finance report group 90

Finance Report

Prepared by

Amit Talwar

MonaneeBharadwaj

SanjanaAgrawal

AnkitAgarwal

AnkitJhunjunwala

1

List of Group Members with Details (Study Group – 90)

Amit Talwar

Company: Unitech Limited

Section H, Seat No -06

E.No: 11BSPHH010092

MonaneeBharadwaj

Company: The Leela Group


E.No: 11BSPHH010490

SanjanaAgrawal

Company: DLF limited


E.No: 11BSPHH010719

AnkitAgarwal

Company: Kingfisher Airlines


E.No: 11BSPHH010123

AnkitJhunjunwala

Company: Jet Airways


E.No: 11BSPHH010127

2

Table of ContentsIntroduction...........................................................................................................................................4

Risk and Return Analysis........................................................................................................................6

Beta Estimation and CAPM....................................................................................................................7

Beta Estimation.................................................................................................................................7

Capital Asset Pricing Model (CAPM)..................................................................................................8

Earnings Per Share, Leverage Ratio and WACC analysis........................................................................9

Earnings per share (EPS):...................................................................................................................9

Leverage Ratio.................................................................................................................................10

Weighted Average cost of Capital...................................................................................................11

Relative Valuation Analysis..................................................................................................................11

Relative Valuation:...........................................................................................................................11

Inter Industry analysis.........................................................................................................................13

Unitech Group.................................................................................................................................13

DLF group........................................................................................................................................14

The Leela Group..............................................................................................................................15

Kingfisher Group..............................................................................................................................16

Jet Airways.......................................................................................................................................17

Conclusion...........................................................................................................................................18

3

IntroductionThe year 2008 was a year of turmiol for the global financial markets. Initiated due to the U.S. debt

crisis, primarily reasonsed as a sub prime crisis, global economy was declared in the state of

recession. Indian economy could not completely shield itself from the impact of the global economic

recession, and the Indian financial syterm also suffered in huge proportions. Stock prices were

decling, investors were reluctant to invest, companies were going bankcrupt due to lack of cash inflow

and jobs security was non-existant. The initial response of the Indian government (GOI) was to first

restrict the impact of the global economic crisis on the Indian economy and then undertake recovery

measures.

The Indian economy showed initial signs of recovery in early 2009. This was the period when

investementactivity in the stock market and sectors like real estate witnessed some inflow of funds

from the investors. This move was primarily driven by the GOI policy of lowering interest rates

especially for priority sector. With market showing an upward movement, investor confidence started

to build again, and positive sentiments resulted in individual and institutions investors ploughing their

money back into the financial sector. Over the past two years the Indian economy has witnessed quite

a few macro variations, with some changes in investor preference and banking sector reactions. Lets

look at some the changes witnessed by the Indian economy in the past couple of years.

1. Interest rates and inflation changes: Indian banking syterm has witnessed drastic variation in the

interest rate patterns during the last two years. As reflected from the chart below, the interest rates

were lowered till mid 2009, so as to increase the money supply in the economy and ensure continuity

of investment. During the last 6-8 months though, the banking systerm has completed revised its

lending pattern by increasing interest rates, due to high level of inflation in the economy. Mid 2010,

onwards Indian economy has been facing rising concers over increase in inflation, due to excessive

spending, which has been due to easy availibility of funds. To restirct this price rise, the banking

sector has resorted to increase in interest rates to limit borrowing and money supply in the economy.

4

Repo Rates in India

2. Changes in Repo rates: Repo rates are rates at which the Reserve Bank of India (RBI) lends

money to commercial banks in India to meet their short term fund requirement. Since 2006, the RBI

has regularly varied its repo rates to control the flow of funds to commercial banks. It can be observed

that since Q1 2010, RBI has consistently increased its repo rates, which currently stands at 8%. This

also has been used as a key policy instrument for controlling inflation.

3. Changes in prices of Gold and silver: There has been shift in the way an Indian investor thinks of

gold and silver in India. In the past two years, Indian buyers have consider gold and silver as

investment commodities along with its traditional status of ornamental utility. These commodities are

ranked lower when it comes to risk associated in investment as compared to the financial markets.

