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JAIPURIA INSTITUTE OF MANAGEMENT, LUCKNOW

Analysis of Risk and Return

(Assignment)

Sector: FMCG Industry

Submitted To:

Dr. Saima Rizwi

Submitted By:

Feroz Ahmad (JIML-11-057)

Bhola Bhakta (JIML-11-FS-021)

Kushal Bhardwaj (JIML-11-075)

Gaurav Saraswat (JIML-11-060)

Bhagwati Prasad Gupta (JIML-11-044)

DATE: January 10, 2012


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ACKNOWLEDGEMENT

We are grateful to our respected instructor Dr. Saima Rizvi for giving us an opportunity tounderstand the financial analysis of FMCG Industry. Through this project we came to learn that

how to look at the problem from a Managers perspective.

We would like to present our gratitude to Saima Mam for the successful completion of the

project which would not have been possible without his continuous help and guidance.


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CONTENTS

INTRODUCTION ................................................................................................................................ 4

COLGATE PALOMOLIVE ...................................................................Error! Bookmark not defined.

DABUR INDIA LTD. ...........................................................................Error! Bookmark not defined.

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

HINDUSTAN UNILEVER LTD .............................................................Error! Bookmark not defined.

ITC LTD ........................................................................................... Error! Bookmark not defined.

COMPARISON AMONG BETA 5COMPANIES.14

Risk & Return Of The Companies ...16-17


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INTRODUCTION

Risk and Return

The project assigned to us is the analysis of Risk and Return of FMCG companies. Both risk and

return go side by side, it becomes very important for an investor to consider both risk and return.

The decision of an investor whether to invest or not is greatly influenced by the return given by

that particular company and the risk associated.

We took five different FMCG companies return as a component of FMCG sector. Market return

has also been considered as benchmark. Excel has been used for the calculations. We have used

functions like descriptive statistics, regression and charts.

Risk and return has been calculated, analyzed and interpreted on the basis of last 12 months

return (From April 2010 to March 2011). Firstly mean return of the companies has been

calculated then with the help of descriptive statistics standard deviation risk has been

calculated. It shows the amount of deviation of actual return from thee mean return. The

sensitivity (BETA) has been calculated with the help of regression.

The following companies have been taken:

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

Measurement Risk

Financial Management develops the concept of total risk as,

Total risk = Systematic risk + Unsystematic risk

Unsystematic risk is the company or industry specific risk that is inherent in each investment. It

can be removed.


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But systematic cant be removed though it can be minimized. Interest rates, recession and wars

all represent sources ofsystematic risk because they affect the entire market and cant be

avoided through diversification.

Beta () is used to define the systematic risk of a stock.

Beta measures a stock's volatility, the degree to which its price or return fluctuates in relation

to the overall market. In other words, it gives a sense of the stock's market risk compared to the

greater market. Beta is used also to compare a stock's market risk to that of other stocks.

This measure is calculated using regression analysis.

A beta of 1 indicates that the security's price tends to move with the market.

A beta greater than 1 indicates that the security's price tends to be more volatile than the

market.

A beta less than 1 but greater than 0 means it tends to be less volatile than the market.


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Colgate Palmolive

The above graph has been derived by plotting monthly returns of Colgate Palmolive with respect

to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to

March 2011. Here, the total no. of observations is 12.The characteristics line has also been

drawn. The Beta of Colgate Palmolive is the slope of this characteristics line.

BETA ()

Beta () is used to measure the systematic risk of a security. Colgate Palmolive has a of

0.457251762 based on the monthly returns during April 2010 to March 2011. A Beta of less than

1 but greater than 0 means that returns of Colgate Palmolive are less volatile than that of the

market (BSE SENSEX). Here the of Colgate Palmolive is less than 1 that implies that the stock

of the company is a defensive stock which would not be market oriented. If there is increase or

y = 0.4573x + 1.3759

R = 0.263

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0

5

10

15

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ColgatePalm

oliveltdReturn

BSE Sensex Return

Colgate Palmolive Vs BSE

Sensex Returns

Colgate Palmoliv

Vs BSE Sensex

Return

Linear (Colgate

Palmolive Vs BSE

Sensex Return)

Company Market

Apr-10 10.48 0.18

May-10 2.28 -3.5

Jun-10 10.7 4.46

Jul-10 0.29 0.95

Aug-10 -0.79 0.58

Sep-10 5.77 11.67

Oct-10 -0.66 0.38

Nov-10 0.74 -2.55

Dec-10 -0.97 3.32

Jan-11 -5.08 -10.64

Feb-11 -2.78 -3.11

Mar-11 -0.2 5.41

Company Name

Standard

Beta

Company's

Beta Avg. Return

Reqd.

