Submitted By:

Aishwariya K.P.L. 09BSHYD0049 Harsh Srivastava 09BSHYD0309 Md. Naeem 09BSHYD0459 Pragati Choraria 09BSHYD0235 Shruti Challani 09BSHYD0792 Siddharth S. Chauhan 09BSHYD0815 Varun Elwadhi 09BSHYD0959 Vidhya K. 09BSHYD0345

Submitted to:

Dr. Sunil

Bhardawaj

ACKNOWLEDGEMENT

We would like to express our gratitude towards all the people who have in various ways, helped

in the successful completion of our projects.

We must convey our gratitude to Dr. Sunil Bhardawaj for giving us the constant source of

inspiration and help in preparing the project, personally correcting our work and providing

encouragement throughout the project.

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Submitted By:

Aishwariya K.P.L. 09BSHYD0049 Harsh Srivastava 09BSHYD0309 Md. Naeem 09BSHYD0459 Pragati Choraria 09BSHYD0235 Shruti Challani 09BSHYD0792 Siddharth S. Chauhan 09BSHYD0815 Varun Elwadhi 09BSHYD0959 Vidhya K. 09BSHYD0345

EXECUTIVE SUMMARY

The aim of this report is to deal with the market rend of power sector by analyzing the share

prices of the respective companies. We are also analyzing and determining the relationship

between risks and returns. To determine the market trend we have taken eight companies from

power sector, ABB, BHEL, NTPC, AREVA, SUZLON, CROMPTON, TATA POWER and CESC.

This report includes the analysis based on the share prices of three years for both the market

and the companies. We have done beta calculation, return using CAPM model, security market

line(SML), hypothesis testing using two tail t-test based on beta, time series analysis of the

share prices and regression analysis.

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Submitted By:

Aishwariya K.P.L. 09BSHYD0049 Harsh Srivastava 09BSHYD0309 Md. Naeem 09BSHYD0459 Pragati Choraria 09BSHYD0235 Shruti Challani 09BSHYD0792 Siddharth S. Chauhan 09BSHYD0815 Varun Elwadhi 09BSHYD0959 Vidhya K. 09BSHYD0345

TABLE OF CONTENTS

Acknowledgement

Executive Summary

P No.

Introduction & Company Background 5

Objective 12

Data Collection 13

Concepts Covered 14

Calculations 15

Data Analysis 21

Conclusion 24

Appendices(Working Notes- Excel Sheets)

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INTRODUCTION

INDIA is the 5th largest power producer in the world with the total power capacity of more than

145,000MW. Despite growth in power generation capacity over various 5-Year Plans, India is

facing huge power deficit with peak power deficit of about 16%. Growth of the Indian economy

is targeted to be over 8% for 2007-2012and power development is the key to this economic

development. The power Sector has been receiving adequate priority ever since the process of

planned development began in 1950. The Power Sector has been getting 18-20% of the total

Public Sector outlay in initial plan periods. Remarkable growth and progress have led to

extensive use of electricity in all the sectors of economy in the successive five years plans.

The electricity sector in India is predominantly controlled by Government of India's public

sector undertakings (PSUs). Major PSUs involved in the generation of electricity include

National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC)

and Nuclear Power Corporation of India (NPCI). Besides PSUs, several state-level corporations,

such as Maharashtra State Electricity Board (MSEB), are also involved in the generation and

intra-state distribution of electricity.

PLAYERS IN TNE INDUSTRY

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MAJOR PLAYERS CAPACITY GEN. TRANS. DIST. PUBLIC SECTORNTPC 29144(MW)

BHEL 4000(MW) Power Plant Equipment Producer

NPC 1412(MW)

DOMESTIC PRIVATE SECTORTATA power 2323(MW)

CROMPTON GREAVES 975(MW) Power Plant EquipmentReliance energy 941(MW)

INRERNATIONAL PRIVATE SECTORAREVA 750(MW)

MC 347(MW)

Above table depicts that NTPC has got highest installed capacity (29144MW) in the public sector. Secondly, all three players in the public sector have restricted their business only to power generation. In domestic private sector, TATA Power is the biggest player with installed capacity of 2323 MW.