The growing preference for these commodities is reflected in an increasing buying activity for these

metals in the commodity market. The trend of increase in gold and silver prices is reflected below. An

increasing price trend for both these commodities is a reflection of high demand for such metals in the

Indian market.

In light of the above mentioned macro-economic changes and trends witnessed in the Indian

economy, this report focuses on comparing five companies namely Unitech Limited, DLF limited,

The Leela Group, Kingfisher Airlines and Jet Airways. The report looks at understanding the risk and

return aspects of each company, with emphasis on the beta of these securities in the market. From a

company point of view the report covers aspects like cost of equity and weighted average cost of

capital (WACC) for each of these sectors, and finally, from an industry point to look at an investor

and his/her portfolio diversification strategy w.r.t to intra and inter industry portfolio.

5

Risk and Return AnalysisThis section discusses the risk and return aspects of the below listed 5 companies. The data used for

these calculations is daily stock prices for these securities for a period ranging from 1 st August 2009 to

31st July 2011.

In the year mid FY 10 the market as a whole was on a recovery phase after a recession that hit the

global markets in year 2008. In recent time, due to debt crisis in United States the market is tending

towards another phase of slowdown and security prices are falling due to speculation and investors

losing confidence on their investment. This explains why most securities have negative expected

return.

Our analysis focuses at three major sectors namely Aviation, Real Estate and Hospitality and the firms

under consideration are Unitech Limited, DLF, The Leela, Kingfisher Airlines and Jet Airways.

Unitech and DLF both belonging to the real estate sector have negative expected return. This shows

that the real estate sectors as a whole is not performing well and has still not gained investor

confidence in terms of drawing substantial investment to drive the share prices northwards.

Though,DLF would be more preferable as it has lesser risk as compared to Unitech in the real estate

spectrum.

Kingfisher and Jet airways belong to aviation sector. Jet airways has yielded a high return while

Kingfisher has yielded negative return. A comparison of other securities such as from this sector,

shows that this sector is not performing as per expectations in terms of increase in share prices and

hence Jet has outperformed other securities in this sector making it a good choice for investment.

The LeelaGroup has the best expected return and also the least risk on return therefore making it the

best choice for any rational investor among the given set of securities. If the investor is interested in

the above securities as a part of a portfolio investment , it also serves as a hedge for two reasons -1) it

is giving positive return when major securities are in a downward trend, and 2) it has the least risk (is

deviation on its return).

6

Company Name Expected Return (Ri) Risk (SD)

Unitech -67.689% 3.08%DLF -42.48% 2.50%The Leela 37.22% 2.17%Kingfisher -30.94% 3.07%Jet Airways 75.81% 3.29%

Risk and Return Inter Company

From the given set of companies we can also conclude that the impact of the global crisis on the real

estate sector and aviation were quite high. In 2009-10, the besides the financial sector, real estate was

also among the sectors badly affected by the downturn. Property purchases had declined due to lack of

funds, corporate and retail leasing activity was low due to cancellation of expansion plans by

corporates and retail brands hence leading to low profitability, which in turn resulted in low buying of

shares by the investors. Similarly, aviation was also affected during the same time period. With

companies cutting down on travel plans and individuals shifting to cheaper alternatives, business

activity in the aviation sector was low, which in turn resulted in poor performance of players like

Kingfisher and Spice Jet. But among all the economicl turmoil, Jet airways still managed to witness

growth in its share price over the last two years resulting in a positive expected return on the

company’s shares.

Beta Estimation and CAPM

Beta EstimationBeta value is the sensitivity of individual securities to market securities. This explains the expected

change in return expectations of individual securities with 1% change in return of the market security.

A positive beta value as is the case represented in the table below signifies that, with a positive growth

in the market security, the return expectations for all the securities are bound to grow above the

market average.

