Shivray A.

Harshe --------EMP14--A--41
Business Environment
Assignment no-14-- week-06

total sheets--2

This application exercise examines whether the annual average stock price of a company has moved in tandem with the grow
company.

* Growth being measured by Capital Employed (Balance sheet figures)

* Efficiency measured by increase in profits (PAT-- Profit & loss accounts)
* Stock price - based on Average annual stock price ( Average of quarter ending prices)

Hindustan Lever Ltd.- case study

Average stock price ( Avg of

Year quarter ending prices) Capital employeed Profit after tax
1991 NA 45521 8020
1992 NA 53357 9848
1993 44.5 50089 12727
1994 66 86236 18996
1995 59.5 97606 23922
1996 79 142915 41270
1997 127.5 144808 58025
1998 161 197734 83744
1999 236 228053 106994
2000 236 259983 131009
2001 214 312743 154100

Using regression , comment on the degree to which the dependent variable i.e. STOCK PRICE is related
to the INDEPENDENT VARIABLES i.e. CAPITAL EMPLOYED and PAT

Y X1 X2

Average stock price ( Avg of

Year quarter ending prices) Capital employeed Profit after tax
1993 44.5 50089 12727
1994 66 86236 18996
1995 59.5 97606 23922
1996 79 142915 41270
1997 127.5 144808 58025
1998 161 197734 83744
1999 236 228053 106994
 2000 236 259983 131009
2001 214 312743 154100

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.953617820756796
R Square 0.90938694806494
Adjusted R Square 0.879182597419921
Standard Error 27.2459764539514
Observations 9

ANOVA
df SS MS F
Regression 2 44700.6628246466 22350.3314123 30.10781
Residual 6 4454.05939757565 742.343232929
Total 8 49154.7222222222

Coefficients Standard Error t Stat P-value

Intercept 59.3804956777329 43.1779173407905 1.37525150204 0.218193
Capital employeed -0.000473124225826 0.00077220686585 -0.61269103753 0.562567
Profit after tax 0.002232613186227 0.00130177292023 1.71505579163 0.137158

RESIDUAL OUTPUT

Observation
Predicted Average stock price ( Avg of quarter ending
Residuals
prices) Standard Residuals
1 64.0966443514766 -19.596644351477 -0.83051733607
2 60.9908750250224 5.00912497497759 0.21228966835
3 66.6093051327431 -7.1093051327431 -0.30129654109
4 83.9038931394899 -4.9038931394899 -0.20782988115
5 120.415702915244 7.08429708475624 0.30023668528
6 152.795708675788 8.20429132421197 0.34770270117
7 190.359311852774 45.6406881472263 1.93427926008
8 228.868660989419 7.13133901058143 0.30223034982
9 255.459897918044 -41.459897918044 -1.7570949064

Regression equation :--

Average stock price is function of capital emploed & profit of the organization.

average stock price = 59.38049568 - 0.000473124(Capital employed) + 0.002232613 (Pro

Comments:----
1. Coefficent of capital employed is -0.000473124 - This means that for every 1 unit of increase in c

2. Coefficent of PAT is 0.0022322613 This means that for every 1 unit of increase in PAT, the predi

Please refer next sheet for Cummins case an

y has moved in tandem with the growth and efficiency of your

PRICE is related 300

250
Avg stock price Rs.

Calculated 200
Based on
regression
equation 150
64.09664435148 Coefficients
60.99087502502 Intercept 59.3805
100
66.60930513274 Capital employ -0.000473
83.90389313949 Profit after tax 0.002233
120.4157029152 50
152.7957086758 Remarks-- R-square value is 90.9% clearly shows that
190.3593118528 Avg stock price is a function of Capital employed & PAT
0
1 2 3
 100

Avg
50

t o c kYp r i c e ( A v g o f q u a r t e r e n d i n g p r i c e s )
228.8686609894
1 2 3
255.459897918

Capital
X Variable
50089
employeed
Residual
1 Residual
Residual
PlotPlotPlot
100
Profit
X Variable
12727
after tax
Residual
2 Residual
Residual
PlotPlot
Plot

Residuals
50 100
Normal Probability Plo
50 Normal Probability Plo

Residuals
0 300

50000
0 0 0
100000 150000
0 100
200
30002000000 250000
250 0 300000 0 350000
-50 00-50 0000 0 0000 0 000 0 0000 00 00
50 0 0 5200 0 0
0 0 10 5 0 0
000 0 00 0
40 0 5 50 0 60
1 0 1 X 0Variable
0 employeed
2 00 1200 20
30
30
00 600
00 3 Percentile
20Capital
4 50089
150
100 6 8 10
0Sample
12 14 1

A v e r a g e s44.5
Significance F 1000 Profit
X Variable
12727
after tax 2
0.000743998867 50 0 10 20 30 40 50 60
0 Sample Percentile
0 10 20 30 40 50

