Disha Final Project

7/30/2019 Disha Final Project

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Portfolio Construction in FMCG and Fertilizer Sector.1

B.R.C.M. College of Business Administration.

Introduction to Indian Capital Market.

Capital markets are the sub-part of the financial system. Conceptually, the financial

system includes a complex of institutions and mechanism which affects the generation of

savings and their transfer to those who will invest. It may be said to be made of all those

channels through which savings become available for investments. The main elements of the

financial system are the variety of the financial assets/instruments/securities, financial

intermediaries/institutions and financial markets.

Money market is created by a financial relationship between suppliers and

demanders of short term funds which have maturities of one year or less. It exists because

investors (individual investors, business units, and govt.) have temporarily idle funds that

they wish to place in some type of liquid asset or short term interest earning instrument. At

the same time other entities find themselves in need of seasonal/temporary financing. The

money market brings together these suppliers and demanders of short term liquid funds.

Capital Market isa financial relationship created by number of institutions and

arrangements that allow suppliers and demanders of long-term funds i.e. funds with

maturities exceeding 1 year to make transactions.

Classification of

financialmarkets.

Organized

Martket.

Capital

Market.

Industrial

SecuritiesMarket.

Govt.

Securities

Market.

Long

Term

Loan

Market

Money

Market.

Call

Money

Market.

Commercial

Bill Market.Treasury

Bill

Market.

Short

Term

Loan

Market

.

Unorganized

Market

Money lenders,

Indigenous bankers

etc.


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The capital market comprises of:

1. Industrial securities market.2. Government securities market.3. Long-term loan market.

I. Industrial securities market.

It is the market for mainly:

Equity shares or Ordinary shares, Preference shares, and Debentures or Bonds.

Industrial securities market can further be divided into:

1. Primary Market or New Issue Market.2. Secondary Market or Stock Exchange.

Primary Market.

It is the market for new issues. Hence, it is also called New Issue Market. The primary

market deals with those securities which are issued to the public for the first time. In the

primary market, borrowers exchange new financial securities for long term funds. Thus,

primary market facilitates capital formation. There are three ways by which a company may

raise capital in a primary market. They are: (i) Public issue (ii) Right issue (iii) Private

placement.

The most common method of raising capital by new company is through sale of

securities to the public. It is called public issue. When an existing company wants to raise

additional capital, securities are first offered to existing share holders on a pre-emptive basis.

It is called right issue. Private placement is a way of selling securities privately to a small

group of investors.

Functions of primary market.

The main function of primary market is to facilitate the transfer of resources from

savers to entrepreneurs seeking to establish new enterprise or to expand/diversify existing

ones or private companies going public. The general functions of the primary market are:


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1. Origination: It refers to the work of investigation and analysis and processing of newproposals. These two functions are performed by the specialist agencies which act as

the sponsors of the issues. One aspect is the preliminary investigation which entails a

study on technical, financial and legal aspects of companies to ensure that thecompany is worthy of stock exchange quotation. These services include advise on

capital issues such as: determination the class of security to be issued, timing and

magnitude, methods of flotation and technique of selling and so on.

2. Underwriting: It is a form of guarantee that the new issue would be sold byeliminating the risk arising from uncertainty of public response.

3. Distribution: It is the sale of securities to ultimate investors.

Secondary Market.

It is a market for secondary sale of securities. Securities which have already passed

through the new issue market are traded in this market. The functions of secondary market

include:

1. Nexus between savings and investment: The savings of the community aremobilized and channeled by stock exchanges for investment into those sectors and

units which are favored by the community at large, on the basis of such criteria as

good return, appreciation of capital, and so on.

2. Market place: The second important function discharged by stock markets is thatthey provide market place for the purchase and sale of securities, thereby enabling

their free transferability who may buy or sell them today or in future for various

considerations like meeting their own liquidity, shuffling their portfolios to gear up

ever changing market situations and so on.3. Continuous price formation: The collective judgment of many people operating

simultaneously in the market has the effect of bringing about changes in the levels of

security prices in small graduations, thereby evening out wide swings in prices. Stock

exchange thus acts as a barometer of the state of health of the nations economy, by

constantly measuring its progress.


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II. Government securities.

Securities issued by central government, state government, semi- government

authorities like city corporations, port trusts etc. improvement trust, state electricity boards,All India and Sate level financial institutions and public sector enterprise are dealt in this

market. They are as follows:

Stock certificates or inscribed stock. Promissory notes. Bearer bonds which can be discounted.

III. Long Term Loans Market.Developments banks and commercial banks play a significant role in this market by

supplying long term loans to corporate customers. Long term loans market includes:

Term loans market. Mortgages market. Financial guarantees market.


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Meaning of Portfolio.

Investing in financial securities is now considered to be one of the best avenues for

investing ones savings while it is acknowledged to be one of the most risky avenues of

investment. It is rare to find investors investing their entire savings in a single security.

Instead, they tend to invest in a group of securities. Such a group of securities is called

portfolio. Creation of a portfolio helps to reduce the risk without scarifying returns.

Meaning of Portfolio Management.

An investor considering investment in securities is faced with the problem of

choosing from among a large number of securities. His choice depends upon the risk-return

characteristics of individual securities. He would attempt to choose the most desirable

securities and like to allocate his funds over this group of securities. Again he is faced with

the problem of deciding which securities to hold and how to invest in each. The investor

faces with an infinite number of possible portfolios or group of securities. The investor tries

to choose the optimal portfolio taking into consideration the risk return characteristics of all

possible portfolios.

Portfolio management comprises all the processes involved in the creation and

maintenance of an investment portfolio. It deals specifically with security analysis, portfolio

analysis, portfolio selection, portfolio revision and portfolio evaluation. It also makes use of

analytical techniques of analysis and conceptual theories regarding rational allocation of

funds.

Objectives of Portfolio Management.

1. Security of principal: The preservation of the value of the investment account for thesake of future income and growth. This principal should be the dominant force in

portfolio management. It seems unwise to save for years to build an investment fund

and then lose it in one careless, risky venture. However, security of principal means

more than just maintaining the original fund.

2. Stability of income: In establishing an investment fund, an investor should attempt toachieve stability of income as a practical goal. Income received in the form ofdividends and interests is somewhat more valuable than a promise of future dividends


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and interests. Stability of revenues allows the investor to plan more accurately and

logically, whether goal is reinvestment or consumption.

3. Capital growth: A fund can be built up from reinvested income as well as throughthe purchase of growth shares. A large fund does provide more income for theinvestors than a small fund. Capital growth is necessary to improve the long range

securities of the investor, to maintain purchasing power, and to offer flexibility of

management.

4. Marketability: It refers to whether a security can be bought or sold easily andquickly. High-priced stocks are less marketable than low-priced. Stock of smaller

companies tends to have less marketability than those of larger companies because

they have a greater number of shares outstanding.

5. Liquidity: Liquidity is desirable in the portfolio because it offers the investor anopportunity to take advantage of attractive opportunities that arise.

6. Diversification: One main reason for diversification is reduction of loss of the risk ofloss of capital and income. Investors face an unknown and uncertain future. Since no

one can predict future most investors diversify their investments.

7. Favorable tax status: Capital gains are not taxed until they are actually realized. Thismeans that unless income is actually needed, a rupee capital gain is really worth than

a rupee income. The key point is that unrealized capital gains are not taxed, whereas

as dividend or interest income is. Taxes can be deferred for many years by successful

long-term growth stock investing.


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Process of Portfolio Management.

Portfolio management is a process encompassing many activities aimed at optimizing

the investment of ones funds. Five phases can be identified in this process:

Each phase is an integral part of the whole process and the success of portfolio

management depends upon the efficiency in carrying out each of these phases.

A. Securities Analysis.This step consists of examining the risk-return characteristics of individual securities.

There are two alternative approaches to security analysis, namely fundamental analysis

and technical analysis. Fundamental analysis, concentrates on fundamental factors

affecting the company such as EPS, the dividend pay-out ratio, competition faced, market

share, quality of management etc. it not only studies the fundamental factors affecting the

company but also the fundamental factors affecting the industry to which the company

belongs as also the economy fundamentals. The fundamental analyst works out the true

worth or intrinsic value of a security based on fundamentals, than compares this intrinsic

value with the currents market price. If current price is higher than the intrinsic value, theshare is said to be overpriced and vice versa. An investor would buy those securities

Securities Analysis.

