International Research Journal of Management Science & Technology ISSN 2250 – 1959(0nline) 2348 – 9367 (Print) An Internationally Indexed Peer Reviewed & Refereed Journal
Shri Param Hans Education & Research Foundation Trust
www.IRJMST.com www.SPHERT.org
Published by iSaRa Solutions
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
“A study on performance analysis of BSE SENSEX stocks by using the Security Market Line approach”
P. S. Viswanadh, Asst.Professor, SMS, SNIST,
Yamnampet, Hyderabad, TS, India.
email: [email protected]
Abstract
The Present “A study on Performance Analysis of BSE-SENSEX Stocks with the Security Market Line Approach” is aimed to analyzethe risk and return profile of the stocks that are been listed in the BSE-SENSEX, and to analyzewhether the stocks are been overpriced or underpriced using the SML Model. Standard Deviation, Beta, t-test, Correlation techniques have been used and found that Adani Ports, Axis Bank, Coal ltd, Dr.Reddy’s Lab, ICIC, Infosys, ITC, Oil & Gas, Sunpharma TCS, Asian paints, Cipla, HDFC housing development, Hindustan Unilever limited, Lupin, M&M and Wipro stocks areunder-valued,Bajaj, HDFC bank, Maruti Suzuki, NTPC, Power grid, Reliance, Gail ltd, Hero Motorcorp, Larsen and Turbo, SBI, Tata Motors and Tata steel stocks areovervalued in the span of two years i.e., fromJanuary 2016 toDecember, 2017.
Key words: BSE SENSEX, Capital Asset Pricing model (CAPM), Security Market line (SML), expected return, estimated return, Over-priced and Under-priced.
INTRODUCTION
Equity markets are known for high rewards in long run and high volatility in short run as compared to other investment avenues such as bonds, monthly interest schemes, gold and real estates. All the stocks that are listed in market or in well-known indices may not provide superior returns to the investors all the time even though the stock is fundamentally strong. In general conditions markets tend to over react to both positive and negative news. This may lead to huge price fluctuations in the stock.Sometimes the stock may over-price for the good news or under-price for the bad news. Being a rational investor one has to make thorough analysis and select the stocks before investing or dis-investing. Capital Asset Pricing Model (CAPM)1 is the concept which dealt with asset’s volatility with non-diversifiable risk is also known systematic risk. The concept of CAPM will dealt with two sub concepts called Capital market line (CML) and Security Market Line
1 Jack Treynor (1961, 1962), William F. Sharpe (1964), John Lintner (1965a,b) and Jan Mossin (1966) independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Sharpe, Markowitz and Merton Miller jointly received the 1990 Nobel Memorial Prize in Economics for this contribution to the field of financial economics. Fischer Black (1972) developed another version of CAPM, called Black CAPM or zero-beta CAPM, that does not assume the existence of a riskless asset. International Research Journal of Management Science & Technology http://www.irjmst.com 354
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
(SML). The former will talk about only the efficient stocks and the later can be used for all the stocks that are listed in the market. Review of literature:
(Lee & Su, 2014)They have studied the mean- variance analysis theory with regard to market portfolio and provide algorithmic tools for calculating the efficient market portfolio. Then explain that the portfolio frontier is hyperbola in mean-standard deviation space. They found that, when the risk-free securities are included in the portfolio, then the return of portfolio is increasing when compared to efficient portfolio set. They have proposed step for Capital market line on efficient frontier of portfolio with lending and borrowing rate is presented.
(Comparison, Portfoliosthe, & Regions, 2015)The objective of the paper is to make highest return with the similar level of risk of a portfolio by using CAPM model and found that the risk of portfolio will be reduced when the stocks are selected from different regions as compared to the stocks that are from the same region.
