Analysis of risk and return on FMCG industry

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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 to understand the financial analysis of FMCG Industry. Through this project we came to learn that how to look at the problem from a Manager’s 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....................................................................................................................5

DABUR INDIA LTD.............................................................................................................................6

GODREJ CONSUMER PRODUCTS LTD.................................................................................................7

HINDUSTAN UNILEVER LTD..............................................................................................................9

ITC LTD...........................................................................................................................................10

COMPARISON AMONG BETA 5 COMPANIES ……………………………………………………………………………………….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

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

But systematic can’t be removed though it can be minimized. Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and can’t be avoided through diversification.

Beta (β) 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

-15 -10 -5 0 5 10 15

-6-4-202468

1012

f(x) = 0.457251761549305 x + 1.37588749207687R² = 0.263030166307946

Colgate Palmolive Vs BSE Sensex Returns

Colgate Palmolive Vs BSE Sensex ReturnLinear (Colgate Palmo-live Vs BSE Sensex Re-turn)Linear (Colgate Palmo-live Vs BSE Sensex Re-turn)

BSE Sensex Return

Colg

ate

Palm

oliv

e ltd

Ret

urn

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 NameStandard Beta

Company's Beta Avg. Return

Reqd. Return

Company's Alpha Status

Colgate-Palmolive (India) Ltd. 1

0.457251762 1.64833333

4.8695234

-3.2211900

9Overpriced

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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 (β)

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

-15 -10 -5 0 5 10 15

-10

-5

0

5

10

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f(x) = 0.326448733558975 x + 2.02715762958778R² = 0.0555263288561247

Dabur India Ltd. Vs BSE Sensex Returns

Dabur India Ltd. Vs BSE Sensex ReturnsLinear (Dabur India Ltd. Vs BSE Sensex Returns)

BSE Sensex Returns

Dabu

r Ind

ia Lt

d. R

etur

ns

Company MarketApr-10 13.75 0.18May-10 2.47 -3.5Jun-10 13.47 4.46Jul-10 -5.79 0.95

Aug-10 6.65 0.58Sep-10 2.63 11.67Oct-10 -5.32 0.38Nov-10 -5.6 -2.55Dec-10 5.19 3.32Jan-11 -6.28 -10.64Feb-11 9.82 -3.11Mar-11 -4.33 5.41

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Company NameStandard

BetaCompany's Beta

Avg. Return

Reqd. Return


Dabur India Ltd. 1 0.3264487342.2216666

7 5.8994883 -3.6778216 Overpriced

The above graph has been derived by plotting monthly returns of Dabur India 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 Dabur India Ltd. is the slope of this characteristics line.

BETA (β)

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

INTERCEPT (ALPHA)

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


The coefficient of correlation is 0.2356. The positive correlation indicates that when the market return goes up, Dabur India Ltd.’s return also goes up.

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The squared coefficient of correlation or the coefficient of determination is 0.0555 or 5.55%. It 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 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 Dabur India Ltd. is the slope of this characteristics line.

Godrej Consumer Products Ltd.


Beta Company's BetaAvg.

Return Reqd. ReturnCompany's

Alpha StatusGodrej

Consumer Products Ltd. 1 0.351176474 2.485 5.7047779 -3.21977791 Overpriced

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

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-15 -10 -5 0 5 10 15

-10

-5

0

5

10

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f(x) = 0.351176474230035 x + 2.27575735077127R² = 0.0864180623537625

Godrej Consumer Products Ltd. Vs BSE Sensex Returns

Godrej Con-sumer Products Ltd. Vs BSE Sen-sex Returns

Linear (Godrej Consumer Products Ltd. Vs BSE Sensex Re-turns)

BSE Sensex returns

Godr

ej C

onsu

mer

Pro

duct

s Ltd

. Ret

urns

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 (β)

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

a β 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 that of the market (BSE SENSEX). Here the β 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)

Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. The intercept Godrej Consumer Product Ltd. is 2.2757. It means the company

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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.


The coefficient of correlation is 0.2339. The positive correlation indicates that when the market return goes up, Godrej Consumer Product Ltd.’s return also goes up.


The squared coefficient of correlation or the coefficient of determination is 0.0864 or 8.64%. It 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.

Hindustan Unilever Ltd.

Company MarketApr-10 0.13 0.18May-10 -0.94 -3.5Jun-10 12.73 4.46Jul-10 -4.68 0.95

Aug-10 5.3 0.58Sep-10 16.49 11.67Oct-10 -3.79 0.38Nov-10 2.67 -2.55Dec-10 5.08 3.32

Jan-11 -13.18 -10.64Feb-11 3.54 -3.11Mar-11 -0.75 5.41

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-15 -10 -5 0 5 10 15

-15

-10

-5

0

5

10

15

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f(x) = 1.10834855012209 x + 1.22294232221892R² = 0.608690828347797

Hindustan Unilever Ltd. Vs BSE Sensex Returns

Hindustan Unilever Ltd. Vs BSE Sensex Re-turns

Linear (Hindus-tan Unilever Ltd. Vs BSE Sensex Returns )

BSE Sensex Returns

Hind

usta

n Un

ileve

r Ltd

. ret

urns

Company Name Standard Beta Company's BetaAvg.

ReturnReqd. Return


Hindustan Unilever Ltd. 1 1.10834855

1.88333333

-0.2573212

2.140654545 Underpriced

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 (β)

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

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INTERCEPT (ALPHA)

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


The coefficient of correlation is 0.7802. The positive correlation indicates that when the market return goes up, Hindustan Unilever Ltd.’s return also goes up.


The squared coefficient of correlation or the coefficient of determination is 0.6087 or 60.87%. It 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.

ITC Ltd.

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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

-15 -10 -5 0 5 10 15

-10

-5

0

5

10

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f(x) = 0.661684570557859 x + 2.42491294337594R² = 0.534329152082568

ITC Ltd. Vs. BSE Sensex Returns

ITC Ltd. Vs. BSE Sensex Returns

Linear (ITC Ltd. Vs. BSE Sensex Re-turns)

BSE Sensex Returns

ITC

Ltd.

Ret

urns

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 (β)

Beta (β) is used to measure the systematic risk of a security. ITC Ltd. has a β of 0.6617 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 ITC Ltd. are less volatile than that of the market (BSE SENSEX). Here the β 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.


BetaCompany's Beta

Avg. Return

Reqd. Return


I T C Ltd. 1 0.6616846 2.81916667 0.3942537 2.424912946 Underpriced

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INTERCEPT (ALPHA)

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


The coefficient of correlation is 0.7309. The positive correlation indicates that when the market return goes up, ITC Ltd.’s return also goes up.


The squared coefficient of correlation or the coefficient of determination is 0.5343 or 53.43%. It 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.

COMPARISON AMONG BETA 5 COMPANIES

Companies Beta

Colgate Palmolive Ltd. 0.47Dabur India Ltd. 0.32Godrej Consumer Products Ltd. 0.35Hindustan Unilever Ltd. 1.1ITC 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 β is most 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 BetaColgate Palmolive Ltd. 1.64 0.47Dabur India Ltd. 2.22 0.32Godrej Consumer Ltd. 2.48 0.35Hindustan Unilever Ltd. 1.88 1.1ITC Ltd. 2.81 0.66

Colgate-

Palmoliv

e (India)

Ltd.

Dabur In

dia Ltd

.

Godrej Consu

mer Pro

ducts Lt

d.

Hindustan Unile

ver L

td.

I T C Lt

d.0

0.5

1

1.5

2

2.5

3

RiskReturn

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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.

Analysis of risk and return on FMCG industry

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