Professional Documents
Culture Documents
December .2022
1
“A Study on risk management in stock exchange
market for automobile companies
December 2022
2
RAV’S
LAXMICHAND GOLWALA COLLEGE OF COMMERCE &
ECONOMICS, M.G. ROAD GHATKOPAR (EAST),
MUMABI- 400077 MAHARASHTRA,
Certificate
This is to certify that Ms. Ashwini Namdev Sonawane has worked and
duly completed his Project Work for the Master of Commerce under the
Faculty of Commerce in the Banking and Finance semester-III (2022-
2023) and his project is entitled, “A Study on risk management in stock
exchange market for automobile companies” under my supervision. I
further certify that the entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any
Degree or Diploma of any University.
It is her/ his own work and facts reported by her/his personal findings and
Investigation.
------------------------------
Name & Signature of Principal
Dr. Sunil Karve
--------------------------------------------------- -----------------------------------------
(Mr.Raju Ambhore)
Project Guide/Internal Examiner Name & Signature of External Examiner
COLLEGE SEAL
3
Declaration
I the undersigned Ms. Ashwini Namdev Sonawane here by, declare that
the work embodied in this project work titled “A study on risk
management in stock exchange market for automobile companies” forms
my own contribution to the research work carried out under the guidance
of Mr. Raju Ambhore is a result of my own research work and has not
been previously submitted to any other University for any other
Degree/Diploma to this or any other University. Wherever reference has
been made to previous works of others, if has been clearly indicated as
such and included in the bibliography. I hereby further declare that all
information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.
----------------------------------------
Name and Signature of Learner
Certified by
---------------------------------
Name and signature of the Guiding Teacher
Mr.Raju Ambhore
4
ACKNOWLEDGEMENT
--------------------
(Signature of Student)
(ASHWINI NADEVSONAWANE)
5
Abstract/summary
Risk factors, arising due to the dynamic business environment, are
expected to have a great influence on the stock market returns. Investors
need to collect timely information on these risk factors so that investments
can be revisited, and necessary revision should be done to reduce their
impact on investment returns. This research attempted to study risk and
return of segments of different automobile companies listed on the
National Stock Exchange of India. Returns were measured in terms of
historical stock returns and reward to risk ratio. Risk was measured as
standard deviation and beta. The automobile segments selected for the
study were cars, motorcycles, scooters, and tractors. The returns and risk
were measured for four-time tenures, namely 1-year tenure, 3-year tenure,
5-year tenure, and 10-year tenure. The basic objective for this was to
ascertain the risk and return variation across time and segments. The
literature evidence showed that only a very few studies attempted to study
the change in risk and returns employing different time tenures.
The S&P BSE AUTO Index was at 29,830.2 and its down 0.3%. The
index is up 2.6% over the last 30 days. And over the last 1 year, it has
gained 12.7%.
Within the BSE Auto Index, the top gainers were TATA MOTORS is
to up 2.8% and ASHOK LEYLAND where up 0.7%. On the other
hand, EICHER MOTOR is down from 5.0% and ESCORTS KUBOTA is
down 1.9% were among the top losers.
Meanwhile, the benchmark S&P BSE SENSEX was at 61,795.0 (up
2.0%).
Keywords
Historical Returns, Standard Deviation, Beta,Automobile Segments, Risk,
6
INDEX
Table of Contents
Introduction
1 8
1.1 Strategies of Risk Management
Literature Review
2 14
Significance
4 22
Risk Factors for Automotive Industry
4.1
Risk assessment of Indian automotive
4.2
enterprises.
4.3
Equity analysis of automobile industry in
stock market.
Research Methodology
5 54
8 81
Bibliography
7
Chapter 1
INTRODUCTION
Indian Automobile represents one of the largest automobile sectors in
world’s manufacturing two-wheeler and four-wheeler domestic and
commercial vehicles. The first imported car ran on Indian road in 1897
and first embryonic industry emerged in 1940s. Today, India
manufactures all type of vehicle and in large units of production in every
segment.
8
According to official statistics provided by IBEF (India Brand Equity
Foundation), auto industry in India became the 4th largest in the world
with sales increasing 9.5 per cent year-on-year to 4.02 million units
(excluding two wheelers) in 2017 and it was the 7th largest manufacturer
of commercial vehicles in 2018. Spulbar et. al (2019) investigated the
issue of sustainable investing on Bombay Stock Exchange
(BSE) of India and suggested that emerging markets are characterized
by rather unstable economic and financial structure.
9
shareholder value. In this context enterprise risk management has
emerged in a new business trend. Many risk identification/assessment
tools developed to enable a management team to identify and assess risks
that their organizations are facing. In the recent past, a numbers of the
world's most widely respected companies have collapsed. Analysis's have
cited equally well known reasons for these collapses like nonviable
business models,
Since then almost all the global majors have set up their facilities in India
taking the production of vehicle from 2 million in 1991 to 15 million in
2011 (SIAM, 2011). The country with its rapidly growing middle class
(450 million in 2007, NCAER report), market oriented stable economy,
availability of trained manpower at competitive cost, fairly well
10
developed credit and financing facilities and local availability of almost
all the raw materials at a competitive cost has offered itself as one of the
favourite destination for investment to the auto makers (Draft Automotive
Mission Plan, 2006-16).
According to the Society of Indian Automobile Manufacturers, annual
vehicle sales are projected to increase to 5 million by 2015 and more than
9 million by 2020 and by 2050, the country is expected to top the world
in car volumes with approximately 611 million vehicles on the nation's
roads. The second section provides the motivation and need for the
framework presented in the paper.
The third section takes up discussion on risk, enterprise risk management
and risk assessment. In the section 4, the research methodology has been
described which includes a discussion on Bayesian networks and
assessment model description. These sections are followed by results,
analysis of results and discussions of limitations and future research.
11
1.1 Strategies of Risk Management:-
Hedging uses derivatives to fix the price of underlying assets and thus
insulate them somewhat from price fluctuations. This strategy is often
used in equity trade.