Why Power sector?

Power is an essential requirement for all facets of our life and has been recognized as a basic human need. It is the critical infrastructure on which the socio-economic development of the country depends. The growth of the economy and its global competitiveness hinges on the availability of reliable and quality power at competitive rates. The demand of power in India is enormous and is growing steadily. The vast Indian power market, today offers one of the highest growth opportunities for private developers.

India is endowed with a wealth of rich natural resources and sources of energy. Resources for power generation are unevenly dispersed across the country. This can be appropriately and optimally utilized to make available reliable supply of electricity to each and every household. Electricity is considered key driver for target 8 to 10% economic growth of India.

There is good scope of investing in power sector due increasing demand and non substitutability of it. An investor by investing in these stocks can gain a lot

NTPC

Company Background

NTPC Ltd. Is a Central Government commercial enterprise was incorporated as National Thermal Power Corporation in 1975 to accelerate power development in India? Primarily engaged in the generation and sale of bulk power to state electricity boards/utilities, the company widened its area of operations to engineering and construction of power plants as well as consultancy to other power utilities in the country and abroad. It is also diversifying into power trading and distribution; and generation of hydro--electricity.

NTPC is India's largest thermal power generating company with an installed capacity of 26,874 megawatt (mw) as on 31 March 2008. This is 3.9 per cent higher than the year--ago level. It includes 15 coal--fired power stations (22,920 mw) and seven gases based power stations (3,954 mw). The company has four joint venture power plants with an annual capacity of 1,054 mw. NTPC accounts for 20.6 per cent of the total installed capacity in the country and it generated 2, 00,853 million kWh of electricity which is equivalent to 28.5 per cent of the total generation during 2007--08.

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NTPC has gone beyond the thermal power generation. It has diversified into hydro& hydro power, coal mining, power equipment manufacturing, oil & gas Exploration, power trading & distribution.

NTPC is now in the entire power value chain and is poised to become an Integrated Power Major and is among the largest five companies in India in terms of market capitalization.

Key Risks

The following factors can pose a threat to NTPC:

Uncertainty in fuel prices:-NTPC’s coal-based power is operating at a lower PLF due to a rain-induced coal shortage. Moreover, the gas-based power plants are facing a similar problem Because of difficulties in procuring gas.

Non-availability of gas linkages:-NTPC depends a lot on gas as a fuel and getting new gas linkages is a major problem. There are not many gas suppliers in India .This increases the risk even more.

Loss or any delay in the approval of contracts:- since NTPC is a government undertaking there is a lots of bureaucracy. at times approval of contracts takes a lot of time which hampers

TATA POWER

Company Background

Tata Power Company Ltd was incorporated in 1919 as a result of the merger between Tata Hydroelectric Power Supply Company and Andhra Valley Power Supply Company. The Power segment of TPL is engaged in generation, transmission and distribution of electricity. The other segment includes electronic equipment, broadband services, project consultancy and oil exploration. Tata Power, India's one of the largest private power supplier, owns 3 hydroelectric and 1 thermal generating stations. It has an installed power generation capacity of over 2000 MW and a presence across the power business system i.e. generation (thermal, hydro, solar and wind) transmission and distribution (T&D). It has T&D facilities throughout Mumbai, interconnected as a grid. The Thermal Power stations of the company are located at Trombay in Mumbai, Jojobera in Jamshedpur and Belgaum in Karnataka. The Hydro stations are located in Raigad district Maharashtra and the Wind Farm in Ahmednagar. Tata Power supplies power to several direct bulk customers like textile mills, railways and industrial consumers. A substantial quantum of power is supplied to the metro's railway network, refineries, ports and Reliance Energy Limited.The company has big overseas power projects in a number of countries, including Malaysia, Saudi Arabia, Kuwait, Algeria and the U.A.E The company is headed by Mr Ratan Tata, the Chairman of Tata Sons. Promoters (Tata

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Sons & TISCO) hold about 33 %, while institutional investors and the India Public hold around 43 % and 22 % of the total equity holdings respectively.

