Part A (Markowitz Graph)

Approach and Assumptions taken:

1. Selection of stock: We have selected stocks from IT and FMCG sectors as observed that
these two industries have shown negative correlation.

o Infosys from IT and

o Britannia from FMCG

2. Correlation calculation: (Refer worksheet ‘corr calc Portfolio (Assn 2)’ in excel for Part A)

o Last 6 months duration historical data has been taken from 15th Feb 2023 till 15th Aug
2023
o The correlation between Infosys and Britannia is -0.138 (this aligns with our selection of
stocks

3. Calculation of Returns and Std Dev of individual stocks: (Refer worksheet ‘AM & SD
calculation’ in excel for Part A)

o Return:

 Duration from 17th Aug 2023 till 21st Sept 2023

 We have considered daily returns for calculating daily HPY and then taken the
average of the daily HPYs
 Britannia: 0.06%
 Infosys: 0.26%

o Standard Deviation:

 Standard deviation is calculated using the excel formula based on the daily HPY
 Britannia: 0.0079
 Infosys: 0.0080
 Std dev is very close for both the stocks

4. Portfolio calculation of Returns, Variation and Std dev: (Refer worksheet ‘Markowitz graph’
in excel for Part A)

o We have iterated with different weightages to find the optimal weights for maximum
returns/ minimum risk (Below mentioned table has risk and returns)
o We notice that 50:50 weightage is the ideal weightage for max return for min risk (as
highlighted in green below)
▪ Weightage: 50:50
▪ Risk (Std Dev): 0.521
▪ Return: 0.160%
Weights (Britannia:Infosys) Risk Return Variance
0.797
0:100 % 0.260% 0.006%
 0.711
10:90 % 0.240% 0.005%
0.635
20:80 % 0.220% 0.004%
0.575
30:70 % 0.200% 0.003%
0.536
40:60 % 0.180% 0.003%
0.521
50:50 % 0.160% 0.003%
0.534
60:40 % 0.140% 0.003%
0.572
70:30 % 0.120% 0.003%
0.631
80:20 % 0.100% 0.004%
0.706
90:10 % 0.080% 0.005%
0.792
100:0 % 0.060% 0.006%

Based on the above data, we have created the Markowitz graph:

1. Sharpe Ratio for portfolio of the 2 stocks (Britannia & Infosys) : (Refer worksheet
‘Markowitz graph’ in excel for Part A)
 Portfolio of Assignment 2
(Br:Infy)
Weighted avg portfolio return 0.16
Portfolio Std deviation 0.521
Risk free rate 0.02
Sharpe ratio (return-rf)/sd 0.276

 Calculations for Assignment 1 portfolio for Comparison of Return, Std

Dev and Sharpe Ratio of the above portfolio with the portfolio of
Assignment 1
1. Assumptions Taken:

▪ We have taken the stocks (& weightages) of Week 5 of Assignment 1

o Mahindra & Mahindra, Dabur, TCS, NTPC, Axis, Polycab

Stocks in Wk 5 Weights

Mahindra 0.0500

Dabur 0.0800

TCS 0.0400

NTPC 0.2900

Axis bank 0.1600

Polycab India Ltd 0.3000

FD HDFC 0.0800

▪ In order to have a similar base comparison, we have considered last 6 months daily price
data and calculated the correlation (Refer worksheet ‘correlation calc Portfolio 1’ in excel
of Part A)

5. Calculation of Portfolio Return & Std Dev of Assignment 1: (Refer worksheet ‘AM & SD
calculation’ in excel for Part A)

o Portfolio Return:
▪ We have taken daily price data duration from 17th Aug 2023 till 21st Sept 2023 to
calculate average individual returns and Std dev.
▪ Considering the Week 5 weightage, calculated Weighted Average return of the
portfolio with individual return: 0.3%
o Portfolio Standard Deviation:
▪ Std dev of portfolio has been derived using the formula, however, since we have 5
stocks, we used excel to calculate based on the Weightage, individual std dev and
correlation coefficient of all 5 stocks:
▪ Std Dev of Portfolio of Assignment 1: 1.216
 6. Assignment 1 Sharpe Ratio: (Refer worksheet ‘Sharpe ratio (Portfolio 1)’ in excel for Part A)

▪ Calculated as below:
▪ (Portfolio Return-Risk free rate)/Portfolio Std. Dev
▪ Risk free rate assumed at 6% annualized
▪ (0.3%-0.0164)/1.216
▪ 0.2331

