AN EQUITY RESEARCH ANALYSIS OF FINANCIAL SERVICES

COMPANIES IN THE NATIONAL STOCK EXCHANGE

Saugat Das, Assistant Professor, Royal School of Business
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ABSTRACT
The Indian stock market has been a game of gambling for many investors who invest their
surpluses in this market without doing any kind of research of the equities listed in it.
Consequently, such investors remain vulnerable to the chances of losing their hard earned money
and develop a misconception that due to the volatility of the market, their money is unsafe. Thus,
investors are advised to do an appropriate equity research analysis of the stocks, they are
thinking to invest in, to ensure their returns and to safeguard their investment in the stock market.
This study is an attempt to provide models that may help retail investors to carry out a proper
analysis and find which script can yield better returns. The models are developed through
regression analysis of daily returns of 10 financial services sector stocks listed in the S & P CNX
NIFTY with the daily returns of the Index for the previous five years (April 01, 2009 to March
31, 2014).The Price-Earnings (P/E) ratio of each individual stock under study has been evaluated
and Buy/Sell recommendation for the stocks has been given accordingly.
Keywords: Equity Research analysis, retail investors, Regression analysis, S & P CNX NIFTY,
P/E Ratio.

INTRODUCTION
The Financial Services sector, of any economy be it India, is an amalgamation of institutions and
of institutional arrangements which exist to meet the borrowing requirements of the investors by
mobilizing the savings of the lenders in the economy. The Indian Financial services sector plays
a role of circulatory system for the Indian economy. It is well evident from its good performance
during the turbulent phases of Global crises 2008 and 2010. The Indian Financial system was
able to insulate itself from such crises only because of the ultra-conservative policy of the
Reserve Bank of India (RBI) and the Securities & Exchange Board of India (SEBI).
The Financial Services sector also accounts for highest weightage in S & P CNX NIFTY index,
the flagship index of the National Stock Exchange (NSE). This sector is relatively more stable

than the other sectors in the Indian stock market. Nevertheless, every investor must do an equity
research analysis of the security, from the available market information, in which one is thinking
to invest ones hard-earned money. Such analysis helps him/her to know about the ins and outs
of the covered security and then to take a wise decision.
This study is an endeavour to help such investors in analyzing the behavioral pattern of the price
movements of Financial Services sector companies listed in NSE. The study provides regression
models for each of 10 financial services companies listed in NIFTY. These models will guide
especially the retail investors in knowing which financial service stock yields more return
amongst the others in relation to the return yielded by NIFTY (market).

OBJECTIVES OF THE STUDY

1. To understand the effect of stock market (NIFTY) on the stock prices of the companies
under research.
2. To analyze the statistical significance of the regression model between NIFTY return and
Stocks return.
3. To recommend the proper Buy/Sell signals for the stocks of the companies under study.

HYPOTHESIS OF THE STUDY

There is no significant impact of NIFTY Return on individual stocks Return.

LIMITATIONS OF THE STUDY

1. The study is confined to only 10 companies of Financial Services Sector listed in NIFTY.
2. Prices of the stocks under study are restricted to the previous five years historical data.

LITERATURE REVIEW
(Sanwar, 2013) stated that Equity Analysis assists the investors in decision-making by studying
the value, risk and volatility of the covered security through fundamental and technical analysis.
A Journal article titled Stock Trend Prediction Using Regression Analysis -A Data Mining
Approach used regression analysis to describe the behavioral pattern of stock prices and predict
the future stock prices of 3 banks of Nigerian economy (Olaniyi, Adewole, & Jimoh, 2011, p.
154). A project entitled A Study on Equity Analysis of Selected Banks used Capital Asset

Pricing Model (CAPM) to predict the future returns of individual securities and analyzed
whether the security is fairly, over or under priced. In a project carried out by (Mandhan, 2007,
pp. 1, 2), Equity Analysis was undertaken for telecom companies by studying their financials and
management plans and policies. Based on such fundamental analysis, recommendations for
Buy/Hold/Sell were provided. (Ravichandran, Nor & Said, 2010) used regression analysis to find
relationship between factors affecting performance of banks and returns on shareholders funds.
It was concluded that return on shareholders funds has positive relationship with advances to
total assets ratios and negative relationship with cost efficiency and interest coverage ratios. In a
report by Equity Master, it was stated that Indian banking industry is plagued by bad loans that
have gone up from 1.3% in March 2009 to 3.4% in March 2013. Public sector banks have
performed worst compared to its private and foreign counterparts.

RESEARCH METHODOLOGY
The research design is descriptive in nature as it has drawn conclusions and derived models from
the available information in the equity market. Secondary data has been collected from the
National Stock Exchange and individual companies websites and from published reports. The
study is conducted with the historical data of the previous five years from April 2009 to
March2014. The sample size of the study is 1247 days closing prices of 10 financial services
scripts listed in NIFTY of the previous five years.