12
Investing in blue-chip – stocks from large stable companies with a market
reputation for efficiency and reliability – is another risk management
strategy. That is effective since market fluctuations have less impact on
such large companies than on smaller companies. Pairs trading involves
buying stocks of a company and simultaneously short-selling the stocks
of another company from the same sector to mitigate risk from an
anticipated price fluctuation
13
Chapter 2
Literature Review
Laxman Raj Kandel (2018)4 this paper analyses the risk and return on
common stock investment of Nepalese stock market and it is focused on
common stock of two commercial banks listed in Nepal stock exchange
Limited. Investors have varying perception towards risk and enterprising
activities. They invest in those opportunities which have certain degree of
risk associated with it. This research study found that there is a positive
relationship between risk and return.
Drzik and Wyman (2005) analysed that while the 2000 recession was
admittedly a less severe test for banks than was the 1991 recession, the
substantial improvement in bank performance was at least partly
attributable to better risk management practices. An improved ability to
14
measure risk, improved decision-making processes about which risks to
take, improved diversification of bank credit portfolios, improved pricing,
and an improved ability to pass risk through to the capital markets all
added up to real progress, fewer losses and better riskadjusted returns.
Sur (2007) examined in his study the BR and FR associated with NTPC
Ltd. in the pre- and post- liberalisation periods. The study observed that
the company, being a public enterprise, faced no serious competition in
the post-liberisation era and hence the BR of the company originating
from economy and industry-specific factors did not increase; rather, the
BR arising out of the company-specific factors reduced notably during the
post-liberalisation era.
Mallik and Sur (2009) in their study analysed the BR and FR in the Indian
corporate sector during the period 1995-96 to 2006-07 using relevant
statistical tools and techniques. Although a ‘high-low’ combination of BR
and FR is theoretically desirable, the study reflected no strong evidence
of positive or negative relationship between the two. The empirical results
of the study on the relationship between BR and operating profitability
and that between financial risk and owners’ profitability provided
evidence of the significant negative association between them implying
that high risk was not at all compensated by high risk premium.
Sur and Mitra (2011) made a modest attempt to analyse the BR associated
with the selected Indian IT companies using Ginni’s coefficient of mean
difference and to ascertain the relative risk-return status of the companies
during the period 1999-2000 to 2008-09. Lack of uniformity in respect of
15
risk-return trade off among the selected IT companies was noticed in the
study. Although a high degree of positive relationship between BR or its
company - specific components and overall profitability is theoretically
desirable, the analysis of interrelation between them made in this study
failed to show strong evidence of positive or negative association between
them
Sur et.al. (2014) in their study analysed the BR associated with 20 selected
companies in the Indian FMCG sector during the period 1995-96 to 2011-
12. The study revealed that the highest BR was faced by Colgate while
Godfrey enjoyed the least BR and it was found that LR, CSR and CPR
established themselves as significant contributors of the BR during the
study period. The study also observed that strong evidence of positive
relationship between BR and return was absent in the Indian FMCG
sector.
16
are immensely important to the corporate managers and executives so that
they can take necessary action to mitigate the loss wherever possible or at
least prepare themselves beforehand to face the challenges. Hence, this is
high time to make an attempt to bridge the gaps
17
Ratna Deepali (2017) inspected the appropriateness of CAPM in NSE.
Closing costs of beat ten companies on the premise of their advertise
capitalization from 2012 to 2016 had been considered. Analyst revealed
whether the securities are overestimate or underestimated by taking
advantage of CAPM so to assist the people interested in investing. It was
found that the difference between forecasted and real gain is very
significant at normal risk. This will help investor to forecast future
movement of stocks.
Suresh A.S & Sai Prakash L. (2018) studied the performance of twelve
nationalized banks listed NSE in terms of return, risk and beta for the
period 1st January 2016 to 31st December 2016. The study shows that the
shares of Yes bank and Federal bank have given positive returns during
the study period whereas the return of Axis bank, Bank of Baroda and
Bank of India were negative during same period. The beta of Bank of
India, Canara Bank, Punjab National Bank, State Bank of India, Axis
Bank, ICICI Bank and Yes Bank were more than one which tells that these
stocks carry a higher market risk
18
companies Sun Pharmaceutical Industry Ltd provides high return but the
market risk of the shares are much high.
19
1 to Walk 31, 2016. The stock costs were taken from the NSE. They have
been utilized for calculating normal returns and Beta. The objective
behind calculating the normal returns and beta is to assist the speculators
arrives at a decision to contribute within the offers on the premise of
chance included in it conjointly to pick up information of the stock
showcase. INFRA, CEMENT and AUTOMOBILES companies were
taken in this investigate. It was found that all companies have less than
one beta esteem which suggests securities will be less unstable than the
advertise.
Laxman Raj Kandel (2018)4 this paper analyses the risk and return on
common stock investment of Nepalese stock market and it is focused on
common stock of two commercial banks listed in Nepal stock exchange
Limited. Investors have varying perception towards risk and enterprising
activities. They invest in those opportunities which have certain degree of
risk associated with it. This research study found that there is a positive
relationship between risk and return.
20
Chapter 3
21
Chapter 4
Significance
The main objectives have been taken as the basis of research. First
objective is to analyze and compare risk and return of equity shares of
selected automobile companies which will help investors to know about
how much risk he will going to face and earn the return by investing in
these selected securities. They also compare the companies and to know
which companies will more risk and which will have more return. From
this he will make decision, which is profitable company to invest. Second
objective is to find the extent of relationship between automobile
companies and market index which will inform the investor how much
these shares of companies are related to the market index like S&P BSE.
Through which they will get to know about how much securities have risk
in relation to market index
a) High Competition
b) Demand Volatility
f) Regulatory Risk
g) Economic Instability
h) Access to Credit
i) Liquidity Shock
23
RESEARCH ON THE AUTOMOTIVE INDUSTRY’S RISK INDEX
Another risk indicator in the industry trend would be the state of the
economy. If the economy recovers faster than expected, industry levels
that reached a high level in 2007 and 2008, is seen to be coming back
again. In the medium term, growth is seen to rise with expansion
opportunities in Asia and Eastern Europe as stated in Daimler's Report on
Automotive Opportunities and Risk.
Production of spare parts and car assembly are now going full blast in
China and Russia, with cooperation from local partners. Further change is
also seen in the development of automotive technology that affects
corporate sales and earnings. At this juncture, if can be perceived that
there is an apparent real risk and hazard of the trade.