Portfolio Analysis.

Portfolio Selection.

Portfolio Revision.

Portfolio Evaluation.


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which are underpriced and sell those which are overpriced. In technical analysis, a

technical analyst believes that share price movements are systematic and exhibit certain

consistent patterns. He therefore studies past movements in the prices of the shares to

identify the trends and patterns. He then tries to predict the future price movements.An investor cannot consistently earn abnormal returns by undertaking

fundamental analysis and technical analysis. According to efficient market

hypothesis, it is possible for an investor to earn normal returns by randomly choosing

securities of a given risk level.

B. Portfolio Analysis.Security analysis provides the investor with a set of worthwhile or desirable

securities. From this, an infinitely large number of portfolios can be constructed by

choosing different sets of securities and also by varying the proportion of investment in

each security. The return and risk of each portfolio has to be calculated.

Portfolio analysis phase of portfolio management consists of identifying the range of

possible portfolios that can be constituted from a given set of securities and calculating

their return and risk for further analysis.

C. Portfolio Selection.The goal of portfolio construction is to generate a portfolio that provides the highest

returns at a given level of risk. A portfolio having this characteristic is known as an

efficient portfolio. The inputs from portfolio analysis can be used to identify the set of

efficient portfolios. From this set, the optimal portfolio has to be selected. Markowitzs

portfolio theory provides both the conceptual framework and analytical tools for

determining the optimal portfolio in a disciplined and objective way.

D. Portfolio Revision.The investor has to constantly monitor the portfolio to ensure that it continues to be

optimal. As the economy and financial markets are dynamic, changes takes place almost

daily. The investor has to revise his portfolio in the light of the development in the

market. Revision leads to purchase of some new securities and sale of some existing

securities.

Portfolio revision may also necessary in conditions wherein investor need additional

cash, change in risk attitude, need of cash for other alternative use etc.


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E. Portfolio Evaluation.It is the process which is concerned with assessing the performance of the portfolio

over a selected period of time in terms of return and risk. Portfolio evaluation is useful in

yet another way. It provides a mechanism for identifying weakness in the investmentprocess and fro improving these deficient areas.


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RELIGARE ENTERPRISES LTD

About Religare:

Religare is an integrated financial services institution. The Company offers a diverse

bouquet of services, broadly clubbed across three key business vertical Retail, Wealth

Management and the Institutional Spectrums. The services range from equities, commodities

and insurance broking to wealth advisory, portfolio management services, personal financial

services, investment banking and institutional broking services. Religare Enterprises Ltd. isthe holding company for all its businesses being operated and structured through its various

subsidiaries. Religare retail network spreads across the length and breadth of the country with

its presence directly, or through its business associates, in 1,217 locations across 392 cities

and towns.

Religare registered office is at New Delhi. Religare is proud of being a truly

professional financial service provider managed by a highly skilled team, who have proven

track record in their respective domains. Religare operations are managed by more than 2000

highly skilled professionals who subscribe to Religare philosophy and are spread across its

country wide branches.

Religare has a growing network of more than150 branches and more than 300

business partners spread across more than180 cities in India and a fully operational

international office at London. However, the target is to have 350 branches and 1000 business

partners in 300 cities of India and more than 7 International offices by the end of 2006.


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Unlike a traditional broking firm, Religare group works on the philosophy of

partnering for wealth creation. Not only trades are executed for its clients but also they are

provided with critical and timely investment advice. The growing list of financial institutions

with which Religare is empanelled as an approved broker is a reflection of the high level

service standard maintained by the company.

Religare Enterprises Limited (REL) is a leading equity and securities firm in India.

The company currently handles sizeable volumes traded on NSE and in the realm of online

trading and investments it currently holds a reasonable share of the market. The major

activities and offerings of the company today are Equity broking, Depository Participant

Services, Portfolio Management Services, Institutional Brokerage & Research, Investment

Banking and Corporate Finance. To broaden the gamut of services offered to its investors, the

company has also recently unveiled a new avatar of its online investment portal armed with a

host of revolutionaryfeatures.

Mr.Sunil Godhwani Chairman& Managing Director of ReligareEnterprisesLimited. Mr.

Mrinal Kampani is area manager of Surat Branch office.


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RSL is a member of the National Stock Exchange of India, Bombay Stock Exchange

of India, Depository Participant with National Securities Depository Limited and Central

Depository Services (I) Limited, and SEBI approved Portfolio Manager.

Religare is a Latin word that translates as 'to bind together'. This name has been

chosen to reflect the integrated nature of the financial services the company offers. The name

is intended to unite and bring together the phenomenon of money and wealth to co-exist and

serve the interest of individuals and institutions, alike.

The Religare name is paired with the symbol of a four-leaf clover. Each leaf of the

four-leaf clover has a special meaning in the sphere of Religare.

1. The first leaf of the clover represents Hope.2. The second leaf of the clover represents Trust.3. The third leaf of the clover represents Care.4. The fourth and final leaf of the clover represents Good Fortune.

Company Mainly Offering Services.

Equity Trading on NSE & BSE

Derivative Trading

Commodities

Depository

Portfolio Management Service (PMS)

IPO

Mutual Funds

Investment Banking

International Advisory Fund Management Services (AFMS)


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Objectives.

Primary Objectives:The main objective of the project research is to suggest the investors the optimum

combination of the investment options available in FMCG and Fertilizer sector considering

the given level of risk so that the investor risk can be minimized and return can be

maximized.

Secondary Objective:1. Risk and return analysis of selected scrips using various data analysis tools and

techniques like Markowitz model and Sharpe model.

2. To know the relationship between different scrips for diversification.3. Identifying the different efficient portfolios on the basis of risk and return analysis.

Today in the fast growing economy of India, people always look forward to

channelize their savings in different investment avenues. Considering this, investors consider

not only the equity market but also debt instruments, insurance, oil sector, etc. Today lots of

investment advisory firms are opening and these firms manage the portfolio of their clients in

an effective manner.

Research Methodology:

Research area:Here the initial analysis will be done in FMCG and Fertilizer sector of the Indian

Capital Market in order to have idea regarding the past performance , current scenario and

future of the give sector. So the research area will be FMCG and Fertilizer sector of the

Indian Capital.

Research Type (Research Design) :Research designs are concerned with turning the research question into a testing project.

According to David J. Luck and Ronald S. Rubin, "A research design is the determination

and statement of the general research approach or strategy adopted/or the particular project. It

is the heart of planning. If the research design adheres to the research objective, than it is

ensure that the purpose for which the research is carried out will be served."


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Research design is important as it prepares proper framework within which the research

work will be actually carried out. Research design acts as a blue print for the research project.

Research design gives proper direction and time-table to research activity. It keeps adequate

check on the research work and ensures its completion within given time limit. It keeps thewhole research project on the right track. Research design avoids possible errors as regards

with research problem.

Type of Research Design.

The topic Portfolio construction in FMCG and Fertilizer sector requires to deal with

the secondary data of the companies like their daily price, daily return, index return, here the

research design applied is Exploratory research design. As Exploratory research is

conducted when the researcher does not know how and why certain phenomenon occurs.

Here, the hypothetical solutions or actions are explored and evaluated by the decision-maker.

The purpose of exploratory research is to define the marketing problem precisely,

collect required information/data relating to the problem and identify alternative courses of

action in order to deal with the problem. The secondary/published data can be used for

exploratory research as such data are easily available.

Population:A research population is generally a large collection of individuals or objects that is the

main focus of a research. It is also defined as a well-defined collection of individuals or

objects known to have similar characteristics. All individuals or objects within a certain

population usually have a common, binding characteristic or trait. Here we have taken the

Indian capital market as a population for the project. As here the analysis will be done on

FMCG and Fertilizer sector of Indian Capital market.

Sampling:A Sampling indicates the part of the total population. It can be an individual element or

a group of elements selected from the population for the research study. Although it is a

subset, samples are selected with the help of appropriate methods and so it is the

representative of the population. The sample group can be selected based on a probability or anon probability approach. Sampling will include the following areas:


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Sampling Frame:It is the representation or systematic listing of all the elements of target population. It

consists of a list of population members to identify target population. Using this database,

samples are selected.

