Factors affecting the share price of FMCG Companies

Factors affecting the share price of FMCG Companies Authors: Dharia Dilasha, Kakadia Sachita ABSTRACT To review the factors affecting the share prices of various FMCG companies like revenues, operating profit, operating profit margin, net profit, net profit margin, reserves, debt, EPS and P/E. Internet based secondary data was used to do exploratory studies. Findings were analysed by framing various hypotheses like regression equation, ANOVA and t-test to find the conclusion related to the share prices of top 8 FMCG companies. These hypotheses helped us to come to the conclusion that factors like EPS and P/E are responsible for the fluctuation in the share price of different companies and the share price of all the FMCG companies is not same or similar. INTRODUCTION The fast moving consumer goods (FMCG) segment is the fourth largest sector in the Indian economy. The market size of FMCG in India is expected to grow from US$ 30 billion in 2011 to US$ 74 billion in 2018. The FMCG sector in India generated revenues worth US$ 34.8 billion in 2011, a growth of 15.2 per cent as compared to the previous year. Over 2006-11, the sector's revenues posted a compound annual growth rate (CAGR) of 17.3 per cent. Food products are the leading segment, accounting for 43 per cent of the overall market. Personal care (22 per cent) and fabric care (12 per cent) are the other leading segments. Have you ever wondered about what factors affect a share's price? Share prices are determined in the marketplace, where seller supply meets buyer demand. But unfortunately, there is no clean equation that tells us exactly how a share price will behave. That said, we do know a few things about the forces that move a share price of a particular company up or down. These forces fall into three categories: fundamental factors, technical factors and market sentiment. But here, we will concentrate only on fundamental factors. In an efficient market, share prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: Earnings per share and price to earnings ratio. An owner of a common stock has a claim on earnings, and an EPS is the owner's return on his or her investment. When an investor buys a stock, he is purchasing a proportional share of an entire future stream of earnings. That's the reason for the valuation multiple: it is the price that an investor is willing to pay for the future stream of earnings. OBJECTIVES

The objective of the paper is related to the factors like revenues, operating profit, operating profit margin, net profit, net profit margin, reserves, debt, EPS and P/E affecting the share prices of various FMCG companies. Also the objective is to check whether the share price of all the top 8 FMCG companies is similar or not. RESEARCH METHODOLOGY The research was quantitative in nature and secondary data (internet) was collected from established sources like NSE and company annual reports. The following data was collected from 2009 to 2013 on a yearly basis for: share prices, revenues, operating profit, operating profit margin, net profit, net profit margin, reserves, debt, EPS, P/E. The raw data of the top 8 FMCG companies (ITC Ltd., HUL, Godrej Consumer Products Ltd., Dabur India Ltd., Colgate Palmolive, Marico Ltd., Emami, and P&G) has been analyzed using the following statistical tools Multiple regression - to measure the degree of relationship of share price with each variable ANOVA - to check whether all the companies have similar share price in FMCG sector T-test - to determine whether there is a statistically significant difference between the share price of all the companies MAJOR FINDINGS

Hypotheses 1: Factors that affect the most to the share price of FMCG companies. Test Stepwise Regression Solution: Y = Dependent variable Share price X = Independent variable (revenues, operating profit, operating profit margin, net profit, net profit margin, reserves, debt, EPS and P/E) STEP 1: SUMMARY OUTPUT Regression Statistics Multiple R 0.98 R Square 0.96 Adjusted R Square 0.95 Standard Error 132.79 Observations 40.00 ANOVA df SS MS F Significance F Regression 7.00 13,934,565.33 1,990,652.19 112.89 0.00 Residual 32.00 564,265.04 17,633.28 Total 39.00 14,498,830.36 Intercept Revenues OPM NPM Reserves Debt EPS P/E Coefficients Standard Error t Stat P-value Lower Lower 53.92 248.82 0.22 0.83 (452.91) 560.74 (452.91) 560.74 (0.01) 0.01 (2.02) 0.05 (0.02) 0.00 (0.02) 0.00 (1,729.35) 1,161.94 (1.49) 0.15 (4,096.14) 637.45 (4,096.14) 637.45 (1,920.54) 1,185.80 (1.62) 0.12 (4,335.93) 494.85 (4,335.93) 494.85 0.04 0.01 2.90 0.01 0.01 0.07 0.01 0.07 (0.23) 0.17 (1.37) 0.18 (0.57) 0.11 (0.57) 0.11 34.36 1.78 19.34 0.00 30.74 37.98 30.74 37.98 18.14 3.33 5.45 0.00 11.37 24.91 11.37 24.91

Since the p-value of OPM, NPM and Debt is more than alpha, we will not consider these factors as the above shows that these factors do not any affect on the share price of FMCG companies. Therefore, second step will be run without these factors. STEP 2: SUMMARY OUTPUT Regression Statistics Multiple R 0.97 R Square 0.94 Adjusted R Square 0.94 Standard Error 151.11 Observations 40.00 ANOVA df SS MS F Significance F Regression 4.00 13,699,679.14 3,424,919.79 150.00 Residual 35.00 799,151.22 22,832.89 0.00 Total 39.00 14,498,830.36 Intercept Revenues Reserves EPS P/E Coefficients Standard Error t Stat P-value Lower Lower (751.04) 104.42 (7.19) 0.00 (963.03) (539.05) (963.03) (539.05) 0.00 0.00 0.21 0.83 (0.01) 0.01 (0.01) 0.01 0.00 0.01 0.12 0.91 (0.01) 0.01 (0.01) 0.01 32.50 1.54 21.10 0.00 29.37 35.62 29.37 35.62 23.99 3.30 7.26 0.00 17.28 30.70 17.28 30.70 Since the p-value of revenues and reserves is more than alpha, we will not consider these factors as these factors also does not show any affect on share price of the companies. Therefore, third step will be run without these factors.