24
However, the market scenario for car dealers is not the same. Sales had
gone down by 18% – 20% in 2008 and 2009. As a result, car dealers were
forced to do other offerings to help fill up the void of dwindling sales –
used cars and after sales service to perk up their sales targets to stay out
of the red. Interesting to see would be how companies like Klosters and
their Newcastle based smash repairs business dealth with tough economic
crysis couple of years ago.
25
they are coming back with greater visions. Industries have been
increasingly focusing on developing unique and innovative products
designed to address current needs while incorporating futuristic features.
The automotive industry is no exception.
26
2. Incentives
3. Future projections
In 2020, more than 10 million electric cars were on the road globally. This
number is set to grow to 300 million vehicles by 2030, according to the
Net Emissions by 2050 Scenario (IEA, 2021). OEMs are also determined
to increase their EV car production. According to the research team of
Credit Suisse Global Auto, the global EV production share of total vehicle
production is set to increase from 11% in 2020 to 62% in 2030, with the
number of fully electric vehicles projected to reach around 29 million.
(Embedded Computing, 2021).
While these figures might seem too ambitious, many OEMs have already
started taking initiatives to reach that goal. For instance, Volkswagen
Group, converted its German plant in Zwickau to produce EVs instead of
ICE vehicles, making it the first large. Jaguar Land Rover (JLR), on the
27
other hand, started on R&D of BEVs after a loan securement of EUR 749
million (Autovista, 2022). By 2030, several OEMs plan to reach about
50% as an EV fleet.
Sales of EVs are forecasted to represent 60% of all new vehicle sales,
compared to 4.6% in 2020 (IEA, 2021).
28
Projected EV Car Sales in Units
29
Connectivity
Automation
30
a McKinsey report, this ultimate level is expected to be reached and
widely adopted by 2030.
Vehicle-to-Vehicle (V2V)
Future projections
In 2020, the connected car market was worth around USD 55.6 billion,
with nearly 47.5 million connected cars circulating worldwide. This same
market is set to reach USD 191.83 billion, growing by 245% in 8 years
(Carzato, 2021). By 2025, connected vehicles are expected to attain a
share of 53%. The latter is expected to grow even more, reaching 77% by
2030 (Ericsson, 2021).
31
shortage. As for consumers, the main topic of debate will be data privacy.
Connectivity will require access and storage of data, meaning that your
personal car will have data on exactly where you have been every single
time. However, according to Deloitte, this would not be an issue as
consumers might consent to share their own data with their car’s laptop,
provided this would allow them to save time or money, and it would
provide them with a safe driving experience.
The automobile industry, along with the auto components industry, is one
of the core industries in India. A well developed transportation system
plays a key role in the development of an economy, and India is no
exception to it. Automobile is one of the largest industries in the global
market. Owing to its strong forward and backward linkages with several
key segments of the economy. Automobile Sector occupies a prominent
place in the fabric of Indian Economy. Against the backdrop of this crisis,
and quickly became a rallying cry for India‟s innumerable stakeholders
and partners. It was a powerful, galvanising call to action to India‟s
citizens and business leaders, and an invitation to potential partners and
investors around the world. But, Make in India is much more than an
inspiring slogan. It represents a comprehensive and unprecedented
overhaul of out -dated processes and policies.
32
ministry of Commerce, the amount of cumulative foreign direct
investment (FDI) inflow into the auto sector from April 2000 to November
2012 was worth US$7,518 million. The auto sector accounts for 4 per cent
of the total FDI Inflows (in terms of US $) in India. According to the
recent data released by Society of Indian Automobiles Manufacturers
(SIAM) India‟s scooter and motorcycle manufacturers have registered 4
per cent growth during April-November, 2012. The Global and Indian
manufacturers are focusing their efforts to develop innovative products,
technologies and supply chains. India is one of the key markets for Global
Manufacturers for hybrid and electronic vehicles, which is the new
development in automobile sector. With a turnover of almost $59 Million
US Dollars, Automobile industry Provides employment to 13 million
people in the India Work-class. The automobiles sector is divided into
four segments - two-wheelers, passenger vehicles, commercial vehicles
and three wheelers. Two wheelers India is one of the world‟s fastest
growing passenger car markets it is second largest two wheeler
manufacturer and fifth largest commercial
Research Methodology
33
for the descriptive part of the research. Some part of this thesis will be
prescriptive in nature, since this part focuses on constructing a method for
identifying and measuring the benefits and effectiveness „Make in India‟
campaign investments. Objectives of study 1. Identify Make in India
initiatives for automobile sector and investment proposals in automobile
sector recently. 2. Analyze the impacts of Make in India initiatives on
Automobile Sector‟s growth. The study uses of both primar y and
secondary types of data decisio n making. Thus, the primar y data was
collected using structured interviews of the professionals from user and
vendor organisations; however, for the collection of secondary data, we
have used Internet based discussion forums, Enterprise Resource Planning
system product information fro m suppliers and some company specific
material such as annual reports, accounting and auditing reports. The
study also focused on recent material that could be accessed. In order to
get access to the latest developments in this area a number of articles
published in academic journals and trade magazines have also been
collected and properly cited.
Discussions and Findings
34
course the demand for vulcanized rubber skyrocketed. Road construction
created thousands of new jobs, as state and local governments began
funding highway design.
Automobiles are a liberating technology for people around the world. The
personal automobile allows people to live, work and play in ways that
were unimaginable a century ago. Automobiles provide access to markets,
to doctors, to jobs. Nearly every car trip ends with either an economic
transaction or some other benefit to our quality of life.
The auto industry is the single greatest engine of economic growth in
the world.
The global auto industry is a key sector of the economy for every major
country in the world. The industry continues to grow, registering a 30
percent increase over the past decade
Autos create jobs
35
Significance
every Indian at some point has had a dream to own a car. But the
automobile sector in India is quite huge and includes many more segments
rather than just being confined to cars. This industry is one of the major
sectors of the economy and a huge employment generator. The auto
industry was facing a tough time even in the pre covid period for the past
couple of years and the onset of covid had a major negative impact.
However, the auto industry as a whole has recovered quite significantly
in the post covid period.
36
unlikely to ever occur, as investors will not choose to purchase more risky
securities without the possibility of a greater return.
Table of Contents
1. Sector overview
2. Government initiatives
3. Investments
4. Future prospects
37
Given below are a few key details of the auto industry as a whole and
the top stocks in this industry.