Here the sampling frame is FMCG and Fertilizer sector companies listed with

BSE; as from these two sectors companies will be identified on the basis of specific criteria.

Sampling Techniques:In most surveys, access to the entire population is nearly impossible; however, the

results from a survey with a carefully selected sample will reflect extremely closely results

that would have been obtained otherwise by surveying the population. Sampling therefore is a

very important part of the Market Research process. If one had surveyed using an appropriate

sampling technique, one can be confident that results will be generalized to the population in

question.

Here we select the samples by the method ofjudgmental sampling techniques on the

basis ofcriteria such as EPS, Dividend pay-out, P/E ratio, market capitalization, book-

value of the company. From the above mentioned criterias, I have selected 10 companies in

FMCG and Fertilizer sector each. I found these companies match with the criterias at best.

Performance of FMCG sector companies according to the criterias (data

collected on December 2010)

Name of the

company

Criteria for selection

EPS Dividend

yield (%)

Book Value P/E Ratio Market

cap.

HUL 9.0 2.26 11.84 27.04 62665.31

ITC 9.0 5.80 18.15 28.14 133199.26

Nestle 59. 70 1.33 145.20 42.96 35168.11

United Spirits 29.50 0.23 366.30 37.67 14407.07

Colgate 29.63 2.42 23.98 27.85 11222.13

Dabur 2.55 1.95 4.31 40.31 17894.64


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Tata Global

Beverages.

2.71 2.21 33.60 33.39 5596.51

Britannia 6.95 1.45 33.17 49.50 4109.11

Procter and Gamble 40.07 1.33 164.70 42.30 5502.09

Marico 3.97 0.53 9.31 31.36 7648.87

Performance of Fertilizer sector companies according to the criterias (data

collected on December 2010)

Name of the

company

Criteria for selection

EPS Dividendyield (%)

Book Value P/E Ratio Marketcap.

Nagarjuna 2.61 1.84 22.25 10.42 1164.65

Chambal 7.37 5.71 33.40 9.50 2913.45

Oswal 1.35 - 72.16 - 24.45

crore

GNFC 5.88 3.26 133.77 16.97 1551.08

GSFC 72.91 1.23 269.04 5.01 2908.89Bharat fertilizers 9.94 - 18.15 5.73 30.1

Khaitan chemicals

and fertilizers

32.57 0.98 80.60 3.76 118.81

Natiopnal fertilizers 3.36 1 32.25 31.25 5151.07


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Sample:Referring to the sampling frame certain units with the best performance in the given

criterias among them are drawn out for the application of research work which is known as a

sample.

From the above tables, the following companies have been selected for the analysis

because they are having a good performance as compare to the other companies present in the

sector. Following are the companies selected from each sector:

FMCG sector companies : Fertilizer sector companies:

HUL ITC Nestle United Spirits limited

Nagarjuna Fertilizers Chambal Fertilizers Oswal Chemicals Gujarat Narmada Valley Fertilizers

Co. Ltd.(GNFC)

Data Collection: Type of data used:

As per the demand of the research work we have to deal with the secondary data.

Secondary data are the data collected from censuses, surveys, organizational records and data

collected through qualitative methodologies. This type of data collected by someone other

than the user in the past.

Instruments used in collection of secondary data:o Internet

Stock market websites Old research report upload by any researcher Company site

o Magazineso educational bookso Company prospectuso Related articles from newspaper.


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Data analysis tools and techniques:On the collected data following techniques are applied to get the perfect result for

investors.

Data analysis tools:

Arithmetic Mean: A mathematical representation of the values of a series ofnumbers, computed as the sum of all the numbers in the series divided by the

count of all numbers in the series. Arithmetic mean is commonly referred to as

"average" or simply as "mean". Arithmetic mean is calculated as follows.

Standard deviation: It is widely used measurement of variability or diversityused in statistics and probability theory. It shows how much variation or

"dispersion" there is from the "average". A low standard deviation indicates that

the data points tend to be very close to the mean, whereas high standard deviation

indicates that the data are spread out over a large range of values. Standarddeviation can be calculated by the formula given below.

Variance: Variance is used as a measure of how far a set of numbers are spreadout from each other. It is one of several descriptors of a probability distribution,

describing how far the numbers lie from the mean (expected value).

Correlation: A correlation is a single number that describes the degree ofrelationship between two variables. Let's work through an example to show you

how this statistic is computed.


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r = n(xy) (x.y)

(nx2-(x)2). (ny2-(y)2

Regression: A statistical measure that attempts to determine the strength ofthe relationship between one dependent variable (usually denoted by Y) and a

series of other changing variables (known as independent variables).

Regression line: Y = a + bX

Portfolio Construction tools:

Markowitz model:

Dr. Harry M. Markowitz is credited with developing the first modern portfolio

analysis model since the basic elements of modern portfolio theory emanate from a series of

propositions concerning rational investor behavior set forth by Markowitz, then of the Rand

Corporation, in 1952, and later in a more complete monograph sponsored by the Cowels

Foundation. Markowitz used mathematical programming and statistical analysis in order to

arrange for the optimum allocation of assets within the portfolio. To reach this objective,

Markowitz generated portfolios within a reward-risk context.

Markowitzs model is a theoretical framework for the analysis of risk return choices.

Decisions are based on the concept ofefficient portfolios.

Efficient portfolios:

This yields highest return with given level of risk or minimum risk with expected

return. It is prepared on the basis of addition and deletion of different securities or assets. Set

of efficient portfolios is generated with different combinations of securities or assets.

Assumptions:

Investor considers each alternative with probability distribution of expected return. Investors maximize one period expected utility and possess utility curve which

demonstrates diminishing marginal utility of wealth.

Risk is on the basis of the variability of expected return.


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Decisions are solely on expected return and variance (or standard deviation) of returnsonly.

For given level of risk, investor prefer higher to lower level of return and for a givenlevel of return, less risk to high risk.

Formulas of risk and return according to Markowitz model:

Total risk of the portfolio: (2 securities x, y)

Rp= w2x.

2x + w

2y.

2y + 2.rxy. wxx. wyy

Total risk of the portfolio: (3 securities x,y,z)

Rp= w2x.

2x + w

2y.

2y + w

2z.

2z + 2.rxy. wxx. wyy + 2.ryz. wyy. wzz + 2.rxz.

wxx. wzz

Where;

wx= weightage of x in portfolio.

x= standard deviation of X

r= correlation between two securities.

Total return of the portfolio:

Rp= WxRx + WyRy + WzRz..

Where;

wx= weightage of x in portfolio.

Rx= expected return for security X (%)


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Sharp model:

Markowitz model had practical limitation related to compiling expected return,

standard deviation, variance, covariance of each security to every other security in the

portfolio. Sharp model has simplified this process by relating the return in a security to a

single market index. Firstly, this will theoretically reflect all well traded securities in the

market. Secondly, it will reduce and simplify the work involved in compiling elaborate

matrices of variance as between individual securities. The market index is used as a surrogate

(representative) for other individual securities in the portfolio, the relation of any individual

security with market index can be represented in a regression line.

Characteristic line:

RiRf= + im*(RmRf) + ei

Where:

Ri = the holding period return on security i.

Rf= the riskless / risk free rate of interest.

Rm = holding period return on market index.

im = coefficient of regressionline of security i on m

For portfolio:

RpRf= p + ep+ pm*(RmRf)

Where:

RpRf= excess return on portfolio.

p + ep = unsystematic component of portfolios excess return.

pm*(RmRf)= market (systematic) component of portfolios excess return.


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Optimal portfolio of sharp:

If Ri is expected return on stock i Rf is the risk free return than the excess return =

(RiRf). This has to be adjusted to i namely (RiRf/ i) which is the equation for ranking

the securities in the order of their return adjusted for risk.

The method involves selecting a cut off rate for inclusion of securities in a portfolio.

Then only those securities which have (Ri Rf / i) > cut off point will be selected in a

portfolio.

Formula for cut off rate:

Ci = 2

m * [(RiRf/im)] / 2

ei

1 + 2m * (i

2m/

2ei)

Where:

Ci = Cut off rate

2m = variance of market index

2ei = residual variance

Formula for weightage:

Wi = Zi /Z

Zi = i2m [(RiRf/i) - C]

2ei


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Risk and Return.