Key Risk:In the power business, a key risk is on account of emerging new regulation in the sector where some of the proposed modifications are not yet clear, whether put up in the shape of the Electricity Bill 2001 or other changes in statutes. However, the Company has been adequately represented in all fora dealing with this issue. The high fluctuation in fuel price constitutes another risk factor and the Company is constantly optimizing the fuel mix to partly mitigate the problem. The wheeling of power inter-state could provide future opportunities as the Company has some surplus power both in its eastern and western generating plants.On the distribution side, although heavy losses have hitherto stopped private investment from entering this area, some selected urban areas could provide opportunities for breaking into this vital sector. A start will soon be made by the Company in one zone in Delhi.

The following factors can also pose a risk: Delay in capacity additions Any fall in coal prices, which can hurt the value accretion Any delay in completion of the Maithon and Mundra power projects

BHEL

Bharat Heavy Electricals Limited was set up in 1959 by the Government of India with the objective of creating indigenous manufacturing base for power plant equipments. Today, BHEL is the 12th largest company in the world in Power Plant Equipments manufacturing and the largest in India. The company has the ability to manufacture the entire range of power plant equipment and has one of the largest capacities of power plant equipment in the world. Apart from being the lowest cost producer, BHEL also possesses the infrastructure that can supply power equipment for 4,000 MW of generating capacity annually.BHEL has indigenized most components and raw materials for power plants. Technical collaborations with several foreign companies have helped BHEL to adapt and assimilate imported technology to Indian conditions such as modification of boiler design to function optimally with Indian coal which has higher ash content. This is evident in the 86% success rate in bagging contracts in the international competitive bidding route.The company operates through 14 plants and 9 service centers. The major inhibiting factor for the growth of BHEL in the past has been lack of access to large fund base. The company is a candidate for disinvestment as the Central Government has decided to offload atleast 20% of its stake towards a strategic partner.

BHEL has a capital base of Rs. 244.8 crore and its current market capitalization is Rs. 3451.12 crore. The company has 24.48 crore shares outstanding. The free float available in the market for trading is only 6% of the total shares outstanding.

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BHEL's products, services and projects are exported to over 52 countries including United States and New Zealand. BHEL's market share in the coal-based thermal power plant segment is 75%, 65% in nuclear-based thermal plants, 50% in hydro-based thermal power plants.

Key Risk:PSU status is a big weakness for BHEL as it is subject to their rules and regulations and is forced to carry a huge amount of labor force, which it is not able to retrench. The company offers very stringent credit facilities to the customers and this is a weakness when compared in the face of rising competition. On the other hand their customers in the power segment, SEBs, have a huge amount of receivables standing against their name in the company's balance sheet. This is a major weakness for the company.Company is vertically integrated, which could have been avoided by outsourcing its components for power generation and transmission.

CROMPTON GREAVES

Company Background:Crompton Greaves, headquartered at Mumbai, is one of the largest private sector enterprises in the country. It designs, manufactures and markets electrical equipment, and products and services related to power generation, transmission and distribution. The company operates in four business lines – Power Systems, Industrial Systems, Consumer Products and others; it offers a wide range of products in these lines, such as power and industrial transformers, high tension (HT) and low tension (LT) motors, DC motors, traction motors, generators, HT circuit breakers, railway signaling equipment, lighting products, fans, pumps, and transmission and access products.

