned to us is the analysis of Risk and Return of FMCG companies. Both risk and return go side by side, it becomes very important for an investor to consider both risk and return. The decision of an investor whether to invest or not is greatly influenced by the return given by that particular company and the risk associated. We took five different FMCG companies return as a component of FMCG sector. Market return has also been considered as benchmark. Excel has been used for the calculations. We have used functions like descriptive statistics, regression and charts. Risk and return has been calculated, analyzed and interpreted on the basis of last 12 months return (From April 2010 to March 2011). Firstly mean return of the companies has been calculated then with the help of descriptive statistics standard deviation risk has been calculated. It shows the amount of deviation of actual return from thee mean return. The sensitivity (BETA) has been calculated with the help of regression. The following companies have been taken:

Colgate Palmolive Dabur India Ltd. Hindustan Unilever Ltd. Godrej Consumer Products Ltd. ITC Ltd.

Measurement Risk
Financial Management develops the concept of total risk as, Total risk = Systematic risk + Unsystematic risk Unsystematic risk is the company or industry specific risk that is inherent in each investment. It can be removed.

But systematic cant be removed though it can be minimized. Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cant be avoided through diversification. Beta () is used to define the systematic risk of a stock. Beta measures a stock's volatility, the degree to which its price or return fluctuates in relation to the overall market. In other words, it gives a sense of the stock's market risk compared to the greater market. Beta is used also to compare a stock's market risk to that of other stocks. This measure is calculated using regression analysis. A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market. A beta less than 1 but greater than 0 means it tends to be less volatile than the market.

Colgate Palmolive
Company Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 10.48 2.28 10.7 0.29 -0.79 5.77 -0.66 0.74 -0.97 -5.08 -2.78 -0.2 Market 0.18 -3.5 4.46 0.95
Colgate Palmolive ltd Return

Colgate Palmolive Vs BSE Sensex Returns

15 10 5 0 -20 -10 -5 -10 BSE Sensex Return 0 10 20 y = 0.4573x + 1.3759 R = 0.263 Colgate Palmolive Vs BSE Sensex Return Linear (Colgate Palmolive Vs BSE Sensex Return)

0.58 11.67 0.38 -2.55 3.32 -10.64 -3.11 5.41

Company Name Colgate-Palmolive (India) Ltd.

Standard Company's Beta Beta 1 0.457251762

Avg. Return

Company's Alpha Status 1.64833333 4.8695234 3.22119009 Overpriced

Reqd. Return

The above graph has been derived by plotting monthly returns of Colgate Palmolive with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Colgate Palmolive is the slope of this characteristics line.

BETA ()
Beta () is used to measure the systematic risk of a security. Colgate Palmolive has a of 0.457251762 based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0 means that returns of Colgate Palmolive are less volatile than that of the market (BSE SENSEX). Here the of Colgate Palmolive is less than 1 that implies that the stock of the company is a defensive stock which would not be market oriented. If there is increase or

decrease in the market index then the stock may not apparently move along with market. It is good for risk-averse investors, who do want to take high risk.

INTERCEPT (ALPHA)
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. The intercept Colgate Palmolive is 1.3758. It means Colgate Palmolive has positive 1.37% return when the market return is zero for the extra risk. Here the alpha is positive that shows the stock is being traded at underpriced, which is a good option for investors to invest in the stock to get better return in future.

COEFFICIENT OF CORRELATION
The coefficient of correlation is 0.512. The positive correlation indicates that when the market return goes up, Colgate Palmolives return also goes up.

COEFFICIENT OF DETERMINATION
The squared coefficient of correlation or the coefficient of determination is 0.263 or 26.3%. It indicates the percentage of the variance of Colgate Palmolives returns, explained by the changes in the market returns. The 73.7% unexplained variance is the firm-specific variance.

Dabur India Ltd.

Company 13.75 2.47 13.47 -5.79 6.65 2.63 -5.32 -5.6 5.19 -6.28 9.82 -4.33 Market 0.18 -3.5 4.46 0.95 0.58 11.67 0.38 -2.55 3.32 -10.64 -3.11 5.41

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

Dabur India Ltd. Vs BSE Sensex Returns y = 0.3264x + 2.0272

15 10 5 0 -10 -5 -10 BSE Sensex Returns 0 10 20 Linear (Dabur India Ltd. Vs BSE Sensex Returns) Dabur India Ltd. Returns R = 0.0555 Dabur India Ltd. Vs BSE Sensex Returns

-20

Company Name Dabur India Ltd.

Standard Beta 1

Company's Avg. Reqd. Beta Return Return 0.326448734 2.22166667 5.8994883

Company's Alpha Status -3.6778216 Overpriced

The above graph has been derived by plotting monthly returns of Dabur India Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Dabur India Ltd. is the slope of this characteristics line.