Sector overview
• The auto industry in India is the fourth largest in the world and accounts
for approximately a 7% share of the GDP of the country.
• This industry is set to increase at a CAGR of 12.7% and reach about US$
300 billion by the end of 2026.
• India is considered to be the top manufacturer of two-wheelers and the 4th
largest car manufacturer.
38
The auto sector in the country also enjoys a stronghold in the global heavy
vehicles market as it is the largest tractor producer as well as second-
largest bus manufacturer, and the third-largest heavy truck manufacturer
in the world.
Government Initiatives
The government has taken many initiatives for the auto industry that will
help in increasing the manufacture and sales of the industry as a whole as
well as efforts towards increasing the exports. Some of the initiatives
taken by the government include the following,
39
6. The latest initiative of the government in February 2022 includes the plans
to roll out Bharat NCAP. This initiative is set to introduce India’s own
vehicle safety assessment program.
Investments
The promising future of the auto industry in India has helped in attracting
investments from various sources like the government, private sector as
well as FDI. The permissible FDI In the auto industry is up to 100% from
the automatic route. Among the total FDI investment in the country during
the period of April 2020 to September 2021, approximately 5.81% was
towards the auto industry. With the rising demand for the EV sector in
India, it is estimated that the country will need an investment of
approximately US$180 billion for vehicle production and setting up
charging infrastructure by 2030. The various other investments in the auto
industry are highlighted below.
40
6. The government also inaugurated Asia’s longest high-speed track and the
fifth-largest in the world, NATRAX, in July 2021.
Future prospects
The auto industry had a brief setback in 2019 when the sector as a whole
saw a plunge of approximately 19% in sales and the steepest fall was in
the passenger cars segment which was up to 31%. However, the auto
sector is set to increase up to approximately Rs.16 trillion to 18 trillion by
2026 and provide employment opportunities to skilled and unskilled
labour as well as boost the SME industry. The glaring reality of this sector
is also the fact that there is a lack of skilled manpower in the country to
meet the demands of this sector. Also, the sector is facing many challenges
on account of changes in regulations and emission norms (from Bharat
Stage IV to Bharat Stage VI) and the rising cost to meet these changes
which have led to many disruptions in the sector.
After having a brief overview of the key details of the auto sector, the
details of the top companies in this sector are given below.
1. Maruti Suzuki
41
2. Tata Motors
Tata Motors is a very well-known name in the auto industry and has a
huge global presence. The company is part of the Tata group and offers a
wide range of vehicles ranging from passenger cars, SUVs, trucks, buses,
and defense vehicles. The key details of the company are tabled
below.
3. M & M
42
tractors, and earthmovers. The key details of the company are tabled
below.
4. Bajaj Auto
Bajaj Auto is part of the Bajaj Group and exports to 79 countries. The
company has its presence in the manufacture of three-wheelers and two-
wheelers. Bajaj Auto is the third largest manufacturer of motorcycles in
the world and the second-largest in the country. The key details of the
company are tabled below.
43
5. Eicher Motors
This company was incorporated in 1982 and is part of the Eicher Group.
The company is engaged in truck and bus operations, auto components as
well as technical consulting services business. The key details of the
company are tabled below.
45
Risk Assessment:
Risk assessment is one of the steps in a risk management process. The
determination of quantitative or qualitative value of risk related to a
recognized threat (also called hazard). Quantitative risk assessment
requires calculations of two components of risk (R):, the magnitude of the
potential loss (L), and the probability (p) that the loss will occur. (Ayyub,
2003). Fundamentally two different views have evolved over the years on
how risk should be assessed. The first view is known as objectivist, or
46
frequentist. This approach requires probabilities are obtained from
repetitive historical data and it is based on probabilistic risk assessment
(PRA). PRA is the name given to systematic and comprehensive
methodology used to evaluate risks mostly for complex technological
entities. Consequences are expressed numerically and their likelihoods of
occurrence are expressed as probabilities or frequencies. The total risk is
the expected loss: the sum of the products of the consequences multiplied
by their probabilities (Ramana, 2011). It is generally used for risk
assessment of engineering entities such as power plants and airplanes and
finds large scale application in safety and reliability engineering. The
second view is termed as subjectivist, or Bayesian view. Bayesian
considers the expert judgment as a part of risk assessment. A Bayesian
takes not only data into account but also expert' judgment about the
situation. Risk assessment consists of an objective evaluation of risk in
which assumptions and uncertainties are clearly considered and presented.
For audits performed by an outside audit firm, risk assessment is a very
crucial stage before accepting an audit engagement. In project
management, risk assessment is an integral part of the risk management
plan, studying the probability, the impact, and the effect of every known
risk on the project, as well as the corrective action to take should that risk
occur (Rausand, 2011). Bayesian view is well accepted in some circles,
medical, safety and reliability engineering, but it has not penetrated in
enterprise risk management arena.
47
Economic Risk:
I. Exchange Rate risk: Movement in the value of Rupee determines
the attractiveness of Indian products overseas and the price of
import for domestic consumption. The trend of export and import
has been increasing in the industry and thus importance of exchange
rate risk has been increasing. Foreign activities are a source of
exchange rate risk (Copeland, 2005).
II. II. Raw material Price: As a result of increase in raw material prices
– mainly metal and energy prices – the volatility in the sector has
been on a rise in past few years though the overall volatility is still
considered medium.
External Risk:
48
which its products are produced, distributed or sold, may result in
disruptions and delays in the operations of firm’s business.
(Craighead et al., 2007).
II. Regulatory risk: The industry is subject to regulations and
legislations related to environmental concerns. Import, export
tariff, sales and excise duty also effect the prices of the vehicles
affecting the firm and industry as a whole. (Oetzel, Bettis, &
Zenner., 2000) Economic instability: The Auto sector has a strong
positive correlation with macroeconomic factors. Per capita
income, employment levels, size of middle
class, interest rates are the major economic parameters that affect this
industry. Normally, a stable country with low political risk may encourage
the foreign investment whereas countries with high political risk and
instability may discourage the foreign investment (Copeland, 2005).