Portfolio of Assignment 1
Weighted avg portfolio return 0.3
Portfolio Std deviation 1.216360505
Risk free rate 0.016438356
sharpe ratio (return-rf)/sd 0.233123028

 Comparison of Portfolio Assignment 1 and Assignment 2:

1. Based on the Sharpe Ratio of the two Portfolios:

a. Portfolio of Assignment 2 (Britannia and Infosys) gives marginally better Sharpe Ratio
b. Even though the return is almost half of the earlier portfolio, the risk (Std dev) has
reduced significantly.
i. From diversification perspective, portfolio of assignment 1 is more
diversified as it has stocks from different industries and a risk free FD
investment, however, the correlation was positive between the stocks
c. The choice of the portfolio will now be dependent on the risk appetite of the
investor and the expectation of the return.

Portfolio of Assignment 1 Portfolio of Assignment 2

Weighted Avg Portfolio Return 0.30 0.16

Portfolio Std deviation 1.22 0.521

Risk free rate 0.02 0.02

Sharpe ratio (return-rf)/sd 0.23 0.276

Part B (CAPM and relative valuation)

 CAPM and Alpha Calculations
o Approach and Assumptions taken:

 One year historical data has been considered for calculating the daily returns for Alpha
 One year historical data has been considered for calculating the average price for calculating
the PE & PB ratios
 Risk free rate is assumed to be 6%
 Market Return is assumed to be 14%
o Calculation of Actual Return, Expected Return (CAPM) and Alpha of the 2 stocks (Britannia and
Infosys) (Refer Worksheet ‘CAPM’ in excel file for Part B)

Britannia Infosys
Price on 4/1/2022 3074.2 1790.94104
Price on 3/31/2023 4249.3 1372.5
CAGR (Actual Return) 0.38 -0.23
Market Return 0.14 0.14
Rf (Risk Free rate) 0.06 0.06
Beta (from Yahoo Finance) 0.46 0.6
CAPM (Expected Return) Rf+ (Beta(E(Rm)-Rf)) 0.0968 0.108
Alpha (Actual return - Expected Return) 0.2855 -0.3416

o Interpretation:

 Britannia is undervalued as its Alpha is positive. This stock should be bought.

 Infosys is overvalued as its Alpha is negative. This stock should not be bought.

 PE and PB ratios calculation

o References and Sources:
 EPS and Share price Britannia : https://finance.yahoo.com/quote/BRITANNIA.NS/financials?p=BRITANNIA.NS

 Balance Sheet Britannia https://www.britannia.co.in/data/Annual_Report_2022_23_21423c8b60.pdf

 EPS and Share price Infy https://finance.yahoo.com/quote/INFY.NS/financials?p=INFY.NS
 Balance Sheet price Infy https://www.infosys.com/investors/reports-filings/annual-report/annual/
documents/infosys-ar-23.pdf

o Calculation – All calculations are done using data for FY23 (1-Apr-22 to 31-Mar-23) (Refer
Worksheet ‘PE PB Ratios’ in excel file for Part B)
Britannia Infosys
Diluted EPS (Mar 2023) 96.39 57.54
Average Market Price for one year (FY 2023) 3805 1449.79
PE Ratio 39.48 25.16

Total Equity (In Crores) 3564.5 75795

No. Shares outstanding 240868296 4148560044
Book Value/Share 147.99 182.24
PB ratio 25.71 7.96

 Relative Valuation using PE PB ratios

Book
Share price Value Mkt.
on per PE PB Cap (Rs. Retention Cost of
20/10/2023 EPS share (TTM) (TTM) Cr.) ROE Ratio Beta Equity
Nifty FMCG 46.99 9.38
Britannia 4489 96.39 147.97 44.32 30.62 106930 65.69% 41.39% 0.45 9.60%
Nestle 24020 247.94 255.06 78.44 94.77 188056 97.20% 15.30% 0.46 9.68%
Jubilant
Foodworks 500 5.35 30.88 138.92 16.02 28978 17.33% 100.00% 0.86 12.88%
Adani
Wilmar 330.7 4.67 61.46 107.07 5.35 51358 7.60% 100.00% 1.61 18.88%
Hatsun Agro 1134 7.54 64.67 110.04 17.92 20296 11.51% 22.02% 0.36 8.88%
Devyani
International 184.75 2.04 9.55 103.33 19.14 17346 21.38% 100.00% 0.76 12.08%