Return

Company's

Alpha Status

Colgate-Palmolive

(India) Ltd. 1 0.457251762 1.64833333 4.8695234

-

3.22119009 Overpriced


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decrease in the market index then the stock may not apparently move along with market. It is

good for risk-averse investors, who do want to take high risk.

INTERCEPT (ALPHA)

Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and

the Sharpe ratio. The intercept Colgate Palmolive is 1.3758. It means Colgate Palmolive has

positive 1.37% return when the market return is zero for the extra risk. Here the alpha is positive

that shows the stock is being traded at underpriced, which is a good option for investors to invest

in the stock to get better return in future.

COEFFICIENT OF CORRELATION

The coefficient of correlation is 0.512. The positive correlation indicates that when the market

return goes up, Colgate Palmolives return also goes up.

COEFFICIENT OF DETERMINATION

The squared coefficient of correlation or the coefficient of determination is 0.263 or 26.3%. It

indicates the percentage of the variance of Colgate Palmolives returns, explained by the changes

in the market returns. The 73.7% unexplained variance is the firm-specific variance.


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Dabur India Ltd.

The above graph has been derived by plotting monthly returns of Dabur India Ltd. with respect



drawn. The Beta of Dabur India Ltd. is the slope of this characteristics line.

BETA ()

Beta () is used to measure the systematic risk of a security. Dabur India Ltd. has a of 0.326

based on the monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater

than 0 means that returns of Dabur India Ltd. are less volatile than that of the market (BSE

SENSEX). Here the of Dabur India Ltd. is less than 1 that implies that the stock of the

company is a defensive stock which would not be market oriented. If there is increase or

decrease in the market index then the stock may not apparently move along with market. It is

good for risk-averse investors, who do want to take high risk.

y = 0.3264x + 2.0272

R = 0.0555

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5

10

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DaburIndiaLtd.Returns

BSE Sensex Returns

Dabur India Ltd. Vs BSESensex Returns

Dabur India

Ltd. Vs BSE

Sensex Returns

Linear (Dabur

India Ltd. Vs

BSE Sensex

Returns)

Company MarketApr-10 13.75 0.18

May-10 2.47 -3.5

Jun-10 13.47 4.46

Jul-10 -5.79 0.95

Aug-10 6.65 0.58

Sep-10 2.63 11.67

Oct-10 -5.32 0.38

Nov-10 -5.6 -2.55

Dec-10 5.19 3.32

Jan-11 -6.28 -10.64

Feb-11 9.82 -3.11

Mar-11 -4.33 5.41

Company Name

Standard

Beta

Company's

Beta

Avg.

Return

Reqd.

Return

Company's

Alpha Status

Dabur India Ltd. 1 0.326448734 2.22166667 5.8994883 -3.6778216 Overpriced


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INTERCEPT (ALPHA)


the Sharpe ratio. The intercept Dabur India Ltd. is 2.027. It means Dabur India Ltd. has positive

2.027% return when the market return is zero for the extra risk. Here the alpha is positive that

shows the stock is being traded at underpriced, which is a good option for investors to invest in

the stock to get better return in future.



return goes up, Dabur India Ltd.s return also goes up.



indicates the percentage of the variance of Dabur India Ltd.s returns, explained by the changes

in the market returns. The 94.45% unexplained variance is the firm-specific variance.

The above graph has been derived by plotting monthly returns of Dabur India Ltd. with respect



drawn. The Beta of Dabur India Ltd. is the slope of this characteristics line.


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Godrej Consumer Products Ltd.

The above graph has been derived by plotting monthly returns of Godrej Consumer Product Ltd.

with respect to the monthly returns of BSE SENSEX, for a span of one year starting from April

2010 to March 2011. Here, the total no. of observations is 12.The characteristics line has also

been drawn. The Beta of Godrej Consumer Product Ltd. is the slope of this characteristics line.

