Portfolio Management Project

Submitted to: Prof. (Dr.) Purnima Khemani

Submitted by: Group 1

Name of the Student Enrollment ID

Himanshu 22A1HP015
Reetika Saha 22A1HP023
Baishali Nandi 22A1HP092
Ankur Soni 22A1HP118
Dhruv Ramrakhyani 22A1HP154
Anirban Chowdhury 22A1HP155
Antriksh Sahu 22A2HP412

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Introduction
The construction of an investment portfolio involves selection and strategic diversification to
optimize returns while managing risks. In this context, our portfolio selection focused on
considering companies from the automobile and healthcare sectors, recognizing their
significance and potential within the larger market landscape.

Portfolio risk and return

We first considered Tata Motors and TVS Motors from the automobile sector and determined
the portfolio return and risk. Weights assigned to each of the companies is 0.5.
• Portfolio return is 44.79%, and risk is 77.07%. Higher returns and risk result from the
fact that both stocks are from the same sector and are highly correlated.
• Now, to diversify our portfolio, we have added a different stock from a sector that is
not related. We have added Sun Pharma to our portfolio. After doing this, we figured
out that the return had changed to 37.15%, and the risk had reduced to 52.95%. The
diversification in the portfolio helps to minimize the risk.
From the two securities, we have a beta of 1.55 (Beta>1), which depicts that the security is
more volatile; its high Portfolio Risk of 0.770 suggests substantial volatility, likely attributed
to the Beta of 1.55. But in the second case, beta has been reduced to 1.15, indicating less
volatility in the second portfolio. This implies that the portfolio should always be diversified
to mitigate the potential risk.

Modern Portfolio Theory

The Modern Portfolio Theory (MPT) suggests that by combining assets, you can reduce risk
for a given level of return or increase return for a given level of risk.
In our case, Portfolio 1 consists of two stocks from the same industry (Tata Motors & TVS
from the automobile sector), and Portfolio 2 consists of two stocks from automobile and one
from an unrelated sector, i.e., healthcare (Tata Motors, TVS & Sun Pharma). Here is the return
and risk of the portfolios:

Portfolio Return Risk

With 2 securities 0.447938 0.77075
With 3 securities 0.371515 0.529462

Implications within the MPT Framework:

• Diversification Benefits: The lower risk observed in the three-security portfolio
indicates improved diversification, highlighting the benefits of spreading investments
across multiple securities to reduce overall risk.
• Risk-Return Balance: The comparison between the two portfolios aligns with the
fundamental principle of MPT, showcasing how additional securities can influence the
risk-return trade-off within a portfolio.

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Performance Measures:
The performance of a particular portfolio can be measured with the help of three popular
indexes or ratios. These are the Sharpe ratio, Treynor ratio, and Jenson ratio/alpha. Following
are the calculations for two and three securities.
In the first portfolio, we have assigned equal weights to equal stocks (0.5 to both stocks), but
in the second portfolio, we have assigned 0.4 to Sun Pharma and 0.3 each to Tata Motors &
TVS.
Sharpe Treynor Jenson
Portfolio Ratio Ratio Ratio/Alpha Weighted Beta
Tata Motors & TVS 0.5033 0.2495 0.1823 1.5549
Tata Motors, TVS & Sun
Pharma 0.5884 0.2706 0.1593 1.1510

• The Beta value of 1.55 signifies high volatility for the security compared to the market,
contributing to the elevated Portfolio Risk of 0.770. A positive Jenson value indicates
that the portfolio is doing well. A Sharpe Ratio exceeding 50% suggests that the
portfolio is earning more compared to the extra risk it's taking.
• The Sharpe Ratio at 58.84% indicates high returns for each unit of risk taken. The
Treynor Ratio of 27.06 highlights the returns above those predicted by market risk. A
positive Jensen Alpha of 0.1593 suggests the portfolio performed well.