BETA ()
Beta () is used to measure the systematic risk of a security. Dabur India Ltd. has a of 0.326 based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0 means that returns of Dabur India Ltd. are less volatile than that of the market (BSE SENSEX). Here the of Dabur India Ltd. is less than 1 that implies that the stock of the company is a defensive stock which would not be market oriented. If there is increase or decrease in the market index then the stock may not apparently move along with market. It is good for risk-averse investors, who do want to take high risk.

INTERCEPT (ALPHA)
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. The intercept Dabur India Ltd. is 2.027. It means Dabur India Ltd. has positive 2.027% return when the market return is zero for the extra risk. Here the alpha is positive that shows the stock is being traded at underpriced, which is a good option for investors to invest in the stock to get better return in future.

COEFFICIENT OF CORRELATION
The coefficient of correlation is 0.2356. The positive correlation indicates that when the market return goes up, Dabur India Ltd.s return also goes up.

COEFFICIENT OF DETERMINATION
The squared coefficient of correlation or the coefficient of determination is 0.0555 or 5.55%. It indicates the percentage of the variance of Dabur India Ltd.s returns, explained by the changes in the market returns. The 94.45% unexplained variance is the firm-specific variance. The above graph has been derived by plotting monthly returns of Dabur India Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Dabur India Ltd. is the slope of this characteristics line.

Godrej Consumer Products Ltd.

Company Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 11.47 11.29 6.66 0.2 8.12 8.55 2.73 -2.34 -7.18 -3.74 -5.6 -0.34 Market 0.18
Godrej Consumer Products Ltd. Returns

-3.5 4.46 0.95 0.58 11.67 0.38 -2.55 3.32 -10.64 -3.11 5.41

Godrej Consumer Products Ltd. Vs BSE Sensex Returns

15 10 5 0 -20 -10 -5 -10 BSE Sensex returns 0 10 20 y = 0.3512x + 2.2758 R = 0.0864 Godrej Consumer Products Ltd. Vs BSE Sensex Returns Linear (Godrej Consumer Products Ltd. Vs BSE Sensex Returns)

Company Name Godrej Consumer Products Ltd.

Standard Beta

Company's Beta

Avg. Return

Reqd. Return

Company's Alpha

Status

0.351176474

2.485

5.7047779

-3.21977791 Overpriced

The above graph has been derived by plotting monthly returns of Godrej Consumer Product Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Godrej Consumer Product Ltd. is the slope of this characteristics line.

BETA ()
Beta () is used to measure the systematic risk of a security. Godrej Consumer Product Ltd. has a of 0.3511 based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0 means that returns of Godrej Consumer Product Ltd. are less volatile than

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that of the market (BSE SENSEX). Here the of Godrej Consumer Product Ltd. is less than 1 that implies that the stock of the company is a defensive stock which would not be market oriented. If there is increase or decrease in the market index then the stock may not apparently move along with market. It is good for risk-averse investors, who do want to take high risk.

INTERCEPT (ALPHA)
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. The intercept Godrej Consumer Product Ltd. is 2.2757. It means the company has positive 2.27% return when the market return is zero for the extra risk. Here the alpha is positive that shows the stock is being traded at underpriced, which is a good option for investors to invest in the stock to get better return in future.

COEFFICIENT OF CORRELATION
The coefficient of correlation is 0.2339. The positive correlation indicates that when the market return goes up, Godrej Consumer Product Ltd.s return also goes up.

COEFFICIENT OF DETERMINATION
The squared coefficient of correlation or the coefficient of determination is 0.0864 or 8.64%. It indicates the percentage of the variance of Godrej Consumer Product Ltd.s returns, explained by the changes in the market returns. The 91.36% unexplained variance is the firm-specific variance.

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Hindustan Unilever Ltd.

Company Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 0.13 -0.94 12.73 -4.68 5.3 16.49 -3.79 2.67 5.08 -13.18 3.54 -0.75 Market 0.18 -3.5 4.46 0.95 0.58 11.67 0.38 -2.55 3.32 -10.64 -3.11 5.41

Hindustan Unilever Ltd. Vs BSE Sensex Returns

Hindustan Unilever Ltd. returns 20 15 10 5 -20 0 -10 -5 0 -10 -15 BSE Sensex Returns 10 20 Hindustan Unilever Ltd. Vs BSE Sensex Returns Linear (Hindustan Unilever Ltd. Vs BSE Sensex Returns ) y = 1.1083x + 1.2229 R = 0.6087

Company Name Hindustan Unilever Ltd.

Standard Beta 1

Company's Beta

Avg. Return

Reqd. Return

Company's Alpha

Status

1.10834855 1.88333333 0.2573212 2.140654545 Underpriced

The above graph has been derived by plotting monthly returns of Hindustan Unilever Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of Hindustan Unilever Ltd. is the slope of this characteristics line.