Nifty IT 27.15 7.12

Infosys 1373.5 57.54 183.17 22.98 7.58 585676 31.95% 41.22% 1.34 16.72%
TCS 3369.5 115.19 249.2 27.6 13.63 1163072 46.61% 1.90% 0.98 13.84%
HCL Tech 1263.7 54.79 240.88 22.19 5.25 282423 22.70% 12.50% 1.01 14.08%
Wipro 381.8 20.73 141.63 17.12 2.57 206356 14.61% 95.18% 1.13 15.04%
LTI Mindtree 5134.6 148.83 560.7 34.42 9.19 138037 26.56% 64.56% 1.23 15.84%
Tech
Mahindra 1123 54.76 322.65 30.53 3.94 94756 17.30% 11.76% 1.1 14.80%
L&T
Technology 4179.65 110.48 470.99 35.65 8.93 34950 23.62% 72.93% 1.1 14.80%
o Reference & Sources
 www.moneycontrol.com
 https://trendlyne.com/equity/1902/NIFTYIT/nifty-it/
 https://trendlyne.com/equity/1901/NIFTYFMCG/nifty-fmcg/

Britannia :
 PE and PB of Britannia stock is 44.32 and 30.62, while sector PE and PB is 46.99 and 9.38.

 As PE is low and PB is high, Britannia stock falls into the category of falling stars as per the
matrix of PE-PB combination, we can consider it to be a growth stock.
 Growth of Britannia stock is slightly lower than sector’s growth but it is with increased
stability as PB of Britannia is way more than sector’s PB.

 Earnings per share and Return on equity of Britannia is more than compared to its peers
except Nestle which indicates the efficiency of Britannia’s management to convert
shareholders funds for more profits. We can see an upward trend in both Net Profits and
ROE.

 Since the PE and PB ratios is more than 1, the stocks can be considered as overvalued.
However, Britannia’s stock is also less over-valued than its peers as peers companies PE ratio
is more than PE ratio of Britannia that too greater than 50. PE ratio of Britannia is 44.32
which means that the investors are willing to pay Rs. 44 for Rs. 1 of the current earnings of
company. This further indicates that the stock is a growing stock. This is also justified by the
retention ratio of Britannia which grew by 162% compared to FY2022 as the company has
ploughed back its earnings for growth and expansion. Latest Retention Ratio with value of
41.39 is greater than average Retention Ratio of 12.64 in last five years.

Infosys :
 The PE and PB ratio of Infosys is 22.98 and 7.58 which is almost close to the market PE
and PB which is 27.15 and 7.12. This indicates that Infosys is performing at par with the
sector growth.

 As PE is low and PB is high compared to the sector’s PE, Infosys stock falls into the
category of falling stars as per the matrix of PE-PB combination, we can consider it to
be a growth stock. This indicates that the company has huge potential to utilize its rich
assets by making key strategic decisions to obtain a comparative advantage over its
competitors. This is justified by the growth rate of the Infosys which is 13% and higher
than most of it’s comparable peers based on the market capitalization.

 Since the PE and PB ratios is more than 1, the stocks can be considered as overvalued.
However, Infosys stock can be considered as less overvalued in comparison to its
immediate peer which is TCS in terms of market capitalization. Also, PE ratio of Infosys is
22.98 which means that the investors are willing to pay Rs. 23 for Rs. 1 of the current
earnings of company. This further indicates that the stock is a growing stock as there is
upward trend in net profit and ROE as shown below.
 Comparison of Relative Valuation using PE PB ratios vs CAPM
CAPM Model PE PB ratio

Britannia undervalued overvalued

Infosys overvalued overvalued

 Stock valuation based on the CAPM model is a theoretical model as the valuation is
purely based on the risk free rate, market return and volatility of the stock with respect
to the market. CAPM model is best suitable to identify the minimum expected return
which investors are willing to expect from their investments.

 CAPM model calculation is done based on considering risk free rate and market return.
The only parameter of stock in CAPM calculation is beta of the stock only. Beta is the
measure of the volatility or systematic risk of the stock compared to the market as a
whole.

 The PE ratio taken for stock valuation is a more prudent method as it takes into
consideration the performance of its industry or peer group and establishes a
benchmark to assess whether the stock is under or over valued. In contrast to this the
CAPM model only considers the historical return to arrive at the actual current return
 and then we compare it with market return. It does not necessarily compare the
performance of its peers.

 There are some limitations to the CAPM, such as making unrealistic assumptions and
relying on a linear interpretation of risk vs. return.