(Garcia, Borrego, Lisboa, & Lisboa, 2013)They have aimed to estimate the capital market line and efficient frontier for the stocks that are listed in PS120 index which is the part of Portuguese capital market. They have made an attempt to construct an efficient portfolio for the before and after 2008 global financial crisis period. The results show the impact of the 2008 financial crisis on the global minimum variance portfolio and on the market portfolio.
(Shaikh, 2013) They have tested the CAPM on 30 stocks traded at Karachi Stock Exchange (KSE) using the Sharpe- Lintner (1965) approach, and found that the evidence does not validate standard CAPM model.
(Pratik Gohel ,RadhikaParmar and Dr. ChetnaParmar, 2013)they have made a comparative analysis of selective companies using Capital Asset pricing Model. The prime objectives of the research paper is that know expected return, diversification through efficient frontier of lending and borrowing curve, how to reduce level of risk and comparative testing the validity of CAPM for selected companies during the upward trends in the Indian Stock market and found the efficient set of stocks to make higher returns.
Need for the Study:
Indian stocks are known for volatility and risky in nature so an attempt should be made to known the changes in the prices of the stocks and thus to examine the stock prices in BSE-SENSEX if they are been overpriced or underpriced and to identify their returns and their by suggest the investors about the market and when to invest thus to take an advantage. Research Objectives:
1. To measure the risk and return profile of the stocks that are been listed in the BSE Sensex. 2. To analyze whether the stocks are been overpriced or underpriced using the SML model. Hypothesis:
H1: There is a significant relationship between both the returns of the company and the BSE Sensex.
International Research Journal of Management Science & Technology http://www.irjmst.com 355
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
H0: There is no significant relationship between the returns of stocks that are been listed in the Sensex and to that to the individual returns of a company
Research Methodology:
The present study aims to analyse the stocks prices of different companies which are been traded on the BSE-SENSEX Index. For the purpose of study, secondary data will be collected from the BSE website and the data would be examined to identify the price changes in the stocks and by using different statistical tools
Period and scope of the study:
The present study has considered the stocks that are listed in BSE SENSEX and the daily stock prices of index stocks from January, 2016 to December, 2017.
Tools used for the study:
The study has considered Security market line model (SML),standard deviation (SD), beta,correlation andt-test.
In order to meet the above mentioned objectives the following procedures have been followed:
1. Analysis of Correlation, total and market risk 2. Measurement of estimated and expected return using SML model
Standard deviation represents the total risk of the security, higher the SD higher the risk of the same, Beta value represents the market risk of the security, higher the beta is desirable for the stock, correlation value represents the behavior of an underlying security towards market conditions, highestpositive correlation will create better returns when market moves upwards, and highest negative correlation represents that the security will generate highest returns when market is generating losses.
Table No. 1: Total risk of stocks and correlation of stock returns with SENSEX returns
SD for Correlation SD for the Probability S.NO NAME OF THE STOCK the year with year 2016 values 2017 SENSEX