Fundamental Analysis- Tata Motors

Fundamental analysis is a technique used to evaluate a stock's inherent value. It incorporates
events, industry trends, external factors, and financial statements. Fundamental analysis
consists of Economic Analysis, Industrial Analysis, and Company analysis.
Economic Analysis
Economic analysis explores the complicated dynamics of the market, interpreting its intricacies
and forecasting its future direction. The Indian automotive giant Tata Motors exists in a
dynamic ecosystem where multiple economic factors determine its success. The various factors
include the following,
• GDP: India expects its money to grow by 6.8% in the coming year, in FY24, signaling
potential growth in automobile demand. A strong GDP generally leads to increased
disposable income and elevated consumer confidence, both of which stimulate the sales
of passenger and commercial vehicles.
• Inflation: However, the current inflation rate of 6.7% poses a moderate risk, potentially
impacting consumer spending patterns on vehicles. Inflationary pressures can erode
purchasing power, leading to a slowdown in vehicle purchases or a shift towards more
cost-effective options.
• Forex Reserve: The unstable foreign exchange rates, especially the recent fall in the
value of the Indian rupee compared to the US dollar, create a complex situation for Tata
Motors. A weaker rupee could reduce the cost of buying things from other countries,
making it better for Tata Motors' profits. However, it could also make Tata Motors' cars

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 more expensive for people in other countries who want to buy them, affecting how well
the company competes globally.
• Monetary Policy: The Reserve Bank of India's moves with money (called monetary
policy) have a big impact on how people act, especially when they're taking loans to
buy vehicles. If the bank raises interest rates to fight rising prices, people might not
want to borrow for cars. But if they make it easier to get money, it could make more
people buy cars.
• Press Freedom: An open and transparent media benefits trust but subjects Tata Motors
to intense scrutiny. To counter negative attention and maintain a positive brand image,
proactive public relations management becomes crucial.
Tata Motors needs to adjust to economic changes, seize new chances, tackle problems, and stay
a top car company in India by being smart about how it works.
Industry Analysis
About the Industry

India's automobile industry is a key economic force, contributing around 7% to the GDP. The
industry is highly competitive, with several major players, including Tata Motors, Maruti
Suzuki, Hyundai Motor India, and Mahindra & Mahindra. The Indian automobile industry is
involved in the manufacturing, distributing, and selling motor vehicles like passenger cars,
commercial vehicles, two-wheelers, and three-wheelers. Ranking fifth globally, it sold 3
million vehicles in 2022 and is projected to hit 5 million by 2025, growing at 10% annually.

The Herfindahl-Hirschman Index (HHI)

It is employed in the assessment of comparative competitiveness. A market is deemed

competitive if its HHI is less than 1,500, moderately concentrated between 1,500 and 2,500,
and highly concentrated if it is 2,500 or higher.

Major Players and Their Market Share

The major players in the Indian automobile industry in terms of market share are Tata Motors:
11.4%, Maruti Suzuki: 50.2%, Hyundai Motor India: 16.5%, and Mahindra & Mahindra:
11.9%.

Therefore, the HHI index for the automobile industry is as follows:

11^2+50^2+16^2+12^2= 3021 (we only consider the whole number, not the decimal)

As we can see, the HHI Index for the automobile industry is 3021, which is more than 2500.
This indicates that the automobile industry is a highly concentrated and uncompetitive market.
This is because most of the market share is held by these 4 companies, and it is difficult for
smaller firms to compete with these giants in the industry.

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Porter’s 5 Forces Analysis:
1. Threat of New Entrants: High capital expenditures are needed in the automobile
sector for marketing, production facilities, R&D, and distribution systems.
Additionally, well-established market participants have realized economies of scale,
which lowers their costs. As a result, it is challenging for new players to get into this
industry.
2. Bargaining power of suppliers: The bargaining power of suppliers in the automotive
industry is low. Their negotiating power is constrained because the automotive industry
has many suppliers. Furthermore, most of the suppliers are small in size despite the
existence of a few large ones.
3. Bargaining power of buyers: Due to the abundance of options and fierce competition
among automakers, buyers in the Indian automobile market—which encompasses both
fleet and individual consumers—typically possess strong bargaining power. Price
sensitivity among Indian consumers frequently results in more price bargaining and
demands for further features.
4. Threat of Substitution: The threat of substitution in the automobile industry is quite
low. Alternatives such as public transport and electric vehicles can be potential
substitutes for the passenger vehicles segment of the automobile industry, which is very
unlikely to happen.
5. Competitive rivalry: Many local and foreign competitors exist in the fiercely
competitive Indian auto industry. Price wars, innovation, and marketing campaigns
aimed at gaining market dominance result from fierce competition.

