Analysis of Sectoral Indices versus NIFTY

Individual Assignment:Kumar Niraj Mohan09P149Section B

Objective

• Study the variance of the sectoral indexes and market index in terms of returns

• To understand the mutual influence between two sectoral index returns and on market index return

• Sectoral Beta and relative stability/volatility for portfolio risk management

Scope• Period Covered

▫ Jan 2008 – Till Date

• Sectoral Indices Analysed▫ CNX IT Index▫ CNX Bank Index▫ CNX Infrastructure Index▫ CNX Realty Index

• These 4 indices explain 99.2% variation in NIFTY

Indices at NSE• Major Indices

▫ S&P CNX Nifty▫ CNX Nifty Junior▫ CNX 100▫ S&P CNX 500▫ CNX Midcap *▫ Nifty Midcap 50▫ S&P CNX Defty

• Other Indices▫ CNX IT Index▫ CNX Bank Index▫ CNX FMCG Index▫ CNX PSE Index▫ CNX MNC Index▫ CNX Service Sector

Index▫ S&P CNX Industry

Indices▫ Customised Indices▫ CNX Energy Index▫ CNX Pharma Index▫ CNX Infrastructure

Index▫ CNX PSU BANK Index▫ CNX Realty Index▫ S&P CNX Nifty

Shariah / S&P CNX 500 Shariah

▫ S&P ESG India Index

Constituents list of CNX ITCompany Name IndustryCMC Ltd. COMPUTERS - HARDWARECore Projects & Technologies Ltd. COMPUTERS - SOFTWAREEducomp Solutions Ltd. COMPUTERS - SOFTWAREFinancial Technologies (India) Ltd. COMPUTERS - SOFTWAREFirstsource Solutions Ltd. COMPUTERS - SOFTWAREGTL Ltd. TELECOMMUNICATION - SERVICESHCL Infosystems Ltd. COMPUTERS - HARDWAREHCL Technologies Ltd. COMPUTERS - SOFTWAREInfosys Technologies Ltd. COMPUTERS - SOFTWAREMindTree Ltd. COMPUTERS - SOFTWAREMoser Baer India Ltd. COMPUTERS - HARDWAREMphasiS Ltd. COMPUTERS - SOFTWAREOracle Financial Services Software Ltd. COMPUTERS - SOFTWAREPatni Computer Systems Ltd. COMPUTERS - SOFTWAREPolaris Software Lab Ltd. COMPUTERS - SOFTWARERolta India Ltd. COMPUTERS - SOFTWARETata Consultancy Services Ltd. COMPUTERS - SOFTWARETech Mahindra Ltd. COMPUTERS - SOFTWARETulip Telecom Ltd. TELECOMMUNICATION - SERVICESWipro Ltd. COMPUTERS - SOFTWARE

Constituents list of CNX BANKCompany Name Industry

Axis Bank Ltd. BANKS

Bank of Baroda BANKS

Bank of India BANKS

Canara Bank BANKS

HDFC Bank Ltd. BANKS

ICICI Bank Ltd. BANKS

IDBI Bank Ltd. BANKS

Kotak Mahindra Bank Ltd. BANKS

Oriental Bank of Commerce BANKS

Punjab National Bank BANKS

State Bank of India BANKS

Union Bank of India BANKS

Constituents list of CNX REALTY

Company Name Industry

Anant Raj Industries Ltd. CONSTRUCTION

DLF Ltd. CONSTRUCTIONHousing Development and Infrastructure Ltd. CONSTRUCTION

Indiabulls Real Estate Ltd. CONSTRUCTION

Mahindra Lifespace Developers Ltd. CONSTRUCTION

Parsvnath Developer Ltd. CONSTRUCTION

Peninsula Land Ltd. CONSTRUCTION

Phoenix Mills Ltd. CONSTRUCTION

Sobha Developers Ltd. CONSTRUCTION

Unitech Ltd. CONSTRUCTION

Constituents list of CNX INFRACompany Name IndustryABB Ltd. ELECTRICAL EQUIPMENTBharat Heavy Electricals Ltd. ELECTRICAL EQUIPMENTBharti Airtel Ltd. TELECOMMUNICATION - SERVICESCrompton Greaves Ltd. ELECTRICAL EQUIPMENTDLF Ltd. CONSTRUCTIONGMR Infrastructure Ltd. CONSTRUCTIONIRB Infrastructure Developers Ltd. TRAVEL AND TRANSPORTIdea Cellular Ltd. TELECOMMUNICATION - SERVICESIndian Hotels Co. Ltd. HOTELSJaiprakash Associates Ltd. DIVERSIFIEDLanco Infratech Ltd. CONSTRUCTIONLarsen & Toubro Ltd. ENGINEERINGMahanagar Telephone Nigam Ltd. TELECOMMUNICATION - SERVICESNTPC Ltd. POWERNeyveli Lignite Corporation Ltd. POWERPunj Lloyd Ltd. CONSTRUCTIONReliance Communications Ltd. TELECOMMUNICATION - SERVICESReliance Infrastructure Ltd. POWERReliance Power Ltd. POWERShipping Corporation of India Ltd. SHIPPINGSiemens Ltd. ELECTRICAL EQUIPMENTSuzlon Energy Ltd. ELECTRICAL EQUIPMENTTata Communications Ltd. TELECOMMUNICATION - SERVICESTata Power Co. Ltd. POWERUnitech Ltd. CONSTRUCTION