From the above table, it can be observed that Unitech, a real estate company has the highest beta

values, as calculated from the company’s data for the last two years. The highest beta value for

Unitechindicatesthe highest sensitivity of this security with the market as compared to the other

companies in the real estate, hospitality and aviation sector. Kingfisher ranks second among the above

set of companies followed by DLF group. With fluctuations in the market security, the share prices

and return expectations for these companies will change by a greater proportion as compared to the

growth in the market security. Unitech and DLF both belonging to the real estate sector, have beta

values quite close, reflecting an industry aggregate beta value for real estate. It also reflects a

consistent beta for the industry as a whole.

For different class of investors and for different market conditions, there is a different preference for

security based on beta values. For an investor, who is a risk taker, and is looking to maximise his/her

7

Unitech DLF Leela Kingfisher Jet Airways1.69 1.5 1.07 1.54 1.15

Beta Coeffi cient

βUnitech >βKF>βDLF>βJet>βLeela

Company Ke %Unitech 18.78%Kingfisher 17.83%DLF 17.59%Jet Airways 15.33%Leela 14.83%

Cost of Equity

β=1 β=1.5 β =1.69 Beta of a Security

Expected Return

Rm – 14.39%

Ri (DLF) – 17.59%

Ri (Unitech) – 18.78%

Security Market Line - Unitech

Security Market Line - DLF

0

Rf – 8.0907%

Capital Asset Pricing Model (CAPM)

Ri (KF) – 17.83%

Security Market Line - KF

Security Market Line - Jet

Ri (Jet) – 15.33%

Security Market Line - Leela

Ri (Leela) – 14.83%

return will prefer a security with a higher beta. This is because as market security grows, his security

will grow at a higher proportion.

Preference for a security based on beta values also changes with respect to changing market condition.

When the stock market is on the rise and investors are bullish, then in that case there is a lot of buying

happening in the security market due to the growth expectations of the investors. In such a market

condition an investor, who is given a choice between the above set of securities will prefer Unitech as

one of the options or Kingfisher as the second option. This is because as beta for Unitech is the

highest and asthe market is expected to grow, the investor is bound to gain higher than the growth of

the market.

Similarly, in a market situation, when value of the market portfolio is declining, there are a lot of

negative sentiments among the investors and mostly there is selling activity visible in the stock

market, investors would prefer securities with lower beta values, preferably with beta values close to

or lower to 1.This is because as market portfolio will decline, the resultant impact on the investors’

security will be equal to or less than one. As among the above set of securities, beta value for The

Leela hotel is close to one, it will act as the most preferred security, based on beta values from the

above set of securities.

Capital Asset Pricing Model (CAPM)

Using the beta

estimates, we can

work on the CAPM model to arrive at the return expectations for an investor or the Cost of Equity for

each of above mentioned firms. To use the CAPM model, we first assume that all assumptions related

to CAPM model hold true. To arrive at the cost of equity of each of these firms, we have considered

the Risk free rate of return to be similar to a 10 year G-sec bond issued by RBI to be matured in 2019.

It has been assumed that an investor will invest in any of the companies for a long period of time

close to day 10 years. Market rate of return (Rm) is calculated on the bases of the market security.

8

For an investor, the cost of equity is the translation of beta expectations in to return expectations.

Given the past two years of data, Unitech has the highest cost of equity of 18.78%, amongst the set of

securities chosen for our analysis. Even DLF group, a company in the same league of operations has a

cost of equity of 17.59%. It can be inferred that companies in the real estate sector have a higher cost

of equity capital as compared to the peer companies in other sectors.

CAPM figures act as a good guide for an investor who is looking into investment into the sectors, in

terms of setting up of operations. Well his or her investment decision will be based on a number of

factors, but a CAPM analysis among sectors can give him a first-hand impression of the equity cost

structure in each of the sectors discussed in our report namely, real estate, hospitality and aviation.