1 Adani ports 2.191 2.6 0.6 0 2 Asian paints 1.807 1.57 0.2 0 3 Axis Bank 2.117 2.01 0.9 0 4 Bajaj Auto 1.736 1.43 0.2 0 5 BhartiAirtel 1.872 1.7 0.5 0 6 Cipla ltd 1.771 1.54 0.4 0 7 Coal India Ltd 1.811 1.6 0.6 0 8 Dr. Reddy's Lab 1.999 1.67 0.3 0
International Research Journal of Management Science & Technology http://www.irjmst.com 356
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
9 Gail 2.095 1.77 0.5 0 10 HDFC(Housing Development) 1.906 1.49 0.8 0 11 HDFC Bank 1.163 0.97 0.3 0 12 Hero Motocorp 1.458 1.58 0.3 0 13 Hindustan Unilever 1.562 1.28 0.7 0 14 ICICI 1.978 2.25 0.8 0 15 Infosys 3.593 1.45 0.4 0 16 ITC 1.683 2.55 0 0.96 17 Larsen 1.664 1.89 0.8 0 18 Lupin 1.883 2 0 0.39 19 M&M 1.766 1.56 0.4 0 20 Maruti Suzuki 1.398 1.82 0.2 0 21 NTPC 1.678 1.54 0.5 0 22 ONGC 1.954 2.76 0.7 0 23 Power Gird 1.287 1.44 0.4 0 24 Reliance 1.74 1.33 -0.1 0.01 25 SBI 1.938 2.38 0.8 0 26 Sun Pharma 2.267 1.67 0.3 0 27 Tata Motors 2.261 2.56 0.8 0 28 Tata Steel 2.452 2.53 0.5 0 29 TCS 1.25 1.43 0.5 0 30 Wipro 1.428 1.24 0.2 0 Source: Compiled data
The above table reveals companies like Infoys, Adani Ports, Axis Bank, Sun Pharma, Tata Motors, Gail and Tata Steel are facing high risk;stocks such as TCS, Power Grid, HDFC Bankpossess less riskin the year 2016. In the year 2017 the stocks such as Oil&Gas, SBI, Tata Motors, Tata Steel, Axis Bank, Adani Ports were found to be more risky to invest and the stocks such as HDFC Bank, Hindustan Uniliver Ltd, Wipro possess limited risk for the year 2017.But few stocks like Axis Bank, Tata Motors, Adani Ports, and Tata Steel where risky for both the years i.e., for 2016 and 2017 to invest into their stocks.
The table also reveals that there is a highest positive correlation between Sensex and stocks such as Axis bank(0.903), HDFC(0.8170), ICICI(0.767), Larsen(0.823), SBI (0.821), Tata Motors (0.805). There exists a moderate positive correlation between the stocks like BhartiAirtel (0.456),CiplaLtd(0.438),Coal India Ltd(0.592),Gail(0.503),Infosys(0.446),NTPC(0.526),Oil&Gas(0.683),Tata Steel(0.517),TCS(0.506) and Sensex values.The stocks which possess least correlation with Sensex are Asian Paints(0.222),Bajaj Auto(0.168),Dr.Reddy’s Lab(0.276),HDFC-Bank(0.341),Hero Moto Corp(0.303),M&M (0.394),Maruti Suzuki(0.163),Power Grid(0.376),Sun
International Research Journal of Management Science & Technology http://www.irjmst.com 357
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
Pharma(0.315),Wipro(0.227).The Stocks which possess Negative Correlation with Sensex are ITC(- 0.002),Lupin(-0.039),Reliance(-0.112).
P Value of Correlation indicates that correlation between all stocks of BSE such as Adani ports, Asian paints, Axis Bank, Bajaj Auto,BhartiAirtel,Cipla ltd, Coal India Ltd,Dr.Reddy's Lab, Gail, HDFC(housedvp), HDFC Bank, Hero motocorp, Hindustan Unilever, ICICI Infosys with SENSEX is significant.Stocks such as ITC and Lupin are having an insignificant relationship with the SENSEX since the P values are grater then “0.05”.
Therefore it is concluded that there exist a significant relation between the stocks that are mentioned first withSENSEX,and there exit an insignificant relation between SENSEX and ITC,Lupin stocks.
Measurement of estimated and expected return using SML model:
With the help of security market line we can compare the estimated and expected return and can conclude that how the security has priced, i.e., over or under-priced or valued. If the expected return is greater than estimated return, we can conclude that the stock has been under-priced or valued (UV)and the estimated return is greater than expected return then stock can be considered as over-priced (OV). The under-priced securities can be bought and over-priced securities should be dis-invested or sold out.
Expected Return = Risk Free Rate + {Betax[Market Return - Risk Free Rate]}
Estimated return = {{P1-P0}/P0} X 100
Where P1 is the current market price of a stock, P0 is the previous price of a stock.