BETA ()

Beta () is used to measure the systematic risk of a security. Godrej Consumer Product Ltd. has

a of 0.3511 based on the monthly returns during April 2010 to March 2011. A Beta of less than

1 but greater than 0 means that returns of Godrej Consumer Product Ltd. are less volatile than

y = 0.3512x + 2.2758

R = 0.0864

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10

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GodrejConsu

merProductsLtd.Returns

BSE Sensex returns

Godrej Consumer Products

Ltd. Vs BSE Sensex Returns

Godrej

Consumer

Products Ltd.

Vs BSE Sensex

ReturnsLinear (Godrej

ConsumerProducts Ltd.

Vs BSE Sensex

Returns)

Company Market

Apr-10 11.47 0.18

May-10 11.29 -3.5

Jun-10 6.66 4.46

Jul-10 0.2 0.95

Aug-10 8.12 0.58

Sep-10 8.55 11.67

Oct-10 2.73 0.38

Nov-10 -2.34 -2.55

Dec-10 -7.18 3.32

Jan-11 -3.74 -10.64

Feb-11 -5.6 -3.11

Mar-11 -0.34 5.41

Company NameStandard

Beta Company's BetaAvg.

Return Reqd. ReturnCompany's

Alpha Status

Godrej

Consumer

Products Ltd. 1 0.351176474 2.485 5.7047779 -3.21977791 Overpriced


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that of the market (BSE SENSEX). Here the of Godrej Consumer Product Ltd. is less than 1

that implies that the stock of the company is a defensive stock which would not be market

oriented. If there is increase or decrease in the market index then the stock may not apparently

move along with market. It is good for risk-averse investors, who do want to take high risk.

INTERCEPT (ALPHA)


the Sharpe ratio. The intercept Godrej Consumer Product Ltd. is 2.2757. It means the company

has positive 2.27% return when the market return is zero for the extra risk. Here the alpha is

positive that shows the stock is being traded at underpriced, which is a good option for investors

to invest in the stock to get better return in future.



return goes up, Godrej Consumer Product Ltd.s return also goes up.



indicates the percentage of the variance of Godrej Consumer Product Ltd.s returns, explained by

the changes in the market returns. The 91.36% unexplained variance is the firm-specific

variance.


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Hindustan Unilever Ltd.

Company Market

Apr-10 0.13 0.18

May-10 -0.94 -3.5

Jun-10 12.73 4.46

Jul-10 -4.68 0.95

Aug-10 5.3 0.58

Sep-10 16.49 11.67

Oct-10 -3.79 0.38

Nov-10 2.67 -2.55

Dec-10 5.08 3.32

Jan-11 -13.18 -10.64

Feb-11 3.54 -3.11Mar-11 -0.75 5.41

The above graph has been derived by plotting monthly returns of Hindustan Unilever Ltd. with

respect to the monthly returns of BSE SENSEX, for a span of one year starting from April 2010

to March 2011. Here, the total no. of observations is 12.The characteristics line has also been

drawn. The Beta of Hindustan Unilever Ltd. is the slope of this characteristics line.

BETA ()

Beta () is used to measure the systematic risk of a security. Hindustan Unilever Ltd. has a of

1.108 based on the monthly returns during April 2010 to March 2011. A Beta of greater than 1

means that returns of Hindustan Unilever Ltd. is more volatile than that of the market (BSE

SENSEX). Here the of Hindustan Unilever Ltd. is greater than 1 that implies that the stock of

the company is a aggressive stock which would be market oriented. If there is increase or

decrease in the market index then the stock would apparently move along with the market. It is

not good for risk-averse investors, who do want to take high risk but for risk takers who want to

invest in these securities with the hope of getting risk premium for the additional amount of risk.

y = 1.1083x + 1.22

R = 0.6087

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10

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20

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H

industanUnileverLtd.returns

BSE Sensex Returns

Hindustan Unilever Ltd. Vs

BSE Sensex Returns

Hindustan

Unilever Ltd.

BSE Sensex

Returns

Linear

(Hindustan

Unilever Ltd.

BSE Sensex

Returns )

Company Name Standard Beta Company's BetaAvg.