Both domestic and foreign investors evaluating investment decisions based on the above CAPM

figures can conclude that in terms of cost of equity, real estate is one of the most expensive sectors in

terms of equity cost in India, based on the market data for the last two year. Secondly, return

expectation in the hospitality sector in India also witnesses a lot of seasonality and the performance of

the sector is based on a number of external factors. Global recession, terror attach, growing

competition and seasonal demand are few factors which effect the performance of the hospitality

sector in India and eventually leads a lower return expectation. The Leela hotel has the lowest beta

and cost of equity amongst the set of companies mentioned above.

Earnings Per Share, Leverage Ratio and WACC analysis

Earnings per share (EPS):Earnings Per Share is a portion of the company’s profit allocated to each outstanding share of

the common stock. Earnings per share serves as an indicator of company’s profitability.

Calculated as:

= NET INCOME – DIVIDEND ON PREFERRED STOCKS

OUTSTANDING SHARES

9

Year Mar ' 07 Mar ' 08 Mar ' 09 Mar ' 10 Mar ' 11Unitech 11.01 4.17 4.36 2.14 1.95DLF 2.65 15.10 9.11 4.43 6.68Leela 2.06 3.87 3.97 1.18 1.04Jet Airways -25.69 -93.12 -192.53 -70.21 -18.24Kingfisher -55.05 -18.64 -60.67 -51.54 -18.49

-200.00

-150.00

-100.00

-50.00

0.00Mar ' 07 Mar ' 08 Mar ' 09 Mar ' 10 Mar ' 11

EPS

(Rs.

/sha

re)

EPS (Rs./share)

Unitech DLF Leela Jet Airways Kingfisher

From the table, it can be observed that the EPS of DLF and The Leela rose in 2008 and 2009

from 2007 and then again came down in the subsequent years. Unitech’s EPS is constantly

falling. This signifies either lower margin comparatively or other diversification, expansion

and modification plans or other obligations increasing. Unitech since 2008, has been focusing

on lowering its debt liability which has been one of the factors for its lower EPS. The

company has allocated some portion of its profits to repay debts and pay lower dividends to

its shareholders. The continuous negative EPS by Jet Airways and Kingfisher implies

companies incurring losses(negative earnings) having an undefined P/E ratio.

Leverage RatioLeverage Ratio is the ratio used to calculate the financial leverage of a company to get an idea of the

company’s method of financing or to measure its ability to meet financial obligation. There are

several different ratio but the main factors looked at include debt, equity, assets and interest expense.

10

Company Mar ' 07 Mar ' 08 Mar ' 09 Mar ' 10 Mar ' 11Unitech 3.11 3.79 2.69 0.62 0.59DLF 10.37 0.74 0.77 0.98 1.09Leela 1.39 2.84 3.49 3.48 4.28Jet Airways 2.88 6.49 12.61 16.80 5.18Kingfisher 2.38 4.95 - - -

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Mar ' 07 Mar ' 08 Mar ' 09 Mar ' 10 Mar ' 11

Ratio

Leverage Ratio

Unitech DLF Leela Jet Airways Kingfisher

From the above table/chart we observe that The Leela is moderately increasing its leverage and thus

increasing debt liability and interest pay-outson its operating profits. An increase in operating profit

will result in a high earning, nevertheless, financial leveraging makes companies equally susceptible

to greater decrease in earnings if profit drops. In case of Unitech we see that the company is

moderately deleveraging from 2008 leading to a significant decrease in risk of defaulting and also

looking at equity as a major source for project funding. In case of DLF we see that there was drastic

deleverage from 2007 to 2008 and then a consistency is maintained in the subsequent years. Jet

Airways on the other hand increased leveraging and then decreased it in 2011. For kingfisher the

leverage ratio of three years are not available due to negative return. Besides as observed from

Kingfisher’s balance sheet that the company has been increasing its long term debt and utilizing its

cash inflow to maintain a negative reserves and surplus account by excessive drawings from that

account, due to which a leverage ratio for this company cannot be determined.

Weighted Average cost of CapitalThe Capital funding of the company is made up of two components: Debt & Equity. Lenders and

equity holders each expect a certain return on the funds or capital they have invested or provided. The

cost of capital is the expected return to equity owners and debt holders, so weighted average cost of

capital or WACC tells us the return that stakeholders, equity holders and lenders can expect. In other

words it tells us much interest and dividend the company has to pay for every rupee it raises.