Return: The (rate of) return on an asset/investment for a given period, say a year, is the

annual income received plus any change in market price, usually expressed as a percent of the

opening market price. Symbolically, the one period actual/expected return R:

R = Dt + (PtPt-1)

P t-1

Dt = annual income/cash dividend at the end of time period, t

Pt = security price at time period, t (closing security price)

Pt-1 = security price at time period, t-1 (opening price)

Risk: The variability of the actual return from the expected returns associated with a

given asset/investment is defined as risk. The greater the variability, the riskier the security

(e.g. equity shares). The more certain the return from an asset (e.g. T-bills) the less the

variability and therefore the less the risk.

Types of risks.

Systematic Risk: It refers to that portion of variability in return which is caused bythe factors affecting all the firms. It refers to fluctuation in return due to general

factors in the market such as money supply, inflation, economic recessions, interest

rate policy of the government, political factors, credit policy, tax reforms, etc. these

are the factors which affect almost all firms. The effect of these factors is to cause theprices of all securities to move together. No investor can avoid or eliminate this risk,

Risk.

SystematicRisk.

Market Risk. Interest-rate

Risk.

Inflation

Risk.

UnsystematicRisk.

BusinessRisk. FinancialRisk.


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whatever precautions or diversification may be resorted to. The systematic risk is also

called the non-diversifiable risk or general risk.

Unsystematic risk: Represents the fluctuation in return from an investment due tofactors which are specific to the particular firm or industry and not the market as awhole. Since these factors are unique to a particular firm or industry, these must be

examined separately for each firm and for each industry. These factors may also be

called firm-specific as these affect one firm without affecting the other firms. For

example, a fluctuation in price of crude oil will affect the fortune of petroleum

companies but not the textile manufacturing companies. As the unsystematic risk

results from random events that tend to be unique to an industry or a firm, this risk is

random in nature. Unsystematic risk is also called specific risk or diversifiable risk.

Scope of future study: Portfolio construction can also be made considering other investment avenues and

other sectors of Indian capital market like banking, IT, pharmaceutical sectors etc.

Apart from the selected scrips in each sector, portfolio construction can also be doneby selecting other scripts in the same sectors.

The research is carried out on the basis of the performance of the scrip during timeperiod of one year only. The research may be carried out for longer period of time

also and accordingly the different scrips can be selected on the basis of their

performance over the period of time.

Limitations of the project: Here, four companies have been selected and analyzed from the FMCG and Fertilizer

sector each. These four companies have been selected by checking out the

performance of ten companies according to specific criteria but it is not necessary that

these four companies performance is always good in a specific sector as the research

is carried in a very short period of time. It may be possible that we could have

considered the performance of these companies over a longer period of time, the

scrips which seem now feasible for selection may ceases to be so.

There may be some inaccuracy in the collection of data as the data are collected fromsecondary sources.


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The performance of economy may not be same every time and change in theeconomic situation may affect the performance of any particular sector or company

positively or negatively.

The research is carried out with the statically instruments like Markowitz model andSharpe model so the limitation of the instrument inherited in this models will be there

in research.


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Overview of FMCG sector.

FMCG is the acronym of Fast Moving Consumer Goods which is also known as

Consumer Packaged Goods (CPG). Fast moving consumer goods are products that have a

quick turnover, and relatively low cost. FMCG generally include a wide range of often

purchased consumer products such as toiletries, soap, cosmetics, teeth cleaning products,

shaving products and detergents, as well as other non-durables such as glassware, bulbs,

condoms, batteries, paper products and plastic goods. In comparison with other industries

such as automobiles, computers, and airlines, FMCG business has a steady rate of growth, for

it does not suffer from huge recession and layoffs every time the economy starts to dip. In

FMCG business absolute profit made on the products is relatively small. Since they generally

sell in large numbers, the overall profit on such products can be huge.

The Indian FMCG sector is the fourth largest in the economy and has a market size

in excess of US$14.7 billion in Oct 2009. The current market size is US$19.1 billion.

Well-established distribution networks, as well as intense competition between the organized

and unorganized segments, low operational cost are the characteristics of this sector. Brand

switching is often induced by heavy advertisement, recommendation of the retailer or word of

mouth. FMCG in India has a strong and competitive MNC presence across the entire value

chain.


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Analysis of FMCG Sector

Strengths:

1. Low operational costs.2. Presence of established distribution networks in both urban and rural areas.3. Presence of well-known brands in FMCG sector.

Weaknesses:

1. Lower scope of investing in technology and achieving economies of scale, especiallyin small sectors.

2.

Low exports levels.3. "Me-too" products, which illegally mimic the labels of the established brands. These

products narrow the scope of FMCG products in rural and semi-urban market.

Opportunities:

1. Untapped rural market.2. Rising income levels i.e. increase in purchasing power of consumers.3. Large domestic market- a population of over one billion.4. Export potential.5. High consumer goods spending.

Threats:

1. Removal of import restrictions resulting in replacing of domestic brands.2. Slowdown in rural demand.3. Tax and regulatory structure.


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FMCG category and products.

Category Products:

Household Care.Fabric wash (laundry soaps and synthetic detergents);household cleaners(dish/utensil cleaners, floor cleaners, toilet

cleaners, air fresheners, insecticides and mosquito repellents,

metal polish and furniture polish).

Food and Beverages.

Health beverages; soft drinks; staples/cereals; bakery products

(biscuits, bread, cakes); snack food; chocolates; ice cream; tea;

coffee; soft drinks; processed fruits, vegetables; dairy products;

bottled water; branded flour; branded rice; branded sugar;

juices etc.

Personal Care.

Oral care, hair care, skin care, personal wash (soaps); cosmetics

and toiletries; deodorants; perfumes; feminine hygiene; paper

products.

FMCG: Present and Future Scenario.

The Indian FMCG sector is an important contributor to the country's GDP. It is the

fourth largest sector in the economy and is responsible for 5% of the total factory

employment in India and captures a market capitalization of around 60,000 crore rupees.

This has been due to liberalization, urbanization and increase in the disposable incomes and

altered lifestyle of the people. The lower-middle income group accounts for over 60% of the

sector's sales and rural markets account for 56% of the total domestic FMCG demand.

Around 58% of total disposable income is spent on FMCG products and from this 40% of

the portion is spent on grocery and eatables and 10% is spent on personal care products.

FMCG sector is expected to grow by over 60% by 2011 and by 2015; the sector is predicted

to scale up to US$33.4 billion.India will become the worlds fifth largest consumer market

by 2025 moving up from its position in 2007 as 12th largest consumer market. The sector is

expected to grow at a base rate of at least 12 per cent annually to become an Rs 4, 00,000

crore industry in 2020.

India has always been a good market for FMCG industry for its large population base.And even today, the story is not any different as it (the industry) features among the worlds


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fastest moving industry. More so, the growth story of FMCG in India has been phenomenal

so far. With more than ever rising consumer spending, the industry is set to touch new

records it terms of innovation and growth. There is a huge growth potential for all the FMCG

companies as the per capita consumption of almost all products in the country is amongst thelowest in the world. Again the demand or prospect could be increased further if these

companies can change the consumer's mindset and offer new generation products. Earlier,

Indian consumers were using non-branded apparel, but today, clothes of different brands are

available and the same consumers are willing to pay more for branded quality clothes. It's the

quality, promotion and innovation of products, which can drive many sectors. FMCG sector

is long established and over the years, sustaining ups and downs of the Indian economy. Thus

the Critical operating rules in Indian FMCG sector can be summarized as follows:

Heavy launch costs on new products on launch advertisements, free samplesand product promotions.

Majority of the product classes require very low investment in fixed assets. Existence of contract manufacturing. Marketing assumes a significant place in the brand building process. Extensive distribution networks and logistics are key to achieving a high level

of penetration in both the urban and rural markets.

Factors like low entry barriers in terms of low capital investment, fiscalincentives from government and low brand awareness in rural areas have led

to the mushrooming of the unorganized sector.

Providing good price points is the key to success.Exports.

