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- DOI 10.18231/j.jmra.2023.031
-
CrossMark
- Citation
Stock evaluation using capital assets pricing model with reference to select food processing organisations in India
- Author Details:
-
R. Satheeshkumar *
-
Harshitha V
-
S. Sridevi
-
Sushma Rawath
Introduction
Investment risk remains a big issue in terms of financing, and this impact on expected returns. CAPM are used to measure the cost of capital in firms and evaluate the performance of portfolios. According to this model, there are two types of risk; systematic risk and unsystematic risk. Systematic risk is called differential risk and market risk. Systemic risk arises from the fluctuations in securities income caused by the business aspects of the macro economy (Changes in politics, Government policy, changes in the Nation's economy and International economy). The second risk, unsystematic risk, is called company risk and diversified risk. This affects the company's revenues in the scenarios such as the production of undesirable products, labour strikes, etc., in the micro-economy.[1], [2], [3], [4], [5]
Theoretical background of the study
The CAPM includes a coherent framework for investment problems. This model was introduced in 1962 by Jack L. Treynor. The model was further developed by William Sharp in 1964, John Linter in 1965 and Jan Mossin, in 1966. An important part of this type of portfolio management was independently developed in 1952 by Harry Markowitz in his earlier work, Diversification and Modernity. The CAPM model is a key asset value measurement model that provides a risk relationship between underlying returns and capital. Based on the overall Markowitz Model, Sharp (1964) and Linter (1965) invented a new paradigm, the CAPM, in which two models are considered best when describing the trade-off between risk and return. In that case the CAPM model consists of the key components of money pure time value, market risk premium, and beta for asset. Lastly, this model has been well received by many investors and researchers in the 1960s and 70s.
Basic concepts and terms of CAPM
Here the formula of CAPM model is explained,
ERi = Rf+ βi (ERm- Rf) Where:
ER i = Expected return if Investment Rf = Risk Free Rate Bi = Beta of Investment
(Erm – Rf) = Market risk premium
Risk: Risk is the difference between the expected return and the actual return
Risk Free Rate: The risk-free rate is the time value of money in the CAPM model.
Beta: - Beta is the measure of volatility of a stock. The risk of one stock is used to compare the risk of another stock with that of another.
Expected Return: = Risk Free Rate + (Beta * Market return premium
Systemic Risk and Non-Systematic Risk: - Systemic risk, also known as “unexplained risk”, “volatility” or “market risk”, affects the overall market, not just a stock or industry. Non-systematic risk also called “specific risk”; this risk is related to individual stocks.
Industry profile
The food processing sector is essential for the development of the economy, providing links between agriculture and industry. The word food processing is often regarded as a "value added process". Food processing industry is the largest in India and is ranked fifth in the world. It is a technique for preparing and preserving food, improving the quality and functionality of products in an effective way to enhance the shelf life. It covers a wide spectrum of food products, including agriculture, horticulture, animal husbandry and fisheries.[6], [7], [8], [9]
Six major segments of the food processing sectors
1.Fruits and Vegetables 2. Meat 3. Poultry 4. Marine Products 5. Grain Processing 6. Consumer Packaged Foods
Compiled by author from http://mofpi.nic.in, Ministry of Food Processing Industries.
Government initiatives for food processing sector
Government Initiatives for Food Processing Sector are detailed as below:
1.Scheme for Foundation Advancement, 2. Scheme for Innovation Up gradation, Foundation and Modernization of Food Handling Enterprises, 3. Plan for HR Advancement, 4. Scheme for setting up of Value Confirmation/Food Testing Research facility/Research and development and special Exercises, 5. Scheme for Reinforcing of Establishments.
Review of literature and industry forecasts report
Navya Ninan (2018) studied the valuation of the capital asset bills in the Indian stock market has been conducted, which looks at the risk that Indian insurance companies face from trading in the stock market several decades ago. This study proves that there is no relationship between future growth rate and cost of capital. Risk in capital accounting costs is not considered important in this chapter.
Charumathi (2014) in her paper compared valuation models for Indian bank shares to evaluate Bank Shares. This includes the Johnson model, P / B model, CAPM, GDDM model and the additional models used to determine the price of bank shares.