From, the investors’ point of view Ko is important because it tells the investors about the cost of

capital of the company which can be used as a hurdle rate to assess the return on capital investment of

the company. From the above table we can analyse that the cost of capital of Unitech is the highest,

followed by DLF ,Leela, Kingfisher & Jet Airways. A higher cost signifies a higher risk for the

company as well as for the investors because as a rational investor one would always like to invest in

a company which is at a lower risk and a higher WACC says that a company is expected paying

higherreturnon its funds. It might be possible that the company’s return is less than its Koi.e. the

company is shedding value which is an indication for the investors to put its money elsewhere. Seeing

the above facts an investor would like to invest preferably on Jet Airways rather than Unitech but if

Unitech is able to provide its investors with a higher return for increased risk than its still is a

favourable option for investors.

Keeping other parameters equal the WACC of a firm also increases as Beta and return on equity

increases. From the company’s point of view Ko is important because it helps the company determine

11

Unitech DLF Leela Kingfisher Jet Airways13.21% 9.62% 7.13% 8.70% 5.32%

Weighted average cost of capital

WACCUnitech >WACCDLF>WACCKF>WACCLeela>WACCJet

the economic feasibility of expansionary opportunities and mergers apart from indicating the

necessary changes that needs to be incorporated in the overall capital structure of the Company.

Relative Valuation Analysis

Relative Valuation: In relative valuation, the value of an asset is compared to the values assessed by the market for

similar or comparable assets.

To do relative valuation then,

We need to identify comparable assets and need to obtain market values for these

assets.

Convert these market values into standardized values, since the absolute prices cannot

be compared. This process of standardizing creates price multiples.

Compare the standardized value or multiple for the asset being analyzed to the

standardized values for comparable asset, controlling for any differences between the

firms that might affect the multiple, to judge whether the asset is under or over valued

In the table we have two different values of the company assets based on two different

valuation methods. On a comparative basis in the current market, the value of each equity

share of different companies has been estimated to fall in this range. The lower limit and the

upper limit is calculated based on earning and value multiples. Taking into consideration the

current market prices, it is observed that none of the companies’ share prices are undervalued

whereas the share prices of Unitech, DLF, and Jet Airways are overvalued. The reasons can

be many, to list a few-

1. Investors are finally putting money back into the stock funds. They poured money in

2007, pulled it out in droves in 2008 and 2009 after the bottom fell out, and are now

back in.

12

Company Name

Current Market Price

(Rs.)

Relative Valuation (Rs.)

Unitech 28.3 20.56 - 23.95 DLF 199.6 116.51 - 164.52 The Leela 38.0 32.32 - 43.04 Kingfisher 26.9 26.47-27.72 Jet Airways 290.6 275 - 276

2. Bonds are the alternative to stocks, and with rates so low, bonds simply can’t

continue their past gains.

3. As towards the end of 2009 the Indian economy started recovering experts

unanimously predicted greater years ahead. This led to inflow of funds in the financial

market and volume buying of some stock resulting in value appreciation and over

valuation.

The technical indicators on these securities do not justify the current prices and a rationale

investor would prefer to sell the stock when the prices are high as the overvalued stocks

might generate a lofty profit for a while but eventually when company’s fundamentals even

out, its true earning potential surface, the price of the share might reflect its true value. The

current share prices of The Leela and Jet Airways falls within the range indicating neither

undervaluation nor overvaluation considering the comparison base is justifiable.

Inter Industry analysis

Unitech GroupFor an investor, investment decision is based on a number of factors. The sector that he or she wants

to invest in, the choice of firm in a given sector, whether he or she wants to diversify the portfolio or

opt for a single security investment. But among all one of the most crucial factor is the return

expectation of investor accompanied by the associated risk. Every investor wants to maximise return

on investment along with minimising his risk. Value of security fluctuates as the value of market

portfolio changes, as investor sentiments changes. So to overcome the risk associated with security

investments, an investor seeks to diversify his/her portfolio into two or more securities within the

same industry or inter industries. The following section will focus on analysing an investor’s

investment decision starting from a single security portfolio, to a two security portfolio, intra and inter

industries.