Crompton Greaves is one of the top 10 transformer manufacturers in the world. The company operates in 22 manufacturing divisions in India spanning Gujarat, Maharashtra, Goa, Madhya Pradesh and Karnataka. With the acquisition of the Belgium-based Pauwels Group in May 2005, the company has forayed into the global market. Crompton Greaves plans to capitalize on the facilities and network of the Pauwels Group to enrich its umbrella of product and service offerings that will include transformers, switchgears, circuit breakers, mobile substations, power quality products, turn key jobs and after-sales services. The company aims at emerging as a solutions to company. Avantha group-owned Crompton Greaves feels that despite its size it has the ability to match up to its much bigger transmission & distribution (T&D) competitors.Company has already spent Rs 55 crore mostly in the T&D vertical for range extension, capacity addition and technical upgradation at our plants. Crompton Greaves will see a standalone topline growth of 12-14% and our overseas entities will grow 3-4%. As far as the bottomline is concerned, it will maintain the margins achieved last fiscal.

KEY THREATS: Delay in Capital Improvement. Any fall in sector may hamper growth. Size of company is not that huge.

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AREVA POWER

Company Background:Areva world energy expert offers its customers technological solutions for highly reliable nuclear power generation and electricity transmission. Innovate to contribute to CO2-free power generation and electricity transport that are cleaner, safer and more economic. AREVA is a world-leading company in nuclear energy.[3] It is the only company with a presence in each industrial activity linked to nuclear energy: mining, chemistry, enrichment, combustibles, services, engineering, nuclear propulsion and reactors, treatment, recycling, stabilization, and dismantling. AREVA also claims to offer technological solutions for CO₂-free energy; and produces earth leakage circuit breaker technologies.

KEY THREATS: Electricity generation is expensive Transmission takes a long time. Scale of company is less. Threats from huge Power Sector Companies

ABB Ltd.

The Company was incorporated on 24.12.1949 as The Hindustan Electric Company Limited. On 24.09.1965, the Company’s name was changed to Hindustan Brown Boveri Limited (HBB). Pursuant to the Scheme of Amalgamation of Asea Limited with HBB with effect from 1st January 1989, the name was further changed to Asea Brown Boveri Limited, with effect from 13.10.1989. Effective 16.04.2003, the name was further changed to ABB Limited.Flakt India Limited was amalgamated with ABB with effect from 5th October 1995. During 1994-95, a joint venture Company - ‘ABB Daimler-Benz Transportation AG’ (Adtranz) was established by ABB Zurich and Daimler-Benz AG, Germany, in Germany. A subsidiary of Adtranz was incorporated in India viz. ’ABB Daimler-Benz Transportation Limited which took over the Transportation Business of the Company effective 1st January 1996. ABB’s power generation business was globally transferred into the new 50-50 JV with Alstom in 1999. In India the power generation business has been demerged and transferred to ABB Alstom Power India Ltd. with effect from 1st April 1999. In consideration of the transfer of the power business, each shareholder of ABB has been allotted one share in ABB Alstom Power India Ltd. for every share held in the company.

Capital:The Authorised Share Capital of the Company is Rs.500,000,000 divided into 212,500,000 Equity Shares of Rs.2/- each and 750,000 – 11% Redeemable 10 years, Cumulative Preference Shares of Rs.100/- each.

The Issued, Subscribed and Paid-up share capital of the Company, as at the end of the financial year ended December 31, 2007, is Rs.423,816,750/-, consisting of 211,908,375 Equity Shares of the face value of Rs.2/- each.

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As one of the world’s leading engineering companies, ABB helps customers to use electrical power effectively and to increase industrial productivity in a sustainable way. The ABB Group of companies operates in over 100 countries and employs about 120,000 people. ABB operations in India include 14 manufacturing facilities with over 7500 employees. Customers are served through an extensive countrywide presence with more than 18 marketing offices, 8 service centers, 3 logistics warehouses and a network of over 800 channel partners. The ABB Group is increasingly leveraging the Indian operations for projects, products, services, engineering and R&D.

Key Risks: Any unmanageable rise in the prices of input materials. Poor execution of orders. Any slowdown in the areas of infrastructure and industrial capex.