Data collection:
The risk categories, the risk factors and the risk measure used is given in
table 1. The literature review led us to 9 factors that cause risk in Auto
industry. Twenty managers of 15 different automotive firms were mailed
and asked to review the list prepared and add their remarks. Based on their
responses seven factors mentioned above were selected and later
incorporated in the Bayesian network. Subsequent to this, the seven
factors were grouped and the Bayesian network was formed. The risk
measures shown in the table 1 were used to get a priori probabilities for
each of the seven factors for five companies operating in automotive
sector in India
49
Model description
The data for the risk measures mentioned in table 1 were obtained from
the sales reports and annual reports of the five firms who manufacture
passenger vehicles in the Indian market now. Priori probabilities were
then used to calculate the probability of negative impact on net income by
solving them through Bayesian network. The results have been tabulated
below.(For sample calculationsRefer Appendix-I) This has been followed
by sensitivity analysis of companies with respect to external risk i.e. the
probability of a negative impact on net income if external risk has already
occurred. The table 2 shows the probability of negative impact on net
income in case the firm has already been exposed to external risk. The
results show that the probability of decrease in earnings ranges from 25%
to 30 % for the firms in consideration and shoots up to a range of 52% to
57 % when the same firms are exposed to external risks.
50
actions to reduce the possibility of supply chain disruptions and be ready
for new regulatory norms. They should invest in R&D to and make
products by correctly gauging consumer’s needs sustain competitiveness
in this highly competitive industry. The use of derivatives to mitigate
exchange rate risk is imperative as exchange rates have been fluctuating
very often in recent past. Derivatives can also be used to keep the risk of
raw material price fluctuations.
The research takes into account only five companies that make passenger
vehicles in Indian auto sector. Thus, the results can be sub sector specific.
The inability to incorporate all relevant risks into the model could limit its
effectiveness in representing a true risk profile. A potential data limitation
is access risk event probabilities, which are essential to the construction
of the Bayesian networks. Future researchers may choose to develop a
similar model for other sectors of economies which have high
interdependencies and thus impact the economy in a major way. The study
of different sectors and their comparison is another important research
area which can be undertaken.
51
4.3 Equity Analysis of Automobile Industry in Indian
Stock Market
Most of the investors commonly make poor investment decision caused
by mental biases and emotions. All the investors make their investment
with an avowed objective of increasing their wealth. Among the various
investment opportunities equity market is said to be one of the most
rewarding investment options even though it involves more risk. Since the
risk is very high on such investment, the investors need to make equity
analysis that helps them to know about the nature of those equity shares
and those industries where they park their money. Therefore the equity
analysis will help the potential investors in taking a rational and informed
investment decision. In this background, a research has been carried out
to study the equity shares of sampled companies in Automobile Industry
in Indian stock market. The automobile industry in India is one of the
largest in the world and considered to be a fastest growing sector.
52
LIMITATIONS OF THE STUDY
Like other studies, this study also has its own limitations. They are:-
The analysis was completely based on the secondary data collected from
the website of NSE, published literature, annual reports, etc., and so the
findings of the study entirely depend on the accuracy of such data.
The Researcher uses some statistical tools for analyzing and interpreting
the collected data. Therefore the analysis is affected by the natural
limitations of the statistical tools.
53
Chapter 5
Research Methodology
This section presents the methods used to achieve the purpose of this
study. It begins by providing the reasons of why the subject was chosen,
followed by the perspective and preconceptions. Different approaches that
are available for making a scientific research are discussed and relevant
approaches are identified in the process. A discussion of the credibility of
the study including reliability and validity is included. The chapter ends
by describing how the data is collected.
Methodology
1)Choice of Subject
The choice of the subject was mainly based on the previous knowledge
acquired in the previous courses including cash and risk management
course, investment course. The idea of writing on exchange rate risk came
54
up when reading the article: “Corporate Financing Focus; Increased
Volatility in Exchange Rates Spurs Adoption of Best Practices in
Currency-risk Management” (Corporate Financing News, May 2007). It
was then developed during the discussion with our supervisor. We found
the topic very interesting, relevant and challenging since these is a
dramatic rise of firms operating worldwide, thus increasing international
transactions and thereby facing exchange rate risk. Furthermore, the
foreign exchange market has by far become the largest financial market
in the world where, as mentioned before, rating rates have proved
extremely volatile with aggressive fluctuations. This study focuses on the
automotive industry. Being the most outspread industry in the world, with
deliverers, manufactures and customers being situated in different
countries it is especially affected by the ever changing exchange rates of
national currencies. For instance, production and demand for the finished
product is depending on both the global and the domestic market and
therefore difficult to balance. Previous studies have mentioned how
important exchange rate fluctuations have become for firms operating
internationally (Steven B. Kamin, John Schindler and Shawna Samuel
2007). However, most of these studies (Abe de Jong, Jeroen Ligterink and
Victor Macrae 2006) were dealing with firms of Asia and the US. We
therefore decided that a study on European automotive industry firms
could help to complete the picture on how exchange rate fluctuations are
linked to stock returns. We believe that our findings could be used by
managers to determine whether it is necessary to implement hedging
strategies against 19 exchange rate exposures or not, based on the impact
of exchange rate fluctuations on the value of each particular firm.
2) Perspectives
Perspective can be referred to different views that people have on a
55
particular subject (Sunders et al 2003). We have adopted a financial
management perspective (the company perspective). Managing the
impact of the exchange rate volatility on companies’ stock returns is
important for MNCs, especially in the automobile industry where
activities are strongly dependent from the international market.
Management of exchange rate risk affects a company in various manners
such as import and export, turnover, profitability, cost of the products,
competitive advantage and cash flows. A good management of exchange
rate risk can therefore be beneficial for MNCs.
3.)Preconceptions
Since the research on automotive industry is done from real figures, data
and reports; we are sure that individual preconceptions will not be biased
on the outcome of the research.
4 )Research Approach
There are two methods of reasoning for the scientific approach, the
deductive and the inductive approach. Inductive approach is a "bottom
up" approach. It begins with specific observations and measures,
formulate some hypotheses that are to be explored, and finally ends up
developing some general conclusions or theories. It emphasizes on
developing insights and generalizations about the data collected.
Inductive approach is often associated with qualitative method (Bryman
& Bell 2007). The deductive approach is a "top-down" approach, a
hypothesis testing theory. It begins with one or more theories about a
topic, and then narrows that down into more specific hypotheses which
can be tested. A deductive approach is often associated with quantitative
research. The researcher goes further into data collection to address the
hypotheses that can be tested. The hypotheses can then be either
56
confirmed or rejected, leading to a confirmation or a revision of the
theories (Bryman & Bell 2007). 20 We chose to use the deductive
approach since it is better suitable for our purpose and the hypotheses are
generated from the chosen theories which can be tested. We use
quantitative data applying the APT to test the hypotheses.