.

13

ParameterSingle Security

Portfolio (Unitech)

Same Industry Portfolio (Unitech

and Sobha)

Diff Industry Portfoli (Unitech and Oriental

Hotel)

Diff Industry Portfolio (Unitech

and Spice)

Expected Return (Ri) -67.69% -24.16% -76.74% -7.15%

Risk (SD) (equal share) 3.08% 2.351% 2.87% 2.71%

Risk (SD) (MVP) 3.08% 2.348% 2.64% 2.64%

SD Reduction (Total) 0 0.654% 1.22% 0.85%

The above table summarises the comparison of an investor’s portfolio mix, starting with Unitech. This

section presents an analysis of how an investor diversifies his/her investment into different portfolios.

It also summaries the intra industry comparison of portfolio diversification, as in how does an investor

risk gets reduced when he or she diversifies the portfolio from single security real estate to intra real

estate portfolio and then to portfolios inter industry.

Based on the last two years daily data of Unitech share prices, the expected return of Unitech works

out to be -67.69% and risk is about 3.08%. If the investor feels this security to be very risky and poor

on returns and want to diversify his portfolio the first option he has is to diversify intra industry. So he

can opt for Sobha Developers as another company. By doing so he has improved his expected return

to -24.16% and also has reduced his risk expectations by 0.654%.

Finally from the given set of securities, the investor has the option of diversifying his portfolio inter

industry. In our case the available choice for him is either hospitality sector or aviation sector. By

opting for a portfolio comprising of real estate and hospitality firms, the return expectations for the

investor worsens as his expected return goes up to – 76.74%. This is because the portfolio comprises

of two securities, which have witnessed a high decline in share prices in the last two years. But if the

investor diversifies into real estate and aviation, he stands to gain a now his return expectation in close

to – 7.15%. This portfolio will also result in reduction of investment risk by 0.85%.

So for an investor, choice of industry, firm and portfolio is a crucial factor, that effects his risk and

return expectations. If an investor was given a choice to select a portfolio given in the table above a

portfolio comprising of firms from the real estate sector and aviation sector could be a feasible option,

consisting shares of Unitech and SpiceJet. This portfolio would have maximised his return

expectations, with moderate risk levels. Also it would have led to a 0.85% risk reduction as compared

to a single portfolio investment.

DLF groupThere are many factors which affects investors’ decision to invest in a security. The primary objective

of any investment is to gain return. As a rational investor one would always want to increase his

return with minimum risk. Generally investors are risk averse but there can be other category of

investors whom we classify as risk takers but with increase risk there is always a demand of higher

compensation.

14

Parameter Single Security Portfolio (DLF)

Same Industry Portfolio (DLF and

ANANTRAJ)

Diff Industry Portfoli (DLF and ORIENTAL

HOTEL)

Diff Industry Portfolio (DLF and

SPICEJET)

Expected Return (Ri) -42.48% -42.21% -64.10% -5.50%


Risk (SD) (MVP) 1.26% 2.163% 2.24% 2.26%

SD Reduction (Total) 0.56% 6.580% 1.32% 0.93%

In order to mitigate risk investors generally invest in different portfolios so that the negativity in one

investment can be offset by positivity in another. From the table above we can see that when an

investor invests in a single portfolio his return is -42.42% but his returns marginally changes to -

42.21% when he invests in two securities belonging to same industry. Even though there is not much

change in his return we can see that there is a reduction of risk upto 6.58%.

Investors can further mitigate their risk by investing in different industries because factors affect

differently different industries. we see that when the investor tries to increase its return by making

some investment in hotel industry it was not a rational decision as the portfolio gives return of -

64.10% which is less than when it only invested in real estate industry but the combination of aviation

and real estate industry enhances its return upto -5.5% also there is a reduction in risk upto 0.93%.