Zafar (2014) Studied on mutual fund performance of different AMCs in India: An empirical study using CAPM model. In the context of a dynamic global business, the performance of the industry that changes from day to day has been studied.
Viviana (2006) article outlined the time-scale segmentation of the international version of CAPM, which leads to market exchange rate risk. This method is applied through an analytic formula called the portfolio's time- scale value and marginal value (VAR).
Kilselakova (2015) has done a case study of a food processing company and used the CAPM model. CAPM-based approach is used to estimate the systematic risks for the measurement of cost of equity. The building - Off 1 model is adopted for business and financial risk assessment.
Bhuva (2017) studied on validity of capital asset pricing model and stability of systematic risk (Beta) of FMCG firm in Indian stock market. In this article, the CAPM model assumes that the variance of returns is an adequate measurement of risk.
K,Sathyanarayana.et.al (2019) from their study found t Expected Return, Expected Risk, Co-efficient of Variation (CV) and Beta of stock to analyse and present the performance of stocks of 35 companies across seven sectors. It supported the investors to identify the expected return and risk associated with the stock in relation to the stock market and support investors to make appropriate investment decision.
Rangasamy et.al (2016), in their research they ranked various the mutual funds schemes based on the average return and standard deviation.
Scope of the study
This study is based on data of the Food Processing organization over a six-year period from 2017-18 to 2021-22. It measures financial performance through stock evaluation in terms of Risk-Free Rate, Market Risk, Risk premium, Beta of the investment and Expected Return of Investment.
Objectives of the Study
To understand the effectiveness of CAPM model in stock evaluation
To measure the security and systematic risk of security by using beta as a measure in select food processing organisations.
To determine the food processing organization stock valuation using through Capital Assets Pricing Model
Limitation of the study
This study relies only on information extracted from different online sources, websites and annual report of the firm.
Name of the selected indian food processing organizations and expected return rank report
Researcher has selected ten food processing firms for the study purpose as detailed below:
1.Hindustan Unilever Ltd, 2. Nestle Ltd, 3. L T Food Private Ltd, 4. Britannia Biscuit Company Limited, 5. Venky’s India Limited, 6. Bajaj Agro India Limited,7. Jubliant Food Works Limited, 8. American Dry Fruits Limited, 9. Heritage Food Limited, 10. Khushi Ram Bihari Lal Ltd.
Data Anlysis and Interpretation
|
Year |
Index Closing Price |
Index Return |
HUL ltd Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
13321.48 |
0.416 |
|
2018-19 |
131530.50 |
0.150 |
18859.75 |
0.283 |
|
2019-20 |
136939.05 |
-0.264 |
22199.20 |
0.330 |
|
2020-21 |
144898.35 |
0.564 |
25119.48 |
0.100 |
|
2021-22 |
200056.20 |
0.181 |
27650.65 |
-0.131 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on HUL technologies is -32.88 and the beta is -0.606. The HUL beta here is less than the market beta (β-1). So, it can be said as “the lower value of the stock and it is perceived as fair to buy more securities.[10], [11], [12], [13], [14] [Table 1].
|
Year |
Index Closing Price |
Index Return |
Nestle ltd Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
79945.430 |
0.225 |
|
2018-19 |
131530.50 |
0.150 |
116558.087 |
0.343 |
|
2019-20 |
136939.05 |
-0.264 |
155771.970 |
0.440 |
|
2020-21 |
144898.35 |
0.564 |
198238.810 |
0.088 |
|
2021-22 |
200056.20 |
0.181 |
215680.552 |
0.038 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on Nestle technologies is -80.862 and the beta is -1.326. The Nestle beta here is less than the market beta. So, it can be said as “the lower value of the stock” and it is perceived as fair to buy more securities.[Table 2].
|
Year |
Index Closing Price |
Index Return |
LT Food ltd Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
842.289 |
0.314 |
|
2018-19 |
131530.50 |
0.150 |
575.193 |
-0.634 |
|
2019-20 |
136939.05 |
-0.264 |
282.307 |
-0.508 |
|
2020-21 |
144898.35 |
0.564 |
561.644 |
1.287 |
|
2021-22 |
200056.20 |
0.181 |
843.697 |
0.397 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years as month for 2017-18 to 2021-22. The expected return on LT food limited is 27.63 and the beta is 0.306. The LT food ltd beta here is less than the market beta. So, it can be said as “the upper value of the stock” and it is perceived as unfair to buy more securities.[Table 3].