India is one of the worlds largest producers of a number of FMCG products but itsexports are a very small proportion of the overall production. Total exports of food

processing industry were $6.9 billion in 2008-09 and marine products ac-counted for 40 per

cent of the total exports. Though the Indian companies are going global, they are focusing

more on the overseas markets like Bangladesh, Pakistan, Nepal, Middle East countries

because of the similar lifestyle and consumption habits between these countries and India.

Hindustan Lever Limited (HLL), Godrej Consumer, Marico, Dabur and Vicco Laboratories

are amongst the top exporting companies.


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Top 10 players in FMCG sector (India).

1. HUL (Hindustan Unilever Limited).2. ITC (Indian Tobacco Company).3. Nestle India Limited.4. Colgate.5. Dabur India.6. Tata Global Beverages.7. Cadbury India.8. Britannia Industries.9. Procter & Gamble Hygiene and Health Care.10.Marico Industries.


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Overview of Fertilizer sector.

Fertilizer sector is a very crucial for Indian economy because it provides a very

important input to agriculture. The fertilizer industry in India has played a pivotal role in

achieving self sufficiency in food grains as well as in rapid and sustained agriculture

growth. The growth of the Indian fertilizer industry has been largely determined by the

policies pursued by the government. The government exercised extensive controls on the

pricing, distribution and movement of fertilizers. The industry is capital intensive and the

production process energy intensive with the combined cost of feedstock and fuel accounting

for anywhere between 55 and 80 per cent of cost of production, depending on the type of

fertilizers.

The increasing pressure of population on the available land resources necessitates

higher agricultural productivity, which can be achieved through more intensive use of

fertilizer nutrients. Fertilizer is generally defined as any material (organic or inorganic;

natural or synthetic) which supplies one or more of the essential chemical elements to the

plants. Broadly, sixteen elements have been identified as necessary for plant growth, of which

nine are required in macro quantities and seven in micro quantities.

As far as production of fertilizers is concerned, the Indian fertilizer industry, by

meeting the demand for almost all chemical fertilizers, has played a key role in the

development of the agricultural sector. At present, there are 56 large size fertilizer units in

the country, manufacturing a wide range of nitrogenous and phosphate/ complex fertilizers.

Of these, 30 units produce urea; 21 units produce DAP (Di-Ammonium Phosphate) and

complex fertilizers; 5 units produce low analysis straight nitrogenous fertilizers; and 9 units

produce ammonium sulphate as a by-product. Besides, there are about 72 small and medium

scale units producing single super phosphate (SSP). As a result, India is the third largest

fertilizer producer in the world after China and the United States, with an estimated

installed capacity of 120.61 lakh MT of nitrogen and 56.59 lakh MT of phosphate (as on

30.01.2008). This rapid build-up of fertilizer production capacity in the country has been

achieved as a result of a favorable policy environment facilitating large investments in the

public, co-operative and private sectors. The private sector produced 44.73 % of nitrogenous

fertilizers and 62.08 % of phosphatic fertilizers in 2006-07. The production of nitrogenous

fertilizer in the private sector has been increasing in the past few years. The private sector had


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only 13% share in the production in 1960-61. The private sector has always retained a higher

share in the production of phosphatic fertilizer production.

Indian fertilizer industry has reached international levels of capacity utilization by

adopting various strategies for increasing the productions of fertilizers. These include the

following:

Expansion and increase in efficiency through modernization and revamping ofexisting fertilizer units.

Reviving some of the closed fertilizer plants. Using alternative sources, such as coal or liquefied natural gas for the production of

fertilizers, especially urea.

Establishing joint venture projects with companies in countries like Senegal, Oman,Jordan, Morocco, Egypt, Tunisia and other countries that abound in cheaper resources

of raw materials.

Challenges before Indian Fertilizer Industry.

The challenges before the Indian fertilizer industry relate to the incertitude in thesupply of fertilizers. There has been a surge in the demand for fertilizers in the past

few years. Good monsoonal showers have led to the growth in agriculture,

inadvertently increasing the consumption rate of fertilizers. However, the robust

growth in consumption propensity has not been met with the required surge in

fertilizer production. This has widened the gap between the demand and supply of

fertilizers, which has led to an increase in the dependence of the country on imports.

This also reflects on the lack of realizing of the domestic capacity utilization of the

reserves in the country. Another important factor that has led to the stunted growth of the fertilizer industry is

the rise in prices of the feedstock. The fertilizer industry is dependent on gas for the

production of urea and phosphoric acid for the production of phosphatic fertilizers and

DAP. The country imports its inputs from other countries. The overseas suppliers

of raw materials realize the predicament of the Indian fertilizer industry and have

started exploiting the shortage through clever pricing.


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In recent years, some of the private companies, dedicated to the production of fertilizers

have affectively taken stakes in the overseas sources of raw materials.

Future Trends

India's demand for fertilizers in 2007-08 was 26 MM tons, which went up to 29 MMtons in 2008-09 against a supply of 20 MM tons in 2008-2009.

The demand for fertilizers in 2011-12 is forecasted to be around 35.5 MM tons. More fertilizer projects are in the pipeline. Gujarat is expected to play a leading role in fertilizer production. Indian companies have penetrated the overseas market, signaling a new phase for the

industry.

Private Companies Producing Fertilizer in India.

Gujarat State Fertilizer Company Limited Coromondel Fertilisers Limited Khaitan Chemicals and Fertilizers limited Southern Petrochemicals Inds. Corpn. Ltd. Mangalore Chemicals & Fertilizers Limited Gujarat Narmada Valley Fertilisers Co. Ltd. National Fertilizers Bharat Fertlizers. Godavari Fertilizers & Chemicals Limited Nagarjuna Fertilizers & Chemicals Limited Chambal Fertilizers & Chemicals Limited


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Companies overview selected for portfolio construction.

Companies selected in FMCG sector.

Hindustan Unilever Limited (HUL):

Hindustan Unilever Limited (HUL) is India's largest fast moving consumer goods

company. The Anglo-Dutch company Unilever owns a 52% majority stake.

HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 as

Hindustan Lever Limited through a merger of Lever Brothers, Hindustan Vanaspati

Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and has

employee strength of over 15,000 employees and contributes to indirect employment of over

52,000 people. The company was renamed in June 2007 as Hindustan Unilever Limited.

Hindustan Unilever's distribution covers over 1 million retail outlets across India directly and

its products are available in over6.3 million outlets in the country, nearly 80% of all retail

outlets in India. It estimates that two out of three Indians use its many home and personal

care products, food and beverages.

The company owns 35 major Indian brands. Its brands include Kwality Wall's ice cream,

Knorr soups & meal makers, Lifebuoy, Lux, Pears, Breeze, Liril, Rexona, Hamam and Moti

soaps, Pureit water purifier, Lipton tea, Brooke Bond (3 Roses, Taj Mahal, Taaza, Red Label)

tea, Bru coffee, Pepsodent and Close Up toothpaste and brushes, and Surf, Rin and Wheel

laundry detergents, Kissan squashes and jams, Annapurna salt and atta, Pond's talcs and

creams, Vaseline lotions, Fair and Lovely creams, Lakm beauty products, Clear, Clinic Plus,

Clinic All Clear, Sunsilk and Dove shampoos, Vim dishwash, Ala bleach, Domex

disinfectant, Modern Bread, Axe deosprays and Comfort fabric softeners.


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Financial Performance.

Stock price movement considering the movement of SENSEX and FMCG index.

Key-highlights of the company:2009-2010 2009-2008 2008-2007 2007-2006

Dividend

(per

share)

6.50 7.50 9.00 6.00

EPS 9.0 8.10 7.20 7.60

Profit

after tax

(crore)

2,102.68 2,500.71 1,743.12 1,539.67

Sales 17,523.80(crore) 20,239.33(crore) 13,71,775(lakhs) 12,10,339

(lakhs)


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ITC Limited:

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of

India Limited. As the Company's ownership progressively Indianised, the name of the

Company was changed from Imperial Tobacco Company of India Limited to India Tobacco

Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the

Company's multi-business portfolio the full stops in the Company's name were removed

effective September 18, 2001. The Company now stands rechristened 'ITC Limited'.

ITC Limited public conglomerate company headquartered in Kolkata, India. Its turnover

is $6 billion and a market capitalization of over $30 Billion. The company has its

registered office in Kolkata. The company is currently headed by Yogesh ChanderDeveshwar. It employs over 26,000 people at more than 60 locations across India and is

listed on Forbes 2000. ITC Limited completed 100 years on 24 August 2010.