Even though the returns have been negative but this is because the recent economic factors have

affected the real estate and other sectors badly.

So from the above analysis we can conclude that investors need to decide on its investment decisions

very rationally keeping in mind the economic factors, nature of industry, expected return risks and etc.

At times diversifying risk can affect investors negatively also which we saw when the investor chose

wrong portfolio and invested in hotel and real estate.

The Leela GroupThere are multiple things that an investor takes into consideration while taking an investment

decision. The most vital factors that affect the decision making are: risk tolerance, return

needs and the investment time horizon. Risk refers to the volatility of the portfolio’s value.

An aggressive investor does not hesitate to take a higher risk for higher returns, whereas a

risk averse is a conservative investor who tries to reduce it. Return needs refers to whether

the investor needs to emphasize on growth or income. Retirees who depend on their

investment portfolio for regular income would prefer a consistent payout whereas a young

investor would basically prefer return that tends towards growth. The time horizon starts

when an investor puts in the money and ends when he is needed to take it out. It is quite an

important factor as the length of the time directly affects the ability to reduce risk.

15

ParameterSingle Security Portfolio (The

Leela)

Same Industry Portfolio (Leela

and Oriental)

Diff Industry Portfoli (Leela and

Sobha)

Diff Industry Portfolio (Leela and Spice Jet)

Expected Return (Ri) 37.22% -24.30% 28.30% 3.10%


Risk (SD) (MVP) 1.36% 2.00% 1.89% 1.98%

SD Reduction (Total) 0 0.1.40% 0.65% 0..64%

From the above table we can observe how risk and return of an investment changes as we

diversify and select a portfolio of securities instead of investing in just one security. The table

summarizes an inter-industry comparison showing how diversifying your portfolio over the

industry can help recovering easily from a loss (negative earning) security of a company and

its respective industry might be facing a downfall.

Based on past two years data we can observe that investment only in Leela is quite profitable

compared to other portfolios taken into consideration. But now if we observe considering the

aviation industry i.e. Kingfisher which is continuously giving a negative return, a

diversification of investment in the hotel industry i.e. The Leela helped in recovering and

earning a positive return. Investment is a risky decision and we cannot assure our predictions

to be correct every time, so to be on a safer side diversifying can be a rational decision as due

to various micro and macro-economic factors, there are chances of every company or the

respective industry may descent. From the minimum variance portfolio calculation we can

further mitigate risks as it suggest the ideal weight to assign in a particular security. From the

above observation if an investor decides to diversify he should consider the combination of

The Leela and Sobha as it gives the maximum return and has the minimum risk.

As the companies and industries considered are quite limited, the analysis could not give a

fair picture of a good portfolio management. In the real market scenario an investor will have

a multiple number of choices and thus after scrutinizing the various conditions can take a

wise investment decision and thus maximizing its returns.

Kingfisher Group

Parametersingle security

portfolio (1)same industry portfolio (2)

different industry portfolio (3)

different industry portfolio (4)

kingfisher kingfisher+spicejet kingfisher+sobha kingfisher+oriental

Return -30.94% 11.23% -5.78% -58.36%

Risk -sd (equal share) 3.07% 2.82% 2.32% 2.87%

Risk -sd (mvp) 3.07% 2.77% 2.32% 2.65%

Risk reduction (total) 0 0.72% 0.68% 1.21%

Multiple portfolio analysis is the comparison of risk and return which an investor can expect by

diversifying his investment into various securities. This can be of two types- intra sector and inter

16

sector. Intra industry is the diversification into securities within the same sector while inter sector is

diversification into securities of different sectors.

The data taken for the analysis is of 1st August 2009 to 31st July 2011. The returns of considered

securities have been negative in most cases, which could have been reverse in an outperforming

market. Hence a rational investor should give more significance to risk mitigation than returns.

The company in focus in this sub-section is kingfisher hence I shall assume that the investor is

interested in kingfisher as a priority. Therefore comparing kingfisher against other possibilities to

reduce risk and maximize returns.