CESC

CESC, a power utility in India was setup in 1899. It is claimed that it brought electricity to Calcutta, just a few years after electricity was first used to light up London. CESC is part of the RPG Group which has a strong presence in the fields of power generation, transmission network, cable manufacturing and consultancy in the operation and maintenance of power plants. The group has strategic tie-ups with a number of Fortune 500 companies.

SUZLON

Key Risks Supply bottlenecks have occurred due to demand outpacing supply. Widespread global operations could impact operational efficiency, especially if

quality sites are depleted or scarce. Decreases or eliminations of government subsidies relating to wind energy in key

Markets Risks inherent in doing business in rural areas in developing countries due to

lawlessness

OBJECTIVE

To study the market trend of the power sector and analyze the risk and returns of the stocks of

the different companies.

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A basic rule of thumb for investors in the stock market is to ``diversify''; that is to spread one's

money across stocks which are likely to behave differently in response to various conditions in

the market. Risk to the investor is reduced because, under a given set of circumstances, some

stocks in the portfolio will rise while others fall. How can one determine which stocks are

similar and which are not for the purpose of diversification?

The data provided are daily stock prices of 2009 of 8 companies of power sector. The 8

companies -- BHEL, NTPC, Suzlon Energy, Tata power Co, ABB, Crompton, Areva, & CESC --

which constitute the BSE Power index represent about 90% market capitalization of power

sector companies from the list of BSE-500 index.

Given this information, the first step toward answering the question posed above is to

reformulate the question in terms of these data. For example, two stocks may be considered

similar if they maintain approximately the same level, vary to a similar degree, or tend to move

up and down in related ways over some relevant time period. An initial analysis might use some

graphical techniques to examine these aspects of the data.

DATA COLLECTION

Data can be collected using many ways. Primarily, there are two types of data collection,

Primary data and Secondary data. In the former, the company itself collects data using surveys,

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questionnaire etc and information is derived on the basis of this first hand data or Primary data.

In the latter, information is inferred from previously collected data i.e. Secondary data.

Depending on the need, requirements, and keeping in mind the time and money constraints,

companies may either go for Primary data collection or Secondary data collection for inferring

information about a particular field

For analyzing and studying the power sector, we have resorted to the use of Secondary data

from reliable sources such as websites, magazines etc.

The various websites & references used are:

http://www.bseindia.com/histdata/hindices.asp

http://www.google.com/finance

http://www.nasdaq.com

The 8 companies from the power sector chosen for this analysis will be divided among 8 members in the following manner:

1. Areva T&D : Varun Elwadhi2. ABB Ltd. : Mohammed Naeem3. BHEL : Aishwariya KPL4. CESC : Vidhya K.5. NTPC : Shruti Challani6. Crompton : Siddharth Chauhan7. Suzlon Energy : Pragati Choraria8. Tata Power Co. : Harsh Shrivastav

CONCEPTS COVERED

Standard Deviation:

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Variance and Co-Variance:

Coefficient of Variation:

Hypothesis Testing: A statistical hypothesis test is a method of making statistical decisions

using experimental data. These decisions are almost always made using null-hypothesis tests;

that is, ones that answer the question assuming that the null hypothesis is true, what is the

probability of observing a value for the test statistic that is at least as extreme as the value that

was actually observed? One use of hypothesis testing is deciding whether experimental results

contain enough information to cast doubt on conventional wisdom.

The Hypothesis Testing model used is Two tail t-test

CALCULATIONS

To Determine Risks and Returns.

To Determine ‘Beta’:- Sensitivity of Security Return to Market Return.

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Security Market Line

Hypothesis testing

Regression

Time series

Risk and returns

Risk is a concept that denotes the precise probability of specific eventualities. Technically, the

notion of risk is independent from the notion of value and, as such, eventualities may have both

beneficial and adverse consequences. However, in general usage the convention is to focus only

on potential negative impact to some characteristic of value that may arise from a future event.