5) Research Method
There are two main research methods in business research: quantitative
and qualitative. The qualitative method entails an emphasis on non-
numerical values. It is more concerned with issues of the richness, quality,
and ‘feeling’ of raw data. The quantitative method focuses on the
measurement and analysis of causal and effect relationships between
variables. It is more concerned with issues of design, measurement, and
sampling (Bryman & Bell 2007). The research method to be adopted in
this research is the quantitative method since the paper is more concerned
with relationships between variables and analysis of causal using
numerical data and statistics. The present study is constructed through a
model of regression analysis, applying the APT model, and using the
software application SPSS and Microsoft Office Excel. There are mainly
three steps that are necessary for any kind of quantitative research
(Studenmund 2000):
1. specifying the models or relationships to be studied
2. collecting the data needed to quantify the models
3. quantifying the models with the data
The two first steps are similar in all quantitative work. However, the
techniques used in the last step can extensively differ from one discipline
to another. In this paper, the chosen technique is a regression analysis
based on the APT model and including different variables to measure the
57
impact of exchange rate on stock returns. The variables involved are
exchange rate, GDP, stock market index and oil price. 21 To be able to
answer the research question, historical data from the DataStream are
used. The time frame for all historical data is quarterly data between 2000-
01-01 and 2007-12- 31.
6 )Limitations
Our study is limited to six multinational automobile companies from
three European countries. We chose to investigate companies from the
automobile industry since it is the most internationalized industry and
therefore largely exposed to exchange rate fluctuations. The countries
were limited to France, Germany and Sweden since, apart from Italia, they
are considered to inhabit the biggest car industry in Europe. Although
being aware of the exchange rate risk management employed by the
companies in the sample, because of time constrains, we focus on
evidence illustrating if companies face exchange rate risks or not. Further,
we limited our analysis of exchange rate risk to three exchange rates, –
SEK/Euro, SEK/USD and Euro/USD. This is due to the specific home
currency used in the selected countries as well as the fact that all
companies chosen have big interests in the North American market. The
variables used in the empirical part of are study were selected after
studying the theoretical framework and previous empirical evidence on
this kind of topic. Finally, in this research, currency risk and exchange
rate exposure were used in the same content as exchange rate risk.
7 )Research Design
A research design is a framework for conducting and analyzing data. It
details the procedures necessary for obtaining the information needed to
58
structure or solve the research problems. There are many research design
methods available, such as longitudinal design, case study design,
comparative design, experimental design and cross-section design.
Longitudinal is a research design to configure changes by time in business
research. A cross-section design entails the collection of data on more than
one case and at a single point in time in order to collect a body of
quantitative or quantifiable data in connection with two or more variables.
They are then examined to detect patterns of association. An experimental
design is used as a yardstick against which nonexperimental research is
assessed. A comparative research design embodies the logic of
comparison. The case study design is to detail and intense a single case or
multi-cases. It 22 is concerned with the complexity and particular nature
of the case in question. A case study can be in terms of persons, events,
locations or organizations (Bryman & Bell 2007). We decided that the
case study design and the comparative design are to be used in this study.
We want to know if exchange rate fluctuations have an impact on the
sampled companies. Furthermore, we want to study if there is a significant
difference between the companies selected from countries with different
home currencies.
8)Choice of theories
The theory selected for our study was based mainly on two major
objectives. The first is to create an understanding of how exchange rate
movements can impact the stock returns of multinational companies. The
second is to explain that if MNCs are exposed to exchange rate risk, they
can use hedging strategies to mitigate currency risk. The intention with
the theories on risk is to give a basic understanding and knowledge about
what kind of risk a company might face. In this part, we focused on the
currency risk since the objective of this research is investigating its impact
59
on companies’ stock return. The theories on risk managements were
selected based on the appropriate financial instruments that are used to
mitigate currency risk. We finally developed some theoretical
explanations on what model to be used in the empirical part and why the
model is appropriate for our research. For the choice of theories we also
orientated ourselves on the previous studies done on this topic. Finally,
we chose theories to meet the standpoint of this study, the financial
management perspective (the company perspective).
61
11)Validity
According to Bryman A & Bell E (2007), “…validity is concerned with
the integrity of the conclusions that are generated from a piece of
research”. To achieve high quality of a study, a research should measure
what it claims to measure and there should not be any logical errors in
drawing conclusions from the data. Validity is a measurement of whether
the researcher is observing, identifying, or measuring the data coinciding
with what he/she is supposed to do (Bryman & Bell 2007). There are
different types of validity: measurement, internal, external and ecological.
Measurement validity refers to the issue of whether or not an indicator
that is devised to estimate a concept really measures that concept. Internal
validity deals with findings being believable. The external validity is on
the other hand concerned with the findings being applicable to other
contexts (Bryman & Bell 2007). External validity is therefore related to
generalizing (Campbell & Stanely 1966). Finally, the ecological validity
measures whether the findings are applicable to natural social
environments (Bryman & Bell 2007). This paper is not concerned with
external or ecological validity but rather measurement and internal
validity. The findings of our study are not to be generalized since we are
conducting a case study research with a specific number of companies.
With this research paper, we want to know, show and explain what is
going on in these particular companies based on our research question.
We are sure of the validity of the data. All the data used in this thesis are
from the DataStream. They are deemed to have a high degree of
reliability. The sources are highly reliable sources of information thus
measuring what is supposed to measure and being as well believable. 25
62
12) Reliability
Reliability is concerned with the consistency of a measure of a concept. It
is important that a study generate trustworthy and reliable results (Bryman
& Bell 2007). There are some questions that one can use to assess
reliability: • Will the measures yield the same results on other occasions?