Industry Attractiveness, Past Growth Rate:

The Indian automobile industry is a highly attractive market, with a large and growing
population, rising incomes, and increasing urbanization. The industry has grown at a CAGR of
12% over the past five years. Some key challenges the Indian automobile industry faces are the
high cost of raw materials, rising competition from foreign players, inefficient supply chain,
lack of skilled labour, poor infrastructure, etc. The Indian automobile sector is currently in the
growth stage. It is the third-largest automobile market in the world in terms of sales and is
expected to grow at a compound annual growth rate (CAGR) of 10% to reach 50 million units
by 2030.

Role of Regulatory Forces & Key Drivers

The Indian government plays a significant role in the automobile industry. The government has
implemented policies to promote the growth of the industry, such as tax breaks and subsidies.
The key drivers for growth in the Indian automobile industry are rising incomes, increasing
urbanization, growing demand for personal transportation, and government policies to promote
the industry.

Company Analysis

Tata Motors is an Indian multinational automotive manufacturing company and a part of the
Tata Group, one of India's largest and most respected business conglomerates. Founded in 1945

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as Tata Engineering and Locomotive Co. Ltd. (TELCO), it was renamed Tata Motors in 2003
to reflect its broader automotive focus. Tata Motors is headquartered in Mumbai, India. Tata
Motors also owns Jaguar Land Rover. It has a global presence with manufacturing facilities in
multiple countries.

MOAT:

Tata Motors possesses a narrow economic moat, bolstered by the premium pricing power of its
Jaguar Land Rover (JLR) brands and cost advantages stemming from its Indian operations.
With over 50% market share in the Indian commercial vehicle segment and anticipated
government infrastructure spending, the company is well-positioned for growth. Despite
challenges, Tata Motors has demonstrated effective stewardship, particularly through its
successful acquisition and management of JLR, though its Indian passenger vehicle strategy
has lagged behind competitors in recent years.

Ratio Analysis:

Asset Turnover ratio - Over the years, the asset turnover ratio has fluctuated, going from 1.54
in 2019 to 1.26 in 2020, 1.12 in 2021, 1.24 in 2022, and then slightly increasing to 1.57 in 2023.
Although it fluctuates, as can be seen, it is consistently greater than 1, indicating that the
company is effective at earning enough revenue from its asset base.

Debt to Equity Ratio - In 2023, the value was 2.96, whereas in 2019, it was 1.76. Over time,
the ratio has gotten better. Since the debt-to-equity ratio has consistently exceeded 1, the
company is riskier to invest in and needs more funding to support its ongoing operations and
business growth.

Interest coverage ratio - The interest coverage ratio indicates how well EBIT can pay for your
interest costs. Our data indicate that while the company's ratio was relatively modest in 2019,
it considerably rose from that year onward. Investors will consider investing in the company if
it can pay its debts.

Return on equity- ROE increased from 2019 to 2020, implying a positive sign that the Return
generated on Equity infused has increased. The ROE for 2020-2022 remains constant, and real
growth is witnessed in Year 2023, making the ROE positive for the first time in 5 Years.

Gross profit ratio- The gross profit margin increases each successive year. This means the
proportion of the increase in revenue is more than the proportion of the rise in the cost of goods
sold. The gross profit margin of a business is a measure of its efficiency. It indicates how well
a company utilizes its raw materials and direct labour.

Current Ratio - The current ratio for each successive year is increasing marginally, with a
slight downfall in 2023. This also means they have enough Current Assets to cover their
Current Liabilities.