Lower 95% Upper 95%Lower 95.0%Upper 95.0%

-46.2720617677 165.0331 -46.27206 165.0330531
-0.00236264635 0.001416 -0.002363 0.001416398
-0.00095271039 0.005418 -0.000953 0.005417937

PROBABILITY OUTPUT

Average
Percentile
stock price ( Avg of quarter ending prices)
5.555555555556 44.5
16.66666666667 59.5
27.77777777778 66
38.88888888889 79
50 127.5
61.11111111111 161
72.22222222222 214
83.33333333333 236
94.44444444444 236

oyed) + 0.002232613 (Profit after tax)

r every 1 unit of increase in capital employed, the predicted stock price reduces by 0.000473124 if the PAT ke

of increase in PAT, the predicted Stock price increases by 0.0022322613 if the Capital employed is kept con

mins case analysis

 Avg stock price Vs Regression output
300

250

200

Average stock price ( Avg of

150 quarter ending prices)
Calculated Based on regression
equation
100

50

0
1 2 3 4 5 6 7 8 9

years
 100

50

0
1 2 3 4 5 6 7 8 9

years

dual
lotPlotPlot

esidual
xResidual
Residual
PlotPlot
Plot
ormal Probability Plot
ormal Probability Plot
50000 0 300000 0 350000 00
0000 0000 0 00 0 0 0
5
200
200 30
30 0
0 40 0 5 50 0 60 0 70
0 3 00 0 0080 90 100
eed
8 0 0 0 0
10 12 14 16 18
Sample Percentile

ofit
Variable
12727
after tax
2
20 30 40 50 60 70 80 90 100
Sample Percentile
20 30 40 50 60 70 80 90
473124 if the PAT kept constant constant

mployed is kept constant

Shivray A. Harshe --------EMP14--A--41
Business Environment
Assignment no-14-- week-06

Cummins India Ltd.

Balance Sheet (Rs '
000) Data source--- company balance sheet---annual report
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06

Equity Share Capital 396,000 396,000 396,000 396,000 396,000 396,000

Preference Share Capital 0 0 0 0 0 0
Reserves 5,385,642 5,788,207 5,921,698 6,120,931 6,592,887 7,446,806
Networth 5,781,642 6,184,207 6,317,698 6,516,931 6,988,887 7,842,806
Secured Loans 17,728 50,987 207,754 310,820 85,919
Unsecured Loans 119,944 87,366 36,842 3,564 1,920 1,576
Total Debt 119,944 105,094 87,829 211,318 312,740 87,495
Total capital employed 5,091,000 5,901,586 6,454,072 6,405,527 6,872,400 7,391,993 7,948,748

Rs. Cr. Capital employed 509 590 645 641 687 739 795

Stock prices--BSE
Data source--- www.moneycontrol.com
Year 2000 2001 2002 2003 2004 2005 2006
Q1 118.88 88.2 55.4 48.55 128 122.4 158.6
Q2 79.8 58.85 52.6 51.75 98.35 113.05 237.35
Q3 89.83 50.85 57.75 68.1 100.55 134.4 190.05
Q4 69.27 48.3 48 85.15 132.1 148.45 229.25
Average annual stock
price 89.45 61.55 53.44 63.39 114.75 129.58 203.81

Coefficients
Intercept -88.042063941
Capital employed (Rs.Cr.) -0.0165378937
Profit after tax (Rs. Cr.) 1.7575534922

Q-3-- Apply above to your own company, and comment on the company specific environment
that have attributed to the changes in stock price…

Case study of Cummins India Ltd.

Average Capital
stock Price employed Profit after Stock price with
Year (Rs.) Actual (Rs.Cr.) tax (Rs. Cr.) regression eqn
 2000 89.45 509 93 67.535810734531
2001 61.55 590 108.93 93.648257772626
2002 53.44 645.4072 86.31 52.978702304862
2003 63.39 640.5527 94.31 67.119413447541
2004 114.75 687.24 109.27 92.640304086512
2005 129.58 739.1993 137.23 140.92220234868
2006 203.81 794.8748 175.7 207.61452969344
2007 328.36 938.0263 242.05 321.86077961181
Column F shows calculation of stock price with regression equation
Column C shows actual annual avg stock prices

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.9820070096
R Square 0.9643377668
Adjusted R Square 0.9500728735
Standard Error 20.970330717
Observations 8

ANOVA
df SS MS F Significance F
Regression 2 59456.75512 29728.37756 67.60217185 0.0002401714272
Residual 5 2198.773852 439.7547704
Total 7 61655.52898

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Lower 95.0%
Intercept -88.042063941 63.46241258 -1.387310384 0.224003197 -251.1773888948 75.09326 -251.1774
Capital employed (Rs.Cr.) -0.0165378937 0.151034706 -0.109497308 0.917066951 -0.404784965859 0.371709 -0.404785
Profit after tax (Rs. Cr.) 1.7575534922 0.372165249 4.722508334 0.005230912 0.8008722624004 2.714235 0.800872