Table No 2: Estimated and expected return using SML model
S. NAME OF Estimated Expected OP Estimated Expected OP N THE Return for Return or Return for Return for or O STOCK 2016 for2016 UP 2017 2017 UP 1 Adani ports -18.5 1.198 U.V -1.009 1.05 U.V 2 Asian paints 17.79 0.902 O.V 0.131 0.58 U.V 3 Axis Bank -10.4 1.397 U.V 0.044 1.31 U.V 4 Bajaj Auto 3.235 0.827 O.V 5.373 0.71 O.V 5 BhartiAirtel -6.35 0.711 U.V -11 0.54 U.V 6 Cipla ltd 3.382 1.091 O.V -13.21 0.63 U.V 7 Coal India U.V -13.6 0.716 U.V -10.15 0.74 Ltd
International Research Journal of Management Science & Technology http://www.irjmst.com 358
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
8 Dr.Reddy's U.V -3.38 0.721 U.V -1.525 0.66 Lab 9 Gail -15.4 1.037 U.V 14.9 0.72 O.V 10 U.V HDFC(house 12.39 1.362 O.V -0.099 0.81 dvp) 11 HDFC Bank 13.82 0.882 O.V 10.37 0.53 O.V 12 Hero O.V -13.3 0.713 U.V 13.28 1 motocorp 13 Hindustan U.V 13.73 0.495 O.V -3.532 0.62 Unilever 14 ICICI -25.9 1.48 U.V -4.506 1.37 U.V 15 Infosys -44.1 0.607 U.V -9.885 0.64 U.V 16 ITC -10.7 0.788 U.V -28.05 0.73 U.V 17 Larsen -15.1 1.178 U.V 4.722 1.36 O.V 18 Lupin 28.75 0.736 O.V -20.55 0.55 U.V 19 M&M 2.86 0.987 O.V -7.036 0.75 U.V 20 Maruti O.V 38.12 0.75 O.V 14.61 0.96 Suzuki 21 NTPC 2.458 0.873 O.V 13.23 0.63 O.V 22 Oil&Gas -29.7 1.071 U.V -20.98 0.81 U.V 23 Power Gird 2.953 0.649 O.V 30.24 0.71 O.V 24 Reliance 14.03 1.166 O.V 6.377 0.81 O.V 25 SBI -28.5 1.332 U.V 9.708 1.63 O.V 26 Sun Pharma -0.54 0.857 U.V -22.8 0.74 U.V 27 Tata Motors -21.5 1.294 U.V 17.35 1.87 O.V 28 Tata Steel -35.8 1.484 U.V 52.53 1.1 O.V 29 TCS -4.28 0.557 U.V -2.711 0.57 U.V 30 Wipro 1.358 0.611 O.V -15.13 0.5 U.V Source: Compiled data
International Research Journal of Management Science & Technology http://www.irjmst.com 359
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
Interpretation:
The above table reveals that Adani ports, Axis bank, BharatiAirtel, Coal India Ltd, Dr.Reddy’s, ICICI, Infosys, ITC, Sun pharma and TCS are under-valued; Bajaj, HDFC bank, Maruti Suzuki, NTPC, Power grid, Reliance stocks are over-priced through the period. The table also reveals that Asian paints, Cipla, HDFC housing development, Hindustan Unilever limited, Lupin, M&M and Wipro stocks are over-valued in the year 2016 and under valued in the year 2017; Gail ltd, Hero Motorcorp, Larsen and Turbo, SBI, Tata Motors and Tata steel are under-valued in the year 2016 and over valued in the year 2017.
Findings:
1. The study found that Adani Port, Infosys, SBI, Sun pharma, Tata motors and Tata steel possess highest risk in the study period. 2. Axis bank, ICICI, HDFC housing development, SBI and Tatamotorsstockspossesshighest positive risk with BSE SENSEX. 3. All other stocks except ITC and Lupin having significant relation with BSE SENSEX. 4. There are ten under-valued securities have been noticed throughout the period of the study such as Adani, Axis bank, BharatiAirtel, Coal India, Dr. Reddy’s, ICICI, Infosys, ITC, Sun pharma and TCS. 5. Bajaj, HDFC bank, Maruti Suzuki, NTPC, Power grid, Reliance stocks are over-priced through the period.