BETA ()
Beta () is used to measure the systematic risk of a security. Hindustan Unilever Ltd. has a of 1.108 based on the monthly returns during April 2010 to March 2011. A Beta of greater than 1 means that returns of Hindustan Unilever Ltd. is more volatile than that of the market (BSE SENSEX). Here the of Hindustan Unilever Ltd. is greater than 1 that implies that the stock of the company is a aggressive stock which would be market oriented. If there is increase or decrease in the market index then the stock would apparently move along with the market. It is not good for risk-averse investors, who do want to take high risk but for risk takers who want to invest in these securities with the hope of getting risk premium for the additional amount of risk.

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INTERCEPT (ALPHA)
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. The intercept Hindustan Unilever Ltd. is 1.223. It means the company has positive 1.22% return when the market return is zero for the extra risk. Here the alpha is positive that shows the stock is being traded at underpriced, which is a good option for investors to invest in the stock to get better return in future.

COEFFICIENT OF CORRELATION
The coefficient of correlation is 0.7802. The positive correlation indicates that when the market return goes up, Hindustan Unilever Ltd.s return also goes up.

COEFFICIENT OF DETERMINATION
The squared coefficient of correlation or the coefficient of determination is 0.6087 or 60.87%. It indicates the percentage of the variance of Hindustan Unilever Ltd.s returns, explained by the changes in the market returns. The 39.13% unexplained variance is the firm-specific variance.

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ITC Ltd.
Company Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 0.72 6.83 11.51 1.31 5.36 9.47 -1.44 -0.09 1.78 -6.62 0.42 4.58 Market 0.18 -3.5 4.46
ITC Ltd. Returns

ITC Ltd. Vs. BSE Sensex Returns

15 10 5 0 -20 -10 -5 -10 BSE Sensex Returns 0 10 20 Linear (ITC Ltd. Vs. BSE Sensex Returns) y = 0.6617x + 2.4249 R = 0.5343 ITC Ltd. Vs. BSE Sensex Returns

0.95 0.58 11.67 0.38 -2.55 3.32 -10.64 -3.11 5.41

Company Name I T C Ltd.

Standard Company's Beta Beta 1

Avg. Return

Reqd. Return

Company's Alpha

Status

0.6616846 2.81916667 0.3942537

2.424912946 Underpriced

The above graph has been derived by plotting monthly returns of ITC Ltd. with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The Beta of ITC Ltd. is the slope of this characteristics line.

BETA ()
Beta () is used to measure the systematic risk of a security. ITC Ltd. has a of 0.6617 based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0 means that returns of ITC Ltd. are less volatile than that of the market (BSE SENSEX). Here the of ITC Ltd. is less than 1 that implies that the stock of the company is a defensive stock which would not be market oriented. If there is increase or decrease in the market index then the stock may not apparently move along with market. It is good for risk-averse investors, who do want to take high risk.

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INTERCEPT (ALPHA)
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. The intercept ITC Ltd. is 2.4249. It means the company has positive 2.42% return when the market return is zero for the extra risk. Here the alpha is positive that shows the stock is being traded at underpriced, which is a good option for investors to invest in the stock to get better return in future.

COEFFICIENT OF CORRELATION
The coefficient of correlation is 0.7309. The positive correlation indicates that when the market return goes up, ITC Ltd.s return also goes up.

COEFFICIENT OF DETERMINATION
The squared coefficient of correlation or the coefficient of determination is 0.5343 or 53.43%. It indicates the percentage of the variance of ITC Ltd.s returns, explained by the changes in the market returns. The 46.57% unexplained variance is the firm-specific variance.

COMPARISON AMONG BETA 5 COMPANIES

Companies Colgate Palmolive Ltd. Dabur India Ltd. Godrej Consumer Products Ltd. Hindustan Unilever Ltd. ITC Ltd. Beta 0.47 0.32 0.35 1.1 0.66

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Here we can compare the Beta of all the five companies. All of them are having Beta values less than or more than 1. It means all the companies have returns those are less or more volatile than the market returns. Since the index is same for all the companies, the company having lowest is most risk free among them. Here, Asian Paints has the minimum risk among all the companies.

RISK & RETURN OF THE COMPANIES

AVG. YEARLY RETURN OF COMPANIES
Colgate Palmolive Ltd. Dabur India Ltd. Godrej Consumer Ltd. Hindustan Unilever Ltd. ITC Ltd. Returns 1.64 2.22 2.48 1.88 2.81 Beta 0.47 0.32 0.35 1.1 0.66

3 2.5 2 1.5 1 0.5 0 Risk Return

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Among all the companies, Hindustan Unilever Ltd. has High Beta and highest Avg. Returns is of Godrej Consumer Ltd. So the profile of Dabur India Ltd. is most attractive for risk-averse but Hindustan Unilever Ltd. has the most attractive profile for risk takers investors. Again ITC Ltd. is the second best profile for risk takers because of high beta but Dabur India Ltd. is second best for risk-averse investors because of a low beta.

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