TOOLS USED FOR DATA ANALYSIS

WILLIAM SHARPE SINGLE-INDEX MODEL (SIM)

The Sharpe Single-Index Model (SIM) was developed by William Sharpe as a tool for reducing
the number of estimates needed for Markowitz portfolio optimization. The single index model
assumes that the co-movement between the stocks is due to the movement in the market index.
The SIM expression for the return on asset i is:

where,
is the return on the stock i'
= component of security that is independent of market performance
= co-efficient in the market expected change in

given a change in

= rate of return on market index

The term

in the above equation is usually broken down into two elements:

expected value and

which is the random element of

which is

. The single index model equation

therefore becomes:

It is normally expected, the disturbance term

to have a mean of zero, since the random error

represents the net effect of many individual random effects (outside of the market portfolio) on
the assets return, and on average they should cancel out.
R2- coefficient of determination
The closer R2 is to 1, the better is the model and its prediction. Statistically, it is equivalent to
testing the null hypothesis that the regression coefficient is zero. This can be done using t-test.
T-statistic
A t-test is a statistical test which can be used to determine whether the two sets of data are
significantly different from each other, and is most commonly applied when the test statistic
follows normal distribution. This test can also be used to test whether the slope of a regression
line differs significantly from 0.
Prediction Error or Root Mean Square (RMS) Error
RMS error is calculated by first finding the residuals (actual figures minus predicted figures),
squaring the residuals, taking the mean of the squares and then finally the square root of the
mean is called the RMS or Prediction error.
RMS error helps in checking the accuracy of a regression model. RMS error will be
(approximately) the true error of prediction if the regression model is right. The smaller the RMS
error, the more correct is the regression model.

P/E Ratio
Price-Earnings Ratio is a valuation ratio of a company's current share price in market to its pershare earnings. A high P/E ratio suggests that investors are expecting higher earnings growth in
the near future compared to companies with a lower P/E ratio. P/E valuation can be used to
compare companies in the same industry by using their respective P/E ratios n average industry
P/E ratio.

DATA ANALYSIS AND INTERPRETATION

Table 1: Results of t-statistic
R2
0.53189

Result

BANK OF BARODA

0.33295

Reject

HDFC BANK

0.18794

Reject

HDFC

0.21924

Reject

ICICI BANK

0.65685

Reject

IDFC

0.50385

Reject

INDUSIND BANK

0.37577

Reject

KOTAK MAHINDRA BANK

0.35633

Reject

PNB

0.39821

Reject

SBI

0.52276

Reject

NAME OF COMPANY
AXIS BANK

Reject

The table shows the coefficients of determination of t-statistics of the 10 stocks and rejection of
null hypothesis of the study for all the stocks since all the probability values are less than the
level of significance (0.05). Therefore, there is a significant impact of NIFTY Return on the
stocks return of the 10 companies belonging to the Financial Services sector in CNX NIFTY for
the period under study.

Table 2: Regression Analysis of 10 Financial Services sector companies in NIFTY

NAME OF COMPANY

REGRESSION EQUATION

AXIS BANK
BANK OF BARODA

0.33295

HDFC BANK

0.18794

HDFC

0.21924

ICICI BANK

0.65685

IDFC

0.50385

INDUSIND BANK

0.37577

KOTAK MAHINDRA BANK

0.35633

PNB

0.39821

SBI

0.52276

The above table shows the regression models of all the individual securities covered under study.
The coefficient of determination (R2) of ICICI BANK is highest among the other stocks and thus
65% of the variation in ICICI BANK Return is explained by the change in NIFTY Return. Also,
through its regression equation, it is revealed that if NIFTY Return increases by 1 unit then the
ICICI BANK Return is increased by 1.5 units.
Table 3: Root Mean Square (RMS) Error or Prediction Error of the regression models
NAME OF COMPANY

RMS Error

AXIS BANK

0.0158

BANK OF BARODA
HDFC BANK
HDFC
ICICI BANK
IDFC
INDUSIND BANK
KOTAK MAHINDRA BANK
PNB
SBI

0.0158
0.0083
0.010
0.009
0.016
0.015
0.02
0.014
0.011

The accuracy test of all the regression equations was done by calculating the prediction residuals
and then finding square root of the average of the prediction residuals for all the respective
stocks under study. The prediction errors or RMS (root mean square) errors calculated are small
and thus all the regression models in the study are approximately correct.
Table 4: Valuation of ten Financial Services sector companies in CNX NIFTY

STOCK NAME

P/E

EPS

AVERAGE
P/E

P/E
VALUATION

MARKET
PRICE

BUY/SELL

AXIS BANK
BANK OF BARODA
HDFC BANK
HDFC
ICICI BANK
IDFC
INDUSIND BANK
KOTAK MAHINDRA
BANK
PNB
SBI

14.54
8.7
22.88
28.94
18.37
14.75
19.48

137.4
106.8
36.8
35.81
84.83
11.21
28.3

23.75
12.08
23.75
23.75
23.75
23.75
23.751

3263.25
1290.14
874
850.488
2014.71
266.238
672.125

1980.05
863.9
837.5
1055.3
1472.5
152.35
544

BUY
BUY
BUY
SELL
BUY
BUY
BUY

47.29

19.85

23.75

471.438

940.1

SELL

10.07
17.47

92.3
145.9

12.08
12.082

1114.98
1762.47

916.05
2510.15

BUY
SELL

From the above table, it is summarized that out of 10 Financial Services companies in S & P
CNX NIFTY, 7 scripts have higher market valuation than their market prices as on July 2014
which is a good sign for the investors in this sector.
CONCLUSION
The regression analysis between the individual stocks returns & the NIFTY shows that the
market has a significant impact on the share prices of individual securities. The financial services
stocks are the basic building blocks of a nations economy and hence, the healths of these
companies project the economys fundamental strength. The recommendation of buying on 7 out
of the 10 stocks based on previous five years data shows a positive outlook from the perspective
of the Indian investing community. Finally, the paper validates the Sharpes single index model
& utilizes the P/E valuation for analyzing the 10 financial services stocks of the NIFTY Index.

23.75 is an average P/E for Private Sector Companies.

12.08 is an average P/E for Public Sector Companies.

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