Conclusion:
The study concludes that the investors should invest on these companies stocks like Adani Ports, Axis Bank, Coal ltd, Dr.Reddy’s Lab, ICIC, Infosys, ITC, Oil & Gas,SunpharmaTCSsince these are underpriced securities and there is a possibility of high growth in the future.Asian paints, Cipla, HDFC housing development, Hindustan Unilever limited, Lupin, M&M and Wipro stocks can also be considered for investment since these are under-valued in the year 2017. The investors should sell Bajaj, HDFC bank, Maruti Suzuki, NTPC, Power grid, Reliance, Gail ltd, Hero Motorcorp, Larsen and Turbo, SBI, Tata Motors and Tata steel since these are over-valued stocks.
REFRENCES:
Comparison, T. H. E., Portfoliosthe, A., & Regions, S. (2015). Portfolio Risk Management and Capital Asset Pricing Model Case : the Comparison Among Portfolios in the Same and.
Garcia, T., Borrego, D., Lisboa, U. De, & Lisboa, U. De. (2013). Markowitz Efficient Frontier and Capital Market Line – Evidence From the Portuguese. European Journal of Management Studies - EJMS, 22(I), 3–23. Retrieved from www.european-jms.com
Lee, M., & Su, L. (2014). Capital Market Line Based on Efficient Frontier of Portfolio with Borrowing and Lending Rate, 2(4), 69–76. https://doi.org/10.13189/ujaf.2014.020401
Shaikh, S. A. (2013). Testing capital asset pricing model on KSE Stocks. Journal of Managerial Sciences, 7(2), 281–289. Retrieved from http://ssrn.com/abstract=2398381 International Research Journal of Management Science & Technology http://www.irjmst.com 360
IRJMST Vol 9 Issue 1 [Year 2018] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)
Pratik Gohel ,RadhikaParmar and Dr. ChetnaParmar- Comparitive analysis of selective companies using Capital Asset pricing Model
Prashant Kumar, Mukesh Kumar- Study the Underpricing and pricing mechanisms used in IPOS in BSE
Debjiban Mukherjee-Comparative Analysis of Indian Stock Market with International Markets
Other Sources:
1.https://www.bseindia.com/markets/Equity/newsensexstream.aspx
2.http://www.searchblogspot.com/p/blog.html
3.http://www.researchscholar.co.in
4.https://www.bseindia.com
5.https://economictimes.indiatimes.com/topic/stock-market
6. www.business dictonery.com
International Research Journal of Management Science & Technology http://www.irjmst.com 361
..
Shri Param Hans Education & Research Foundation Trust www.SPHERT.org
भारतीय भाषा, शिऺा, साहह配य एवं िोध ISSN 2321 – 9726 WWW.BHARTIYASHODH.COM
INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SCIENCE & TECHNOLOGY ISSN – 2250 – 1959 (0) 2348 – 9367 (P) WWW.IRJMST.COM
INTERNATIONAL RESEARCH JOURNAL OF COMMERCE, ARTS AND SCIENCE ISSN 2319 – 9202 WWW.CASIRJ.COM
INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SOCIOLOGY & HUMANITIES ISSN 2277 – 9809 (0) 2348 - 9359 (P) WWW.IRJMSH.COM
INTERNATIONAL RESEARCH JOURNAL OF SCIENCE ENGINEERING AND TECHNOLOGY ISSN 2454-3195 (online) WWW.RJSET.COM
INTEGRATED RESEARCH JOURNAL OF MANAGEMENT, SCIENCE AND INNOVATION ISSN 2582-5445 WWW.IRJMSI.COM