• Will similar observations be reached by other observers? • Is there
transparency in how sense was made from the data? When analysing how
the data were collected and used, we believe that we have reached a high
reliability. We have applied reliable and transparent tools, measurements
and models. The observations can easily be reached by other observers
since they have been collected from a public source with a high validity
and credibility. We are therefore quite sure that if other researchers use
the same set of data for the same sampled companies they will come up
with the same kind of results. Furthermore, our findings are consistent
with previous studies done in this field as already mentioned in the
theoretical framework. The data collection and analysis (using SPSS)
have been done with a careful attitude. We are therefore sure of the
consistency, transparency and trustworthiness of this study
63
Chapter 6
Data Collection
Data collection is a process of organizing the data. This study is entirely
based on secondary data collected from the NSE website
(https://www.nseindia.com). In addition, data has been collected from
published sources as well as websites, newspapers
(Business standard, Economic times) & management, scholar,
researcher etc.
Data collection is done for analyzing and
interpreting. There are two types of data collection are as follows:
Primary Data
The primary data is a fresh and used for first time. I have collected
primary data during the observations while my research.
Secondary Data
The secondary data is an old or used & existing or not for the first time.
The secondary data can be collected through
following ways:
1. Internet
2. Books
3. Journals
64
Data Analysis
Growth rate I. To study the growth of share price of selected automobile
companies in the stock market
Growth rate - Share price of Hero Motor Corp Ltd, Mahindra and
Mahindra Ltd, Bajaj Auto Ltd from 2017-2018 to 2021-2022
Hero Moto Crop Ltd Bajaj Auto Ltd Mahindra and Mahindra ltd
years
Share Price Growth Rate Share Price Growth Rate Share Price Growth Rate
2017-
2018 3542.8 9.06% 2083.6 3.12% 738.9 12.92%
2018-
2019 2937.45 -19.71% 2720.95 -16.07% 726.9 3.25%
2019-
2020 2363.45 -35.40% 3118.1 -3.83% 562.5 20.10%
2020-
2021 3203 12.45% 4089.5 26.14% 808.05 14.78%
2021-
2022 2499.1 31.69% 3451 6.45% 900.8 27.95%
There is a fluctuating movement in the share price of Bajaj Auto Ltd from
2083.6 to 3451 during the year 2017-2018 to 2021-2022 the highest
growth rate of 26.14% and the lowest growth rate of -16.07% was during
the year 2018-2019.
65
From 738.9 to 900.8 during the year 2017-2018 to 2021-2022 the highest
growth rate of 27.95% and the lowest growth rate of 3.25% during the
year of 2018-2019.
The automobile industry is growing at a very rapid pace and its evident
by a couple of indicators like the arrival of international brands in India
and its financial gains. Many automobile companies, be it manufacturers
or ancillaries are listed on either BSE or NSE and are gaining return during
the study period. This study shows that Hero Moto Corp, Bajaj Auto Ltd,
Mahindra and Mahindra Ltd has a significant positive relationship with
NSE index. Therefore a successful investment in automobile sector
requires a careful assessment of the automobile company’s potential risk
and return as well as deep examination of Indian stock market. A firm’s
risk and expected returns directly affect its share price. If an investor
wishes to earn highest returns than the investor must appreciate that this
can be achieved by accepting a commensurate increase in risk.
66
SUMMARY OF THE COMPANY'S STATISTICAL VALUES
This section helps to find out results from the researcher’s collected data.
67
The following table show that selected companies have nagative deaily
mean return expect ASHOK LEYLAND, BAJAJ AUTO, EICHER
MOTOR, M&M, MARUTI SUZUKI. And have veriouse possitive mean
return accoreding to calculation ESCORTS KUBOTA (0.00%), FORCE
MOTORS (0.58%), HERO MOTORS (0.15%) etc.,
68
VI transition which has made the ownership cost of a vehicle rise very
steeply. The threat of electric vehicles and of course the covid-19
pandemic are other challenges faced by the industry. Rising concern for
climate change and sustainability has led to the need for alternative energy
such as electric vehicles. This will disrupt Auto component companies as
it has only 20 moving parts, while a regular petrol or diesel vehicle has
more than 2,000.
These newly emerging trends are truly testing the automobile company’s
ability to grow. Companies will have to be fundamentally strong and
capable to remain relevant. We believe that the companies in our model
portfolio match these requirements and have witnessed several business
cycles and emerged stronger each time. These companies have adapted
and overcome several technological disruptions and can be counted on to
continue doing so in the future as well.
69
term. The two-wheeler segment dominates the Indian automobile market
in terms of volume due to its young and growing middle class population.
It accounted for 77.21% of the total vehicle sales volumes in FY21. The
passenger cars segment which accounted for 15.62% of volumes is
dominated by small and mid-sized cars. The Indian automobile industry
is supported by various factors such as availability of skilled labour at low
cost, robust R&D centers, and low-cost steel production. The industry also
provides great opportunities for investment and direct and indirect
employment to skilled and unskilled labour. Auto ancillaries and tyre
industries are directly dependent on the original equipment manufacturers
(OEMs). Demand for these industries mostly arise from the OEMs or the
replacement market.
Besides Budget 2021 provides hope for the Auto industry with the
introduction of the voluntary vehicle scrappage policy. The policy makes
it compulsory to undergo a fitness test for private vehicles over 20 years
of age and commercial vehicles over 15 years of age. Also a charge of
green tax at the time of fitness renewal will dis-incentivize the use of older
vehicles. Overall the Automobile Industry has a bright future over the long
term period.
70
Summary Table of Best Auto Stocks
71
A Detailed profile, Pro’s & Con’s of Auto Stocks in the Model
Portfolio
Bajaj Auto:-
Bajaj Auto is another two-wheeler company that has proven itself over the
years. What differentiates Bajaj Auto from other two-wheeler makers in
India is its relentless focus on markets outside of India. Its growth and
presence in the international markets have been on the back of its own
brands as well as its alliance with KTM. This has enabled it to de-risk by
not being over reliant on any one geography or product. It is by far India’s
largest motorcycle and three-wheeler exporter.
The company’s revenue share from exports has increased from 28.2% in
FY10 to 52% in FY22. In fact, International business recorded its highest
ever sales of over 2.5 million vehicles for FY22. It also continues to
dominate the three wheeler segment and remains the market leader. On
the other hand, Bajaj has a poor presence in the scooter market.
Bajaj Auto was the leader in the scooter market till the motorcycle
momentum picked up in the 1990s. The scooter business is booming once
again and the company is back with its iconic scooter brand Chetak in the
electric version to cater the increased demand.