Risk can be defined as “the threat or probability that an action or event will adversely or

beneficially affect an organization’s ability to achieve its objectives”. In simple terms risk is

‘Uncertainty of Outcome’, either from pursuing a future positive opportunity, or an existing

negative threat in trying to achieve a current objective.

Return on investment (ROI), rate of profit or sometimes just return, is the ratio of money

gained or lost (whether realized or unrealized) on an investment relative to the amount of

money invested. The amount of money gained or lost may be referred to as interest,

profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset,

capital, principal, or the cost basis of the investment. ROI is usually expressed as a percentage

rather than a fraction.

Beta

The beta (β) of a stock or portfolio is a number describing the relation of its returns with that of

the financial market as a whole.

An asset with a beta of 0 means that its price is not at all correlated with the market; that asset

is independent. A positive beta means that the asset generally follows the market. A negative

beta shows that the asset inversely follows the market; the asset generally decreases in value if

the market goes up and vice versa.

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A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the

market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that

calculates the expected return of an asset based on its beta and expected market

returns.

Beta is calculated using regression analysis, and you can think of beta as the tendency of a

security's returns to respond to swings in the market. A beta of 1 indicates that the security's

price will move with the market. A beta of less than 1 means that the security will be less

volatile than the market. A beta of greater than 1 indicates that the security's price will be more

volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile

than the market.

Systematic risk is a type of risk that is beyond the control of investors and cannot be mitigated

to a large extent and is due to risk factors that affect the entire market such as investment

policy changes, foreign investment policy, change in taxation clauses, and shift in socio-

economic parameters, global security threats and measures.

Unsystematic risk is due to factors specific to an industry or a company like labor unions,

product category, research and development, pricing, marketing strategy. It can be mitigated

through portfolio diversification. It is a risk that can be avoided and the market does not

compensate for taking such risks.

This logic forms the base for the capital asset pricing model (CAPM). The greater is the

systematic risk, the greater is the return expected out of the asset.

What the CAPM (Capital Asset Pricing Model) explains.

Total Risk is defined as the sum total of systematic and unsystematic risk.

Total Risk = Systematic risk + Unsystematic Risk

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CALCULATING RISK FACTOR OF STOCK (β calculation)

β symbolizes the risk of an individual security as compared to the market. Here, market is taken

as a benchmark;

If β>1 it signifies that the stock is more volatile than the market.

If 0<β<1 it signifies that the stock is less volatile or less riskier than the market.

If β<0 it signifies that the stock is in reverse harmony with the market i.e. if the market is

returning positive results, the stock will return negative (these types of stocks are very rare to

find).

Here, as we know that the stock’s return is dependent on the market’s return so we have to

establish a relation between the market return and the stock’s return.

To establish that relation we use the tool of regression analysis in which tha market return is

the independent variable while the stock return is the independent variable.

The linear regression equation :-

yi=ai+bixi

y=stock’s rate of return

x=market rate of return

b= risk factor

a=stock’s return when the market return is zero

The subscript (i) represents the stock number

CALCULATING THE REGRESSION EQUATION BY LEAST SQUARE METHOD

b=(∑xy-nxy)/(∑x2-nx2)

Using the above formula we have calculated the β for all different stocks.

FORECASTING THE S & P ENX NIFTY INDEX

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The decision of investment in stocks depends upon the future trend the market is going to

follow, thus forecasting the market is a necessity for intelligent investment decision.

For example: If the future is a bear market then the prime objective of the investor is loss

minimization. But if it’s a bull market then the prime objective is profit maximization.

The forecasting of the market can be done only through the series analysis. So we are doing

time series analysis of Sand P ENX NIFTY INDEX for a period of April2003 to March 2009.