|
Year |
Index Closing Price |
Index Return |
Britannia ltd Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
23492.361 |
0.408 |
|
2018-19 |
131530.50 |
0.150 |
33488.963 |
0.259 |
|
2019-20 |
136939.05 |
-0.264 |
32086.914 |
-0.105 |
|
2020-21 |
144898.35 |
0.564 |
40090.463 |
0.362 |
|
2021-22 |
200056.20 |
0.181 |
41455.510 |
-0.078 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years as month for 2017-18 to 2021-22. The expected return on Britannia Limited is 55.90 and the beta is 0.732. The Britannia beta here is less than the market beta. So, it can be said as “the upper value of the stock” and it is perceived as unfair to buy more securities.[Table 4].
|
Year |
Index Closing Price |
Index Return |
Venky’s Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
28201.05 |
1.566 |
|
2018-19 |
131530.50 |
0.150 |
29971.61 |
-0.385 |
|
2019-20 |
136939.05 |
-0.264 |
18660.89 |
-0.792 |
|
2020-21 |
144898.35 |
0.564 |
16496.20 |
0.755 |
|
2021-22 |
200056.20 |
0.181 |
30777.66 |
0.580 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on Venky’s Ltd is 18.412 and the beta is 0.167. The beta here is less than the market beta. So, it can be said as “the upper value of the stock” and it is perceived as unfair to buy more securities.[Table 5].
|
Year |
Index Closing Price |
Index Return |
Bajaj Agro Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
171.950 |
-0.305 |
|
2018-19 |
131530.50 |
0.150 |
97.350 |
-0.039 |
|
2019-20 |
136939.05 |
-0.264 |
76.400 |
-0.831 |
|
2020-21 |
144898.35 |
0.564 |
69.350 |
1.505 |
|
2021-22 |
200056.20 |
0.181 |
173.700 |
1.276 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on Bajaj Agro limited is 23.654 and the beta is 0.246. The Bajaj Agro ltd beta here is less than the market beta. So, it can be said as “the upper value of the stock”. Bajaj Agro Stock is priced high and it is perceived as unfair to buy more securities.[Table 6].
|
Year |
Index Closing Price |
Index Return |
Jubilant Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
1832.643 |
0.856 |
|
2018-19 |
131530.50 |
0.150 |
3093.827 |
0.285 |
|
2019-20 |
136939.05 |
-0.264 |
3490.159 |
0.080 |
|
2020-21 |
144898.35 |
0.564 |
5403.173 |
0.752 |
|
2021-22 |
200056.20 |
0.181 |
8128.757 |
-0.049 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on Jubilant Food works ltd is 32.28 and the beta is 0.376. The Bajaj Agro ltd beta here is less than the market beta. So, it can be said as “the upper value of the stock”. Jubilant stock is priced high and it is perceived as unfair to buy more securities.[Table 7].
|
Year |
Index Closing Price |
Index Return |
ADF Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
2972.856 |
0.306 |
|
2018-19 |
131530.50 |
0.150 |
2863.215 |
0.278 |
|
2019-20 |
136939.05 |
-0.264 |
3163.843 |
-0.217 |
|
2020-21 |
144898.35 |
0.564 |
5699.377 |
1.861 |
|
2021-22 |
200056.20 |
0.181 |
10201.515 |
-0.097 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on ADF Food ltd is 27.56 and the beta is 0.305. The ADF Food ltd beta here is less than the market beta. So, it can be said as “the upper value of the stock”. ADF ltd. stock is priced high and perceived it is perceived as unfair to buy more securities.[Table 8].