TVS Motor:-
TVS Motor Company is the third-largest 2-wheeler company in India with
a revenue of over Rs 18,217 crore (over US$2.9 billion). It has an annual
sale of more than 3 million units and an annual capacity of over 4.95
million vehicles. The company is also the 2nd largest exporter in India
with exports to over 60 Countries. TVS Motor’s strength lies in its
extensive research and development, resulting in products that are
industry-leading in terms of innovation.
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Due to the strong product line-up, unwavering focus on consumers,
quality, cost, and strong new launches the company is confident about
outperforming the industry ahead, in spite of the global challenges and a
tough business environment. Further, the export of two-wheelers is likely
to see growth ahead fuelled by strong demand for TVS products and due
to its operations in diverse geographies that mitigate overall risk. The EV
industry is the future of commuting and with the iQube, TVS Motor has
marked a strong presence in this segment. In fact, the iQube network is
expanded to 30+ cities across the country. On the other hand, the company
has been a consistent wealth creator for investors as it has delivered an
ROE of 20.8% over the last 5 years. The automaker also outperformed the
broader Industry in FY22 which declined by 11%. However, the company
is exposed to timely raw material availability, shortages of semi-
conductor, and some EV-specific components that could lead to a burden.
73
to be a key growth driver for the company. In an endeavour to create a
very strong automotive product portfolio, the company plans to leverage
its platforms to launch 23 new products by CY 2026: 9 SUVs & 14 LCVs.
On the other hand, the auto giant plans to build a strong product pipeline
of farm machinery, in partnerships with global CoEs. The company is also
exploring exports and inorganic acquisitions to rapidly scale up the
segment. The management’s aggressive business growth plans will lead
to value creation for shareholders. On the other hand, rural stress,
commodity price inflation, and chip supply difficulties may continue to
weigh on margins in the near term.
Eicher Motors
Eicher Motors owner of iconic Royal Enfield leads the premium
motorcycle segment in India. Royal Enfield has captured nearly 95% of
the 250cc plus premium segment category. It enjoys a virtual monopoly
in this segment without any intentions of entering the other segments. One
of the main reasons for the strong brand name – Royal Enfield is due to
its high-quality standards. Royal Enfield emphasizes on providing best
quality to its customers.
The company also has a joint venture with the Volvo group, VE
Commercial Vehicles Limited which designs, manufactures and markets
reliable, fuel-efficient trucks and buses. The company has delivered
impressive return ratio metrics over the last 5 years as its ROE and ROCE
stand at 19.5% and 27.2% respectively. Since Eicher Motors caters to the
premium category, it is prone to stiff competition led by an increasing
presence of global as well as Indian players. Further, Royal Enfield is
highly dependent on Indian markets and remains exposed to geographical
concentration risk.
74
Maruti Suzuki:-
Maruti Suzuki set up as a joint venture between Maruti and Suzuki is
India’s largest car maker selling more than half of the cars on road. It has
created unmatched brand equity over the years. The company has a strong
product portfolio with models in every segment. It focuses on continuous
process improvement, effective cost control measures and flexible
manufacturing processes. The company possesses a healthy balance sheet
with 0 debt due to its strong cash generating ability and RoIC placed at a
healthy 28% Apart from hybrids, the carmaker is focusing on EV, CNG
as well as ethanol and bio-CNG compliant engines. Further, it plans to
launch its first EV in 2025. With more players and models vying for a
share of the growing pie, competition in the domestic car market may
intensify, resulting in price competition and lower realizations. Given
Maruti’s limited presence in SUVs, its market share in passenger vehicles
has dipped below 50% in recent times. However, the company is gearing
itself to gain popularity in the segment through the launch pipeline of four
SUVs.
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Model Portfolio of Automobile Stocks
In order to get an exposure to best Indian auto stocks, you would need a
total of Rs. 1,03,190 for the below curated portfolio as of July 01, 2022.
76
A detailed table with various parameters of Best Auto Stocks
77
PROBLEMS IN THE AUTOMOTIVE INDUSTRY TODAY
In the past, the prices of metals and other raw materials were less volatile
than they are now. In some cases, when they increased significantly, those
extra costs could be passed on to buyers, but this is not often the case
today. Demand is low, competition is high and many car markets are
struggling, especially in the cheap market segment. An increase of €200
can mean a sale is lost. Consumers will go for the cheapest option, or not
buy at all. Both suppliers of metal components and buyers (car or spare
parts manufacturers) are facing losses and there is little flexibility. In the
past, the large producers would often smooth out price fluctuations for
their smaller buyers, but this is no longer the case. Long term contracts
give fixed prices for a year or so, but are hardly ever available now. It is
ironic that one of the reasons why the car industry is suffering so much is
because manufacturers have improved their processes (JIT – Just In Time,
TQM – Total Quality Management etc.) Such processes cut the amount of
metal in stock. So, on the one hand car makers have reduced their stock
financing cost, but on the other they are always having to buy on the ‘spot’
market and are at risk from much higher price volatility as a result.
78
Chapter 7
79
selected companies stock price of Automobile industry. This work helps
the institutional investor to aware about the ups and down of the stock
price of automobile companies and also portrays them to loss their
hesitation to make investment in the automobile companies. This research
article influenced the investment decision making of both institutional and
individual investor effectively and efficiently on the stock of automobile
companies list on the Bombay stock exchange.
Stock means ownership as an owner you have claim the Assets an earring
of company
Risk management in trading involves the calculation of market risk and
fluctuations.
This can be done through many analytical tools which factor That is
effective since market fluctuations
have less impact on such large companies than on smaller companies.
Pairs trading involves buying stocks of a company and simultaneously
short-selling the stocks of another
company from the same sector to mitigate risk from an anticipated price
fluctuation.
80
Chapter 8
Bibliography
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81
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uncertainties. Energy. 182 (2019) 201-10.
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• ACEA. (2017). Overview on Tax Incentives for Electric Vehicles
in the EU. Brussels: ACEA. Retrieved from
http://www.acea.be/uploads/publications/EV_incentives_overvie
w_2017.pdf
Magazine: -
1) Pratiyogita Darpan
2) Yojana
3) The Economic Times
4) The Economic Times
Websites:-
www.marketrisk.com
www.bsebti.com
www.nseindia.com
www.economictimes.com
www.investopedia.com
www.moneycontrol.com
www.samco.in
www.bseindia.com
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