STEPS OF TIME SERIES ANALYSIS

Moving and central moving average calculation

Modifies mean and seasonal index calculation

De-seasonalizing data

Secular trend analysis by regression

Cyclical residual calculation

Cyclical index calculation

Forecast

1. Moving and central average calculation: In this we will calculate the average of four

monthly index on moving alone i.e. by subtracting the first entry and adding the fifth we

will get the second moving average and so on. Then from moving average we calculate

the central moving average by taking the average of two consecutive moving average

and placing it in the middle , correspondingly third entry of the index figures.

We will calculate the percentage of actual to moving average by dividing the index value

by the corresponding central moving average. Now we get the seasonal index

corresponding to every month’s index value

2. Modified mean and seasonal index calculation: As from the above step we got many

seasonal index for a particular month. So to have a unique seasonal index month wise

we need to average out all the seasonal indices for a particular month. To do that first

we need to exclude the two extreme values i.e. the lowest and highest seasonal

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index(SI) and taking the mean of the rest. This would give us the final seasonal index

month wise

3. De-seasonalizing data: To de-seasonalize data divide the index figures by the

corresponding seasonal index. Now the resulting data is having only secular trend and

cyclical variation.

Secular trend analysis by regression

Now we will do regression between time and de-seasonalized Nifty index .For this we need to convert the months into coded time. The reason behind doing this is to signify the calculations of regression co-efficients. The total number of data we have is 72 i.e. even number so far coded time the (n/2)th entry would be coded as -1 and (n/2)th + 1 entry would be coded as +1 ans so on, on both the sides

y = a + bx

y = deseasonalized nifty index

x = coded time

b = slope of the trend

a = intercept

b= ∑xy−nxy∑ x2−nx2

a = y – bx

but here x = 0 ; so

b=∑xy∑ x2

a = y

Cyclical Residual Calculation

In this first we will calculate the estimated y for the given 72 months by using the regression

equation. Then the relative cyclical residual is

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y− yy

X 100

It signifies that by how much percentage my actual values differ from the estimated values on

either side.

Cyclical Index Calculation

This is similar to the seasonal index calculation, by taking the modified mean (excluding two

extreme values) and calculating the cyclical index.

Cyclical Index = Modifiedmeanof residual

100

FORECAST

FORECAST = SECULAR TREND x CYCLICAL INDEX x SEASONAL INDEX

So first we will forecast the secular trend using the regression equation which is obtained in

step 4 of time series analysis. We have forecasted the nifty index secular trend for next 6

months (april - september). Then we multiply the monthly values by that month’s cyclical and

seasonal index’s to obtain the actual forecast

Security market Line

In Modern Portfolio Theory, the Security Market Line (SML) is the graphical representation of the Capital Asset Pricing Model. It displays the expected rate of return for an overall market as a function of systematic, non-diversifiable risk (its beta).

The Y-Intercept (beta=0) of the SML is equal to the risk-free interest rate. The slope of the SML is equal to the Market Risk Premium and reflects investors' degree of risk aversion at a given time.

ANALYSIS

T-test analysis

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A t-test is any statistical hypothesis test in which the test statistic follows a Student's t

distribution if the null hypothesis is true. It is most commonly applied when the test statistic

would follow a normal distribution if the value of a scaling term in the test statistic were known

Once a t value is determined, a p-value can be found using a table of values from Student's t-

distribution. If the calculated p-value is below the threshold chosen for statistical significance

(usually the 0.10, the 0.05, or 0.01 level), then the null hypothesis is rejected in favor of the

alternative hypothesis.

H0: beta of any co. is independent of the time

H1: beta of any co. is dependent of the time

1. BHEL: In case of bhel t-stat is (1.641002471) and t-critical is 2.228138842. Therefore as

t-stat< t-critical, null hypothesis is accepted. That means the risk factor is not affected by

the time period. So it is almost same risky to invest either for long term or for short term

2. CROMPTON: In case of Crompton t-stat is (-2.826873171) and t-critical is 2.228138842.

Therefore as t-stat>t-critical, null hypothesis is rejected. That means the risk factor is

affected by the time period. So it is less risky to invest in the short term than for

investing in long term.