|
Year |
Index Closing Price |
Index Return |
Heritage food Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
7862.242 |
0.322 |
|
2018-19 |
131530.50 |
0.150 |
6513.623 |
-0.188 |
|
2019-20 |
136939.05 |
-0.264 |
4172.181 |
-0.721 |
|
2020-21 |
144898.35 |
0.564 |
3436.446 |
0.438 |
|
2021-22 |
200056.20 |
0.181 |
4843.582 |
0.223 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on Heritage Food ltd is 42.169 and the beta is 0.525. The Heritage Food ltd beta here is less than the market beta. So, it can be said as “the upper value of the stock”. Heritage ltd. stock is priced high at and it is perceived as unfair to buy more securities.[Table 9].
|
Year |
Index Closing Price |
Index Return |
KRBL Closing Price |
Return |
|
2017-18 |
120956.60 |
0.105 |
5765.188 |
0.163 |
|
2018-19 |
131530.50 |
0.150 |
4117.161 |
-0.094 |
|
2019-20 |
136939.05 |
-0.264 |
2896.176 |
-0.614 |
|
2020-21 |
144898.35 |
0.564 |
2752.766 |
0.454 |
|
2021-22 |
200056.20 |
0.181 |
2810.939 |
0.232 |
Analysis: The above table presents beta and expected return. Beta and Expected Returns are calculated by taking 5 years data from 2017-18 to 2021-22. The expected return on KRBL Food ltd is 51.26 and the beta is 0.662. The KRBL Food ltd beta here is less than the market beta. So, it can be said as “the upper value of the stock”. KRBL ltd. stock is priced high and perceived it is perceived as unfair to buy more securities.[Table 10].
|
SL. No |
Organization Name |
Beta (β) Value |
Expected Return |
Rank |
|
1 |
Hindustan Unilever Ltd. |
-0.606 |
-32.88 |
9th Rank |
|
2 |
Nestle Ltd |
-1.329 |
-80.862 |
10th Rank |
|
3 |
LT Food Private Ltd |
0.306 |
27.63 |
5th Rank |
|
4 |
Britannia Industries Ltd |
0.732 |
55.90 |
1st Rank |
|
5 |
Venky’S India Ltd |
0.167 |
18.412 |
8th Rank |
|
6 |
Bajaj Agro India Ltd |
0.246 |
23.654 |
7th Rank |
|
7 |
Jubliant Food Works Ltd |
0.376 |
32.28 |
4th Rank |
|
8 |
ADF Ltd (American Dry Fruits Ltd) |
0.305 |
27.56 |
6th Rank |
|
9 |
Heritage Food Ltd. |
0.525 |
42.169 |
3rd Rank |
|
10 |
Khushi Ram Bihari Lal Ltd |
0.662 |
51.26 |
2nd Rank |
Results and Discussions
The returns of the firms shown in the above table are calculated based on index closing returns, then the price of beta is calculated based on the stock market index closing price and the organization index closing return price. Similarly, the expected return is found through the formula of CAPM model and their rank is determined. In this table Britannia firm earns expected return of 55.90 and beta price is 0.732, which means it is less than the market beta as it is considered as over-valued stock and it is perceived unfair to buy more security, Similarly, rest of the companies KRBL is in the second rank with revenue of 51.26 and Heritage is in the third rank, Jubilant Food is in the fourth rank, L&T Food is in the fifth rank, ADF is in the 6th rank, Bajaj Agro is in the 7th rank and Venky’s is in the 8th rank considered by the above value of the stock It can be said that buying a security is not fair. But from the above table HUL and Nestle firms have negative expected return and beta is also negative so it can be said that these two firms’ securities are reasonable to buy.
Conclusion
CAPM known as the “Capital Asset Pricing Model” has dominated modern finance. Based on numerous studies, as well as articles, companies with high market ratios tend to earn higher returns in the long run even after they are associated with beta. This has sparked fierce debate among some economic economists that certain risks should have greater rewards.
Source of Funding
None.
Conflict of Interest
None.
References
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- Introduction
- Theoretical background of the study
- Basic concepts and terms of CAPM
- Industry profile
- Six major segments of the food processing sectors
- Government initiatives for food processing sector
- Review of literature and industry forecasts report
- Scope of the study
- Objectives of the Study
- Limitation of the study
- Name of the selected indian food processing organizations and expected return rank report
- Data Anlysis and Interpretation
- Results and Discussions
- Conclusion
- Source of Funding
- Conflict of Interest