ReturnReqd.Return

Company'sAlpha Status

Hindustan Unilever

Ltd. 1 1.10834855 1.88333333-

0.2573212 2.140654545 Underpric


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INTERCEPT (ALPHA)


the Sharpe ratio. The intercept Hindustan Unilever Ltd. is 1.223. It means the company has

positive 1.22% return when the market return is zero for the extra risk. Here the alpha is positive

that shows the stock is being traded at underpriced, which is a good option for investors to invest

in the stock to get better return in future.



return goes up, Hindustan Unilever Ltd.s return also goes up.



indicates the percentage of the variance of Hindustan Unilever Ltd.s returns, explained by the

changes in the market returns. The 39.13% unexplained variance is the firm-specific variance.


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ITC Ltd.

Company Market

Apr-10 0.72 0.18

May-10 6.83 -3.5

Jun-10 11.51 4.46

Jul-10 1.31 0.95

Aug-10 5.36 0.58

Sep-10 9.47 11.67

Oct-10 -1.44 0.38

Nov-10 -0.09 -2.55

Dec-10 1.78 3.32

Jan-11 -6.62 -10.64

Feb-11 0.42 -3.11

Mar-11 4.58 5.41

The above graph has been derived by plotting monthly returns of ITC Ltd. with respect to the

monthly returns of BSE SENSEX, for a span of one year starting from April 2010 to March

2011. Here, the total no. of observations is 12.The characteristics line has also been drawn. The

Beta of ITC Ltd. is the slope of this characteristics line.

BETA ()

Beta () is used to measure the systematic risk of a security. ITC Ltd. has a of 0.6617 based onthe monthly returns during April 2010 to March 2011. A Beta of less than 1 but greater than 0

means that returns of ITC Ltd. are less volatile than that of the market (BSE SENSEX). Here the

of ITC Ltd. is less than 1 that implies that the stock of the company is a defensive stock which

would not be market oriented. If there is increase or decrease in the market index then the stock

may not apparently move along with market. It is good for risk-averse investors, who do want to

take high risk.

y = 0.6617x + 2.4249

R = 0.5343

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5

10

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-20 -10 0 10 20ITCLtd.Returns

BSE Sensex Returns

ITC Ltd. Vs. BSE Sensex

Returns

ITC Ltd. Vs.

BSE Sensex

Returns

Linear (ITC

Ltd. Vs. BSE

SensexReturns)

Company Name

Standard

Beta

Company's

Beta

Avg.

Return

Reqd.

Return

Company's

Alpha Status

I T C Ltd. 1 0.6616846 2.81916667 0.3942537 2.424912946 Underpriced


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INTERCEPT (ALPHA)


the Sharpe ratio. The intercept ITC Ltd. is 2.4249. It means the company has positive 2.42%

return when the market return is zero for the extra risk. Here the alpha is positive that shows the

stock is being traded at underpriced, which is a good option for investors to invest in the stock to

get better return in future.



return goes up, ITC Ltd.s return also goes up.



indicates the percentage of the variance of ITC Ltd.s returns, explained by the changes in the

market returns. The 46.57% unexplained variance is the firm-specific variance.

COMPARISONAMONG BETA 5COMPANIES

Companies Beta

Colgate Palmolive Ltd. 0.47

Dabur India Ltd. 0.32

Godrej Consumer Products Ltd. 0.35

Hindustan Unilever Ltd. 1.1

ITC Ltd. 0.66


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Here we can compare the Beta of all the five companies. All of them are having

Beta values less than or more than 1. It means all the companies have returns

those are less or more volatile than the market returns.

Since the index is same for all the companies, the company having lowest ismost risk free among them. Here, Asian Paints has the minimum risk among all

the companies.

RISK&RETURN OF THE COMPANIES

AVG.YEARLY RETURN OF COMPANIES

Returns Beta

Colgate Palmolive Ltd. 1.64 0.47

Dabur India Ltd. 2.22 0.32

Godrej Consumer Ltd. 2.48 0.35

Hindustan Unilever Ltd. 1.88 1.1

ITC Ltd. 2.81 0.66

0

0.5

1

1.5

2

2.5

3

Risk

Return


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Among all the companies, Hindustan Unilever Ltd. has High Beta and highest Avg.

Returns is of Godrej Consumer Ltd. So the profile of Dabur India Ltd. is most

attractive for risk-averse but Hindustan Unilever Ltd. has the most attractive

profile for risk takers investors. Again ITC Ltd. is the second best profile for risk

takers because of high beta but Dabur India Ltd. is second best for risk-averse

investors because of a low beta.

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