3. NTPC: In case of NTPC t-stat is (-1.97324546) and t-critical is 2.228138842. Therefore as t-

stat< t-critical, null hypothesis is accepted. That means the risk factor is not affected by

the time period. So it is almost same risky to invest either for long term or for short term

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4. CESC:In case of cesc t-stat is(-2.273281697) and t-test is 2.228138842. Therefore as t-stat>t-

critical, null hypothesis is rejected. That means the risk factor is affected by the time

period. So it is less risky to invest in the short term than for investing in long term

5. ABB: In case of cesc t-stat is (-2.459114946) and t-test is 2.228138842. Therefore as t-

stat>t-critical, null hypothesis is rejected. That means the risk factor is affected by the

time period. So it is less risky to invest in the short term than for investing in long term

6. AREVA: In case of AREVA t-stat is (-1.367923285) and t-critical is 2.228138842. Therefore

as t-stat< t-critical, null hypothesis is accepted. That means the risk factor is not affected

by the time period. So it is almost same risky to invest either for long term or for short

term

7. SUZLON: In case of SUZLON t-stat is (-0.940666549) and t-critical is 2.228138842.

Therefore as t-stat< t-critical, null hypothesis is accepted. That means the risk factor is

not affected by the time period. So it is almost same risky to invest either for long term

or for short term.

8. TATA POWER: In case of SUZLON t-stat is (-1.157903273) and t-critical is 2.228138842.

Therefore as t-stat< t-critical, null hypothesis is accepted. That means the risk factor is

not affected by the time period. So it is almost same risky to invest either for long term

or for short term.

CAPM ANALYSIS

ABB: the expected rate of return is 15.87%

AREVA: The expected rate of return is 20.62%

BHEL: The expected rate of return is 14.98%

CROMPTON: The expected rate of return is 15.48%

CESC: The expected rate of return is 17.10%

NTPC: The expected rate of return is 14.41%

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SUZLON POWER: The expected rate of return is 23.19%

TATA POWER: The expected rate of return is 19.14%

Thus the expected rate of return is highest in case of Suzlon energy with 23.19% than the other seven companies as it has highest beta co efficient and least in case of NTPC with 14.14% as it has the lowest beta co efficient.

Time Series Analysis:

Time series was calculated for an Irregular Variation. Using the following 3 steps, an equation was formulated to forecast the future share prices of the companies.

The steps are;

1. Calculation of Seasonal Index2. De-seasonalised Time-Series value3. Identifying the Trend Component

The Following equations for various companies were found:

Company Equation

ABB Ltd. y=19.39+0.22x

Areva Ltd. y=247+4.83x

BHEL Ltd. y=1894.89-45.92x

CESC Ltd. y=290-1.468x

Crompton Ltd. y=232.16-2.43x

NTPC Ltd. y=161.98+2.71x

SUZLON Ltd. y=216.3-6.64x

TATA Power y=796.46+21.42x

Using these equations, it is possible to find the future values of shares of any of these companies.

CONCLUSION

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The study of market trend of the power sector and analysis of the risk and returns of the stocks

of the different companies has been done. The various techniques used gives the following

results:

CAPM Result: The expected rate of return is highest in case of Suzlon energy with 23.19% than the other seven companies as it has highest beta co efficient and least in case of NTPC with 14.14% as it has the lowest beta co efficient.

Time Series Result: The equation for predicting the Stock Price of all the companies has

been calculated as the share price of ABB limited for the 1st quarter of 2009 is Rs. 19.62

which is the lowest & that of BHEL for 1st quarter of 2009 is Rs. 2087.975, which is the

highest.

Hypothesis Test: The null hypothesis (Ho= The risk factor of the companies is

independent of time period) was rejected for 3 companies viz. CESC, Crompton & ABB &

was accepted for rest all companies, which means for these 5 companies the risk

involved in investment does not depend on time period(i.e. long term or short term

investment).

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