List of products & brands.

In FMCG, ITC has a strong presence in:

Cigarettes: W. D. & H. O. Wills, Gold Flake Kings, Gold Flake Premium, Navy Cut,Insignia, India Kings, Classic (Verve, Menthol, Menthol Rush, Regular, Mild & Ultra

Mild), 555, Benson & Hedges, Silk Cut, Scissors, Capstan, Berkeley, Bristol, Lucky

Strike, Players and Flake.

Foods: Kitchens of India; Ashirvaad; Minto; Sunfeast; Candyman; Bingo; Yippee,Sunfeast Pasta brands in Ready to Eat, Staples, Biscuits, Confectionery, Noodles and

Snack Foods;

Apparel: Wills Lifestyle and John Players brands;


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Personal care: Fiama di Wills; Vivel; Essenza di Wills; Superia; Vivel brands ofproducts in perfumes, haircare and skincare

Stationery: Classmate and Paperkraft brands Safety Matches and Agarbattis: [Ship (through ownership of WIMCO); iKno;

Mangaldeep; Aim brands]

Other businesses include:

Hotels: ITC's hotels (under brands including ITC Hotel /Welcomhotel) have evolvedinto being India's second largest hotel chain with over 80 hotels throughout the

country. ITC is also the exclusive franchisee in India of two brands owned by

Sheraton International Inc. - The Luxury Collection and Sheraton which ITC uses in

association with its own brands in the luxury 5 star segment. Brands in the hospitality

sector owned and operated by its subsidiaries include Fortune and Welcomheritage

brands.

Paperboard, Specialty Paper, Graphic and other Paper; Packaging and Printing for diverse international and Indian clientele. Infotech (through its near-wholly owned subsidiary ITC Infotech India Limited



Key-highlights of the company:


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2009-2010 2008-2009 2007-2008 2006-2007

Dividend

(per share)

10 3.70 3.50 3.10

EPS 9.0 8.00 7.70 6.70

Profit after

tax (crore)

4061.00 3263.59 3120.10 2699.97

Sales (crore) 18153.19 15611.92 13947.53 12369.30


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Nestl:

Nestl S.A. is one of the largest food and nutrition companies in the world, founded andheadquartered in Vevey, Switzerland. Nestl originated in a 1905 merger of the Anglo-

Swiss Milk Company, which was established in 1866 by brothers George Page and Charles

Page, and the Farine Lacte Henri Nestl Company, which was founded in 1866 by Henri

Nestl. The company grew significantly during the First World War and following the

Second World War, eventually expanding its offerings beyond its early condensed milk and

infant formula products. Today, the company operates in 86 countries around the world and

employs nearly 283,000 people. Its turnover is CHF (Swiss franc) 109.72 billion.

Nestl has 6,000 brands, with a wide range of products across a number of markets

including coffee (Nescaf), bottled water, other beverages (including Aero (chocolate) &

Skinny Cow), chocolate, ice cream, infant foods, performance and healthcare nutrition,

seasonings, frozen and refrigerated foods, confectionery and pet food.


Stock price movement considering the movement of SENSEX and FMCG index


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Dividend

(per share) - 12.50 12.50 -

EPS 59.70 48.20 37.50 29.10

Profit after

tax (crore)

6,550,028 5,340,822 4,138,122 3,150,965

Sales

(thousands)

51,293,767 43,242,450 35,043,532 28,160,646

United Spirits Limited (USL):

United Spirits Limited (USL) - the INR 5700 crore spirits arm of the UB Group is

Indias largest and the worlds 2nd largest spirits company. USL was earlier McDowell

and Company Limited. USL has a portfolio of more than 140 brands, of which 19 are


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millionaire brands* (selling more than a million cases a year) and enjoys a strong 59%

market share for its first line brands in India. United Spirits recorded global sales of 90

million cases for the fiscal year that ended on March 31, 2009.

United Spirits brands have won the most prestigious of awards across flavors, ranging from

the Mondial to International Wine and Spirit Competition (IWSC) to International Taste and

Quality Institute (ITQI); a total of 108 awards and certificates (as of June 2009). The

company is known to be an innovator in the industry and has several firsts to its credit such as

the first pre-mixed gin, the first Tetrapack in the spirits industry in India , the first single

malt manufactured in Asia and the first diet whisky in the world.

USL has a well-established global network with exports to over 59 countries. It has a

sizeable presence in India with distilleries and sales offices all across and a dedicated team

of over 7500 people simplemindedly committed to fulfilling the company's objective of

becoming a world leader. It has established manufacturing and bottling plants in every state

of India. To deliver its products to customers located anywhere in India, USL has also

established a robust distribution network across the country.




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Dividend

(per share) 2.50 2.00 1.50 1.00

EPS 29.50 29.30 30.80 51.80

Profit after

tax (million)

3,760.215 2,966.624 3,112.759 4,940.194

Sales

(million)

45,241.276 37,476.623 28,441.815 24,366.783


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Companies selected in Fertilizer sector.

Nagarjuna Fertilizers and Chemicals Limited

The flagship company of the Nagarjuna Group, Nagarjuna Fertilizers and Chemicals

Limited is a leading manufacturer and supplier of plant nutrients in India. Commencing

operations in 1985, today our asset base is around Rs. 21 billion. We have the distinction of

being the single largest private sector investment in Southern India. An ISO 9001:2000

certified company, our operational profits are one of the highest in the industry. We assume

market leadership in the markets we operate.

Nagarjuna Group is a dream willed into reality by its visionary Founder Shri KVK Raju.

Shri KVK Raju a first generation technopreneur was born in a humble agricultural family in

Andhra Pradesh on November 28, 1928. He joined Union Carbide of India and stayed there

for 15 years. While working with Union Carbide, KVK's deep-rooted urge to serve society

through industry impelled him to start a venture of his own. Thus was born Nagarjuna Group

in 1973 with an investment of US$ 23 million. The Group has since then come a long way to

become a diversified conglomerate with an asset base of US$ 2.5 billion.

Our broad portfolio of products and services include:

Nutrition solutions: Macro and Micro fertilizers and Farm Management services. Micro Irrigation solutions.


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Chambal Fertilizers & Chemicals Limited.

Chambal Fertilizer and Chemicals, also known as Chambal Fertilizers and Chemicals

Limited (CFCL) is an India-based fertilizer manufacturing company established in 1985.

Chambal Fertilizer and Chemicals belongs to the legendary K K Birla Group and the main

business activity of Chambal Fertilizers and Chemicals Limited involves the manufacture of

fertilizer.

Chambal Fertilizers and Chemicals Limited is one of the largest private sector

fertilizer producers in India. Chambal Fertilizers has three divisions - agri-inputs, shipping

and textiles. It has diversified into other sectors through its subsidiaries in the software and in

the infrastructure sector. It also has a joint venture in Morocco for manufacturing phosphoric

acid.

Chambal Fertilizers and Chemicals Limited is one of the largest private sector

fertilizer producers in India. It was promoted by Zuari Industries Limited in the year 1985. Its

two hi-tech nitrogenous fertilizer (urea) plants are located at Gadepan in Kota district of

Rajasthan. Built at a price of over Rs. 25 billion (USD 500 million), the two plants produce

about 2 million tones of Urea per annum. The first plant was commissioned in 1993 and

second plant in 1999. These plants use state-of-the-art technology including that from

Denmark, Italy, United States and Japan.

Chambal Fertilizers caters to the need of the farmers in ten states in Northern, Centraland Western regions of India and is the lead fertilizer supplier in the State of Rajasthan. The

Company has a vast marketing network comprising 11 regional offices, 1,300 dealers and

20,000 village level outlets. The Company has donned the mantle of providing all agri-

products through a single window to enable the farmer to buy all products from one source.

The Company dealers provide Urea and other agri-inputs like DAP (Di-Ammonium

Phosphate), MOP (Murate of Potash), SSP (Single Super Phosphate), pesticides and seeds.

Most of these products are sourced from reputed suppliers and sold under the Uttam


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umbrella brand. Today, the Company has attained a leadership position in the pesticide

business in North India.