Single security portfolio- Kingfisher has given a negative return/loss of -30.94% and has a risk of

3.07% which is the highest from amongst the available options. Thus there is a dire need of

diversification to minimize the risk and loss.

The investor can diversify either through intra-sector or inter-sector securities.

Intra sector – for this a combination of kingfisher and spicejet from aviation sector has been taken.

This combination has provided the maximum return of 11.23% and has a lower risk than the single

security portfolio at 2.77%. Even then it not the safest option because it is not shielded from the sector

specific risk.

Inter sector – for this there are two options available. First the combination of kingfisher and sobha

from the aviation and real estate sector respectively and second the combination of kingfisher and

oriental from the aviation and hospitality sector respectively. The first combination (kingfisher +

sobha) has the least risk and minimum negative return of -5.78% (which can be acceptable when the

market is down performing) making it one of the preferred portfolio options. The second portfolio

combination (kingfisher + oriental) has a negative return of -58.36% and risk of 2.65% not making it

a very viable option.

Therefore in the present scenario portfolio 2 is the best option but for a longer term/different market

scenario portfolio 3 is also a good option.

Jet Airways

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Parameter

Single portfolio Jet airways

Same Industry portfolio Jet Airways and spice jet

Mixed Portfolio Jet Airways and DLF

Mixed Portfolio Jet Airways and

Indian Hotels

Expected Return (Ri) 75.81% 64.61% -37.01% -10.38%

Risk (SD) (Equal share) 3.30% 2.82% 2.18% 1.98%

Risk (SD) (MVP) 3.30% 2.87% 2.18% 1.98%

Risk reduction (Total) 0 0.78% 0.68% 0.87%

The above table summarises the comparison of an investor’s portfolio mix, starting with Jet Airways.

This section presents an analysis of how an investor diversifies his/her investment into different

portfolios. It also summaries the intra industry comparison of portfolio diversification, as in how does

an investor risk gets reduced when he or she diversifies the portfolio from single security Aviation to

intra Aviation portfolio and then to a portfolio inter industry.

Based on the last two years daily data of Jet Airways share prices, the expected return of Jet Airways

works out to be 75.81% and risk is about 3.30%. If the investor feels this security to be very risky and

want to diversify his portfolio the first option he has is to diversify intra industry. So he can opt for

Spice jet as another company. But by doing so his expected return would come down to 64.61% but

his risk expectation will be reduced by 0.78%.

Finally from the given set of securities, the investor has the option of diversifying his portfolio inter

industry. In our case the available choice for him is either hospitality sector or Real Estate sector. By

opting for a portfolio comprising of real estate and aviation, the return expectations for the investor

worsens as his expected return goes up to – 37.01 %. This is because the portfolio comprises of two

securities, one which have witnessed a high decline in share prices in the last two years. But if the

investor diversifies into Aviation and Hospitality, he is better off in terms of an inter industry

portfolio, as now his return expectation in close to – 10.38 %. This portfolio will also result in

reduction of investment risk by 0.87%.

So for an investor, choice of industry, firm and portfolio is a crucial factor, that effects his risk and

return expectations. If an investor was given a choice to select a portfolio given in the table above a

portfolio comprising of firms from the Aviation Industry would be feasible option. In the present

scenario we can see from the table that if an investor goes for the intra industry investment his/her

expected return is positive and better than the investment in other sectors. Investment in the intra –

industry would further reduce the risk by 0.78%. The single investment gives the maximum expected

return of 75.81 % but is highly risky. Investment in the intra industry spice jet will reduce the risk and

a rational investor one should go for intra – industry investment.

ConclusionThe above report summarises various aspects of financial decision making from an investors’ point of

view. Given the set of companies, this report summarises crucial investment decision making aspects

such as risk and return from a security, portfolio diversification, beta value of each security. From a

company’s point of view the report summarises aspects of CAPM based cost of equity and weighted

cost of capital analysis and some performance indicators in terms of leverage ratios and EPS. Finally

the report also compares market value of the five companies with respect to their relative valuation to

arrive at range to determine, whether the securities are overvalued or undervalued.

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finance report group 90

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