STEP 3: SUMMARY OUTPUT Regression Statistics Multiple R 0.97 R Square 0.94 Adjusted R Square 0.94 Standard Error 147.40 Observations 40.00 ANOVA df SS MS F Significance F Regression 2.00 13,694,976.53 6,847,488.27 315.18 0.00 Residual 37.00 803,853.83 21,725.78 Total 39.00 14,498,830.36 Intercept EPS P/E Coefficients Standard Error t Stat P-value Lower Lower (737.61) 97.06 (7.60) 0.00 (934.27) (540.94) (934.27) (540.94) 32.29 1.44 22.50 0.00 29.38 35.20 29.38 35.20 23.96 3.22 7.44 0.00 17.43 30.48 17.43 30.48 Conclusion: Since the p-value of EPS and P/E is less than alpha, it means that EPS and P/E affect the share price of FMCG companies. Regression equation to predict share price of any FMCG companies: Y = C + Mx 1 + Mx 2 EPS PE y = (737.61) 32.29 23.96 = 355.06 9.39 32.96 Here, the share price of ITC Ltd. was predicted using the EPS as 9.39 and P/E as 32.96 which gave the share price as 355.06. If the price is below this in the market, it means that the share of this company is undervalued and so the investor should invest in the shares of this company. If the price is above 355.06 in the market, it means that the share of this company is overvalued and so the investor holding the shares of this company should sell it off. Same came be done to come up with the price of different FMCG companies using the respective company s EPS and P/E pattern.

Hypotheses 2: Comparing the share prices of top 8 FMCG companies, therefore Test ANOVA: Single factor Solution: H o : Share price across companies are same H a : Atleast one of the company has different share price Anova: Single Factor SUMMARY Groups Count Sum Average Variance ITC Ltd 5.00 1,166.35 233.27 2,923.42 HUL 5.00 1,641.15 328.23 10,931.38 Godrej Consumer Products 5.00 2,018.35 403.67 60,186.04 Ltd Dabur India Ltd 5.00 597.65 119.53 743.76 Colgate Palmolive 5.00 4,320.50 864.10 99,913.02 Marico Ltd. 5.00 697.00 139.40 3,467.25 Emami 5.00 2,232.30 446.46 28,966.79 P&G 5.00 9,330.00 1,866.00 460,020.47 ANOVA Source of Variation SS df MS F P-value F crit Between Groups 11,830,221.81 Within Groups 2,668,608.55 Total 14,498,830.36 Conclusion: 7.00 32.00 39.00 1,690,031.69 83,394.02 20.27 0.00 2.31 The reason to run this hypotheses was to compare whether the share price of the above 8 FMCG companies are same or not. So, by carrying out this hypotheses, we came to the conclusion that since, fo > fc i.e. (20.27 > 2.31), we REJECT the NULL which means that we accept the alternate hypotheses which says that atleast one of the company has different share price. Now to find which companies have different share prices, we will conduct a t-test.

T-test for checking the share prices of ITC Ltd and Dabur India Ltd. t-test: Paired Two Sample for Means ITC Ltd Dabur India Ltd Mean 233.27 119.53 Variance 2,923.42 743.76 Observations 5.00 5.00 Pearson Correlation 0.81 Hypothesized Mean Difference - df 4.00 t Stat 7.09 P(T<=t) one-tail 0.00 t Critical one-tail 2.13 P(T<=t) two-tail 0.00 t Critical two-tail 2.78 Randomly, two companies i.e. ITC Ltd and Dabur India Ltd were selected to check whether the share prices of these companies are same or not. But since the P-value < alpha, it means that the share prices are different for both the companies and similar results were found for the companies like HUL, Colgate Palmolive and P&G which means that these companies have different share prices when compared to each other. T-test for checking the share prices of Dabur India Ltd and Marico Ltd. t-test: Paired Two Sample for Means Dabur India Ltd Marico Ltd. Mean 119.53 139.40 Variance 743.76 3,467.25 Observations 5.00 5.00 Pearson Correlation 0.19 Hypothesized Mean Difference - df 4.00 t Stat (0.74) P(T<=t) one-tail 0.25 t Critical one-tail 2.13 P(T<=t) two-tail 0.50 t Critical two-tail 2.78 When the t-test was run for the companies like Dabur India Ltd and Marico Ltd, it was found that the P-value > alpha, which means that both the companies have almost similar share prices. Same result was found for Godrej Consumer Products Ltd and Emami which means that these two companies also have similar prices.

CONCLUSIONS This study investigated the relationship between the share prices and EPS & P/E of the FMCG sector of India. Various hypotheses were conducted which suggest that share prices are affected through EPS and P/E of the individual companies and also that the share prices of different companies is not same as it is related to their individual EPS & P/E. We can make a primary conclusion that share prices moves with the movement in EPS & P/E in the long-run, but not necessary at the same rate. Furthermore, there exists an inverse relation between the growth rate of operating revenue and the degree of EPS impact on share prices. Finally, we found evidence that EPS & P/E could impact share prices by running the regression equation hypotheses and that the share price is different for all the companies through ANOVA. It could provide investors or securities analysts a method to predict the variation for share prices under long-run strategy of investment. LIMITATIONS The study is restricted with only selected factors of companies in FMCG sector of India. The study is based on the past data, which may not guarantee to the future of share prices of that particular company. REFERENCES Company annual reports http://www.nseindia.com/ http://economictimes.indiatimes.com/ Applied Business statistics by Ken Black