Stock price movement considering the movement of SENSEX

Oswal Chemicals & Fertilizers Limited:

Incorporated in 1981, Oswal Chemicals & Fertilisers Ltd (OCFL) belongs to the

Oswal Agro Group of companies promoted by Abhay Oswal. OCFL (formerly known as

Bindal Agro Chem Ltd) was initially started as a trading company and entered into the

manufacture of refined vegetable oil through acquisitions. The company acquired the LDPE

division of ICI, which was later shut down as operations became uneconomical. In a major

diversification, OCFL in FY96 commissioned an Rs 1368-mn gas-based urea plant at

Shajahanpur in Uttar Pradesh. OCFL has the capacity to produce 850,000 tonn per annum of

urea at Shahjahapur in UP. The company has exited from its vegetable oil business. The

fertilizer business is predominantly equity-financed, leading to a lower cash cost of

production, increasing the companys competitiveness over new gas-based urea plants. OCFL

has units at Nangal, Bhatinda and Panipat and Vyajpur. The company changed its name in

September 1995 to Oswal Chemicals & Fertilizers Limited.


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The company has a 5000 strong workforce and its annual turnover is to the tune of

1209 crores as on the year ended 31st March 2003. The Group ranks among the top twenty

Indian business houses in terms of net worth. It leads the industry in the production of agro-

based products, petrochemicals, alcohol chemicals and nitrogenous fertilizers. It leads theway in phosphatic fertilizer and power sectors by setting up the world's largest grass root

DAP plant at Paradeep in Orissa. The company's manufacturing plants use the latest available

technology. Another area of interest for the management is its personnel, who are well looked

after. Its plants are located throughout India. In the north, at Ludhiana, Shahjahanpur etc, in

the west at Mumbai and in the east at Calcutta.

Gujarat Narmada Valley Fertilizers Co. Ltd.:

Gujarat Narmada Valley Fertilizers Company Ltd. (GNFC), is a joint sector enterprisepromoted by the Government of Gujarat and the Gujarat State Fertilizer Company

Ltd.(GSFC). It was set up in Bharuch, Gujarat in 1976. Located at Bharuch in an extremely

prosperous industrial belt, GNFC draws on the resources of the natural wealth of the land as

well as the industrially rich reserves of the area.

GNFC started its manufacturing and marketing operations by setting up in 1982, one

of the world's largest single-stream ammonia-urea fertilizer complexes. Over the next few

years, GNFC successfully commissioned different projects - in fields as diverse as chemicals,

fertilizers and electronics. The Gujarat Narmada Valley Fertilizers Co. Ltd.'s main activities

are to produce and distribute chemicals, fertilizers, IT solutions, and electronic goods. The

Fertilizers Co. of Gujarat Narmada Valley has a Urea plant which is the world's single largest

stream plant and also an Ammonia plant which too is one of the largest in the world. The

main idea behind manufacturing fertilizers by the company is to make a broad range of

fertilizers easily available to the community of farmers in India. In order to ensure fertilizers

of the best quality for its customers, the Gujarat Narmada Valley Fertilizers Co. had set up a


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research and development center in 1986. A qualified team of technologists and scientists

check and maintain the quality of fertilizers that are manufactured by the company.

GNFC today has extended its profile much beyond fertilizers through a process of

horizontal integration. Chemicals/Petrochemicals, Energy Sector,

Electronics/Telecommunications and Information Technology form ambitious and

challenging additions to its corporate portfolio. GNFC has an enterprising, strategic view

towards expansion and diversification.

Stock price movement considering the movement of SENSEX


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Calculation of Markowitz model

Particulars

Name of the company

FMCG Fertilizer

HUL ITC Nestle

United

Spirits Nagarjun Chambal Oswal GNFC

Avg

return

(expected

return)0.0782 -0.0590 0.1809 0.0619 0.0237 0.1761 0.3060 0.0651

S.D.1.5196 3.5050 1.6151 2.0090 2.3874 2.7347 3.2034 2.0552

Correlation matrix ofFMCG and Fertilizer companies.

Oswal Chambal GNFC Nagarjun ITC HUL NESTLE US

Oswal 1

Chambal 0.299 1

GNFC 0.254 0.596 1

Nagarjun 0.381 0.838 0.643 1

ITC 0.035 0.051 0.043 0.082 1

HUL 0.123 0.186 0.140 0.213 0.12

1

1

NESTLE -0.008 0.078 0.163 0.081 0.09

3

0.191 1

US 0.162 0.198 0.162 0.258 0.01

9

0.219 0.110 1

According to the Markowitz model, the securities between which there is the least

correlation or the negative correlation will be selected. In this case, two securities Nestle and

Oswal is selected because the correlation between them is negative than all the other

combinations. The correlation between these two securities is (-0.008) which is lesser than all


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the other combinations. Here we take the Oswal security as security (x) and Nestle security

as (Y) and we will calculate the weightage as per the below formula.

Wx = 2yx* y * rxy

2x + 2y2 *x*x*rxy

= (1.6151*1.6151-3.2034*1.6151*-0.008) / (3.2034*3.2034+1.6151*1.6151-

(2*3.2034*1.6151*-0.008))

= 0.2046

Approximately= 20%

Wx = 0.2046

Now, Wy = 1 - Wx

Wy = 10.2046

Wy = 0.7954

Approximately = 80%

So as per the Markowitz model, investor should invest 20% in Oswal and 80% in

Nestle security to get the maximum return by minimizing the risk


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Calculation of Sharpe model

In Sharpe model first calculation of alpha and beta is done by the formulas given below.

Betaxy () = N * xy - x * y

N * y2(y)

2

Alphaxy= mean ofY * (mean ofY)

Particulars

Name of the company

FMCG Fertilizer

HUL ITC Nestle

United

Spirits Nagarjun Chambal Oswal GNFC

Beta 0.24602 0.05238 0.12644 0.24160 0.19114 0.11188 0.09181 0.15879

Alpha 0.04941 0.071735 0.04576 0.05367 0.06411 0.04894 0.04055 0

Further calculations are done as per the table below.

Securities

mean

return(Ri)

Beta(im)

unsystematicrisk (ei)

(Ri-

Rf)*im

Ei i

2

mEi

(Ri-

Rf)*imEi (i2m/Ei) Ci

Oswal0.3060 0.0918 0.9678 -0.4427 0.000000008 -0.4427 0.00842724

-0.4608

Chambal 0.1761 0.118 0.9606 -0.7478 0.0130

-1.1905 0.0125 -1.2337

GNFC 0.0651 0.1578 0.9489 -0.1218 0.0262

-2.4522 0.0249 -2.5069


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Nagarjuna 0.0237 0.1911 0.8456 -1.7799 0.0432 -4.2322

0.0365 -4.2529

ITC

-

0.0590 0.0523 1.0208 -0.4677 0.0027

-4.6998 0.0027 -4.9232

HUL 0.0782 0.2460 0.9143 -2.0669

0.0662 -6.7668 0.0605 -6.6462

Nestle 0.1809 0.1264 1.0128 -0.8198 0.0158

-7.5866 0.0160 -7.8396

UnitedSpirits 0.0619 0.2416 0.8181 -2.2869 0.0713

-9.8735 0.0584 -9.6487

Rf 8

variance1.05048

From the above table no single security can be selected in the portfolio. Because as

per the criteria of Sharpe model the securities can be selected when Ci is greater than (Ri-

Rf)/im i.e. when the cut-off rate is greater than . So by following this rule no security can

be selected for the portfolio.

So for the better investment opportunity and to construct more efficient portfolio, one

should consider other sectors of economy or can consider the same sector, the scrips other

then selected as a sample for portfolio construction.


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Conclusion and Suggestions:

On the basis of various data collected for each selected sample scrip, a portfolio has been

constructed by using two techniques. They are;

Markowitz model. Sharp model.According to the Markowitz model analysis and findings, two securities namely Oswal

and Nestle are selected for a portfolio construction out of the 8 securities. Both the companies

are negatively correlated with each other. So the performance of one company does not

depends upon the other and so in this way investor can diversify his fund for minimizing the

risk and maximizing the return. So in case if one scrip does not perform well than it is not

necessary that the other scrip will also not perform well and so the investor will be able to get

return and advantage of one scrip which is performing well. The calculations suggest that the

weight age of Oswal is 80% and that of Nestle is 20%.