RESIDUAL OUTPUT PROBABILITY OUTPUT

Observation
Predicted Average stock Price
ResidualsStandard
(Rs.) Residuals Percentile
Average stock Price (Rs.)
1 67.535810735 21.90918927 1.236189485 6.25 53.4375
2 93.648257773 -32.09825777 -1.811090692 18.75 61.55
3 52.978702305 0.458797695 0.025886895 31.25 63.3875
4 67.119413448 -3.731913448 -0.210566996 43.75 89.445
5 92.640304087 22.10969591 1.247502739 56.25 114.75
6 140.92220235 -11.34720235 -0.640246979 68.75 129.575
7 207.61452969 -3.802029693 -0.214523188 81.25 203.8125
8 321.86077961 6.501720388 0.366848736 93.75 328.3625

Regression equation
average stock price = -88.04206394 - 0.016537894 (Capital employed) + 1.1757553492 (Profit after tax)

Coefficient of Capital employed is - 0.01653794

This means , for every 1 unit of increase in capital employed , the predicted stock price reduces by 0.016537

Coefficient of PAT is + 1.1757553492

This means , for every 1 unit of increase in PAT, the predicted stock price increases by 1.1757553492 , if cap
 Actual avg stock price Vs Regression output
350 This graph clearly shows
Capital employed & Profi
300

i.e. Annual avg stock pric

250
Avg stock price Rs.

200
Average stock Price (Rs.) Actual
150 Stock price with regression eqn

100

50

0
1 2 3 4 5 6 7 8

Years

Specific environment contributed to changes in stock prices..

1) Constant growth in Cummins Business.. 20000

sales volume increased i.e. almost doubled since last five years. 18000
16000
14000
%
Contribution 12000
Total sales Exports % Domestic of exports in 10000
Year -Rs.Million Rs.Million sales total sales
2002-2003 8320 1762 78.8 21.2 8000
2003-2004 9324 2274 75.6 24.4 6000
2004-2005 11920 4024 66.2 33.8 4000
2005-2006 14630 5449 62.8 37.2
2000
2006-2007 18408 6050 67.1 32.9
0
Substantial rise in 'Exports' 2002-2003 2003-2004 2004-2005

2) Product cost reduction achieved through various initiatives.

like turnbo-Kaizen, Ace projects.
which has direct impact on bottomline , results increased profitability. This has attracted shareholders/ new buyers

3) Brand Image of Cummins:-- Proven technology , product & after sales service has created a very good Brand Image
of Cummins in the Indian business environment.
Cummins mission is -- Growth through Dependability
We are successful in this Image building , resulting in rise in sale , keeping leadership position in the Industry
and profit maximisation.
4) Dividend :-- Shareholders are getting 200% dividend for last 5 consecutive years.

5) Cash rich company & Debt free :-- Cummins has cash reserves worth Rs. 889 Cr., at the same time we are "Debt free
So we have achieved confience in equity market which is leading to rise in stock price.

6) Indian economy is booming:- Various projects are in progress contributing to Infra-structural development.
Diesel engines is a prime mover , an integral part of any Infr-structrural devp project.

7) Cummins- Potential to grow :-- In India Power is always on shortage. Our 60% business is in Power generation secto
Increasing and uninterrupted power is given by Cummins products, hence Cummins is growing by leaps & bounds.
We are aiming to become $ 2 billion company by 2010.
 Mar-07

396,000
Stock price trend from year 2000 till today
0
8,899,531
data source- moneycontrol.com
9,295,531
24,064
1,218
25,282
9,380,263

938

2007
277
264.9
339.95
431.6

328.36
 Capital employed (Rs.Cr.) Residual Plot
40
Profit after tax (Rs. Cr.) Residual Plot
Residuals

20
40
Average stock Price (Rs.)

0
Normal Probability Plot
Residuals

-20400 20
500 600 700 800 900 1,000
0 400
-40
-20 60 80 100 120 140 160 180 200 220 240 260
Capital200
employed (Rs.Cr.)
-40
0 Profit after tax (Rs. Cr.)
0 10 20 30 40 50 60 70 80 90 100
Sample Percentile

Upper 95.0%
75.09326
0.371709
2.714235

53492 (Profit after tax)

rice reduces by 0.01653794 , if PAT is constant

s by 1.1757553492 , if capital employed is constant

 This graph clearly shows that Cummins avg annual stock price has strong relation with
Capital employed & Profit after tax for the year.

i.e. Annual avg stock price is a function of capital employed & PAT

Total sales -Rs.Million

Exports Rs.Million

03 2003-2004 2004-2005 2005-2006 2006-2007

shareholders/ new buyers

ed a very good Brand Image

sition in the Industry

same time we are "Debt free" company

ctural development.

is in Power generation sector.

owing by leaps & bounds.