The main motive of Markowitz model is to diversify the risk by selecting the negatively

correlated or least correlated scrips having the ideal weightage of 49% and 51%. But as per

the analysis, by selecting this investment option investor cannot diversify the risk up to the

satisfactory level as the weightage of the scrips came to be at 20% and 80% which is not

considered to be ideal or nearer to ideal. So he should not go with this investment pattern,

alone.

Along with the Markowitz according to the Sharp model calculations also, no security can

be selected for a portfolio construction out of the 8 analyzed securities because from all these

securities no combination of the securities can help investor to get the maximum return at

minimized level of risk.

So as per the calculations and findings, the sharp model resulted into disselection of

security whereas Markowitz calculations suggested a portfolio of two securities. This

indicates that with the help of Markowitz and Sharpe model, optimum portfolio cannot be

constructed. Because of this reason it is always better to have more number of securities in a

portfolio because it helps to minimize the risk and maximize the return of the portfolio or

investor should try other portfolio construction theory other then these two. Also the investor

can consider other sectors of the economy for portfolio construction. In true sense, the


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portfolio of any investor does not consists of only equity, but it also consist of debt and other

long term and short term investment avenues and the scrips are selected on the basis of the

market trend, fundamentals of the company, state of the economy and such and less of with

the help of theoretical tools like Markowitz Model and Sharpe Model.


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Bibliography.

Internet http://business.mapsofindia.com/india-company/g/gujarat-narmada-valley-fertilisers.html

www.gnfc.in http://economictimes.indiatimes.com/oswal-chemicals-&-fertilizers-

ltd/infocompanybackground/companyid-13950.cms

http://www.nagarjunafertilizers.com/social.htm http://www.chambalfertilisers.in/ http://www.economywatch.com/indian-fertilizer-

industry/challenges.html

http://www.naukrihub.com/india/fmcg/scope/ http://www.economywatch.com/world-industries/fmcg.html http://www.economywatch.com/business-and-economy/fertilizer-

industry.html

http://business.gov.in/Industry_services/fertilizers.php http://www.indiainfoline.com/Markets/Company/Fundamentals/Key-

Ratios/ITC-Ltd/500875

www.hul.co.in www.nestle.com ITCportal.com www.theubgroup.com http://www.nseindia.com/content/equities/eq_historicaldata.htm www.moneycontrol.com

www.religare.in www.businessindia.com

Text

books

Securities Analysis and Portfolio Management by V.A.Avdhani, 2001. Investment management by V.K.Bhalla, 2010. Portfolio Management by S. Kevin

Company

Prospectus

Prospector by Religare security, Explore Endless Opportunities
http://www.nseindia.com/content/equities/eq_historicaldata.htmhttp://www.moneycontrol.com/company-facts/statebankindia/history/SBIhttp://www.religare.in/http://www.businessindia.com/http://www.businessindia.com/http://www.religare.in/http://www.moneycontrol.com/company-facts/statebankindia/history/SBIhttp://www.nseindia.com/content/equities/eq_historicaldata.htm


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Daily closing share price of the companies selected as a sample for the

analysis for the year 2010. (Fertilizer sector)

Date Oswal Chambal GNFC Nagarjun

04-Jan-10 21.05 63.65 110.4 34.65

05-Jan-10 21.35 63.25 113.75 34.75

06-Jan-10 21.3 64.95 115.85 35.65

07-Jan-10 21 64.4 114.65 35.4

08-Jan-10 21.05 64.1 111.2 35.1

11-Jan-10 21.5 65.65 112.2 35.8

12-Jan-10 21.1 63.8 112.85 35.85

13-Jan-10 21.15 64.3 112.9 36.25

14-Jan-10 21.3 64.6 115.65 36.2515-Jan-10 21.3 65.3 114.05 36.55

18-Jan-10 21.7 67.75 115.05 37.35

19-Jan-10 22.95 70.8 122.6 38.95

20-Jan-10 22.65 67.85 123.4 37.8

21-Jan-10 22.1 69.15 125.7 37.5

22-Jan-10 21.15 67.1 123.55 36.2

25-Jan-10 20.8 67.2 121.45 35.65

27-Jan-10 18.9 61.8 114.1 32.8

28-Jan-10 19.15 61.85 110.55 31.85

29-Jan-10 20 64.9 118.75 33.9

01-Feb-10 20.25 66.2 120.2 34.55

02-Feb-10 20.05 67.2 117.25 34.45

03-Feb-10 19.95 67.7 119.2 35

04-Feb-10 19.6 67 116.25 34.15

05-Feb-10 18.65 64.25 116.25 32.7

06-Feb-10 19.2 67.3 115.9 33.5

08-Feb-10 19.85 71.95 117.7 35.35

09-Feb-10 19.7 72.25 119.45 35.5

10-Feb-10 19.1 68.85 117.1 34.2

11-Feb-10 19.35 70.1 116.5 34.65

15-Feb-10 19.1 68.7 114.7 34.2

16-Feb-10 19.2 69.65 115.7 34.6

17-Feb-10 19.25 69.45 115.5 34.85

18-Feb-10 19.75 71.3 119.8 36

19-Feb-10 19.2 68.15 115.25 35.4

22-Feb-10 18.75 64.45 110.9 33.85

23-Feb-10 18.1 62.05 108.9 33


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24-Feb-10 17.95 61.95 107.25 32.6

25-Feb-10 17.9 61.9 109.2 32.55

26-Feb-10 18.1 62.2 107.4 32.85

02-Mar-10 18.15 61.15 107.85 32.65

03-Mar-10 18.35 60.1 109.35 32.704-Mar-10 18.55 62 111.65 33.4

05-Mar-10 18.35 61.85 113.45 33.3

08-Mar-10 18.25 61.2 113.75 33

09-Mar-10 18 61.3 110.6 32.8

10-Mar-10 17.5 59.4 111.4 32.5

11-Mar-10 17.55 59.35 109.55 32.1

12-Mar-10 17.3 58.65 109.05 31.95

15-Mar-10 17 57.75 107.6 30.85

16-Mar-10 16.9 59.05 108.2 31.317-Mar-10 16.85 58.8 108.35 31.25

18-Mar-10 16.95 58.75 107.85 30.9

19-Mar-10 16.95 61.1 108.15 31.45

22-Mar-10 16.6 62.7 107.25 31.15

23-Mar-10 16.6 61.9 107.05 30.8

25-Mar-10 16.55 60.15 107.9 30.1

26-Mar-10 16.65 60.3 108.9 30.3

29-Mar-10 16.3 61.4 110.05 30.95

30-Mar-10 16.65 61.4 111.6 3131-Mar-10 16.3 61.45 112.4 30.75

01-Apr-10 17.7 61.95 111.65 31

05-Apr-10 18.35 62.8 113.1 31.65

06-Apr-10 18.4 62.45 115.35 31.4

07-Apr-10 18.75 62.5 116.8 31.3

08-Apr-10 18.5 61.65 114.6 31.35

09-Apr-10 18.65 62.1 113.65 31.35

12-Apr-10 18.65 62.95 116.8 31.9

13-Apr-10 18.65 63.35 116.05 32.2515-Apr-10 18.65 62.5 116.7 31.65

16-Apr-10 18.55 61.75 118.1 31.3

19-Apr-10 18.1 60.65 115.95 30.6

20-Apr-10 18.4 61.75 118.2 31.1

21-Apr-10 18.25 61.85 120.6 30.95

22-Apr-10 18.8 64.2 121.9 31.75

23-Apr-10 18.7 64.5 118.55 31.9

26-Apr-10 18.55 65.45 118.35 32.2

27-Apr-10 18.8 66.3 119.65 33


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28-Apr-10 18.15 63.8 117.55 31.8

29-Apr-10 18.05 65.4 116.6 31.8

30-Apr-10 18.1 65.75 120.35 32.75

03-May-10 17.9 64.7 120.15 32.7

04-May-10 17.45 62.95 116.95 31.905-May-10 17.2 63.15 116.65 32.3

06-May-10 17.3 62.8 115.25 32

07-May-10 16.85 60.45 112.65 30.9

10-May-10 17.2 59.25 114.65 31.6

11-May-10 17.35 61.

Disha Final Project

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