Sectoral Index Volatility vs NIFTY

1-Jan-08 16-Apr-08 30-Jul-08 17-Nov-08 5-Mar-09 25-Jun-09 8-Oct-09 25-Jan-1012-May-100

2000

4000

6000

8000

10000

12000

NIFTY IT BANK INFRA REALTY

Beta Analysis

Beta Calculation

Covariance

IT BANK INFRA REALTY

0.0004204 0.000566 0.000543 0.000778

VARIANCE - NIFTY

0.000505416

BETA

0.8317116 1.120605 1.075122 1.539308

Beta Analysis• The analysis throws some startling results

• Beta for IT is less than NIFTY and other three are more than NIFTY for the period 01/01/2008 – Till Date

• This might seems counter-intuitive as bank stocks are relatively stable and IT is relatively more volatile.

• However, a closer look at the next graph shows this is indeed true. The “Normalized Indices (Index/Average)” plots the daily value divided by the mean over the period.

• The highest variation is in REALTY showing it have moved more with respect to its mean – variance from mean is high. This is followed by INFRA, BANK and then IT, being the least

Normalized Indices (Index/Average)

1-Jan-08 11-Apr-08 24-Jul-08 6-Nov-0820-Feb-0911-Jun-0917-Sep-09 5-Jan-10 20-Apr-10 27-Jul-100

0.5

1

1.5

2

2.5

3

3.5

Normalized NIFTYNormalized ITNormalized BANKNormalized INFRANoramalized REALTY

Regression Analysis• Determine whether there exists relationship between

indices and NIFTY

• CNX NIFTY regressed with CNX IT, CNX BANK, CNX INFRA, CNX REALTY

• Results show these 4 indices are correlated to a major portion of variation in NIFTY

Regression AnalysisSUMMARY OUTPUT

Regression StatisticsMultiple R 0.996006506R Square 0.992028961Adjusted R Square 0.991979374Standard Error 79.61902577Observations 648

ANOVA df SS MS F Significance F

Regression 4 507287426.6 126821856.6 20006.00571 0Residual 643 4076098.698 6339.189265Total 647 511363525.3

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 150.5918082 30.40511213 4.952845018 9.35906E-07 90.88650077 210.2971156 90.88650077 210.2971156IT 0.323941202 0.005836275 55.50478647 2.0282E-247 0.312480741 0.335401662 0.312480741 0.335401662BANK 0.083096314 0.004567562 18.19270649 5.65604E-60 0.074127175 0.092065453 0.074127175 0.092065453INFRA 0.732832329 0.017484644 41.9129107 4.8415E-186 0.69849843 0.767166229 0.69849843 0.767166229REALTY -0.352469623 0.032852017 -10.72901019 8.10776E-25 -0.416979819 -0.287959426 -0.416979819 -0.287959426

Regression Analysis - Results• High R2 /Adjusted R2 of 99. 2/99.1%

▫ Most of the variation in NIFTY explained by 4 chosen sectoral indices

▫ Significance F = 0 implies the reliability of R2 – model fits properly and R2 is authentic

▫ Near zero p-values for intercept, IT, REALTY, INFRA, BANK show they are significantly different from zero, giving their coefficients credence

▫ REALTY negatively correlated. Intercept, IT, INFRA BANK positively correlated

CNX IT versus NIFTY

CNX IT versus NIFTY• August 2009 shows IT index crossing over NIFTY showing

improvement in IT spending

• Signals end of the trough of business cycle

• Here, the IT index improves after the nadir of the business cycle trough – showing the IT spending may have been delayed – should usually start before the nadir of the trough (Around March 2009)

• Period of consolidation from August 2009 till date as the gap between NIFTY and CNX IT seems almost stable

CNX BANK versus NIFTY

CNX BANK versus NIFTY

• Remains consistently over NIFTY showing a high valued sector

• March 2009 shows BANK index improving – exactly at the trough – ideally Financial Services should improve just before the trough

• Signals end of the trough of business cycle

• BANK index seems to have entered a period of expansion rather than consolidation as the gap is ever widening since March 2009

CNX INFRA versus NIFTY

CNX INFRA versus NIFTY• Remains consistently below NIFTY showing a relatively

low return sector for the period 2008-till date

• March 2009 shows INFRA index improving – exactly at the trough – little earlier than the expected for capital goods sector

• Signals end of the trough of business cycle

• INFRA index seems to have entered a period of stagnation even as NIFTY moves steeply into the expansion phase. Infra spending is yet to pick up

CNX REALTY versus NIFTY

CNX REALTY versus NIFTY • Remains consistently far below NIFTY showing investors’

lack of confidence in the sector

• Realty caused the primary panic and the recession thereafter

• Though NIFTY is improving, Realty has virtually stagnated showing that there is time before investor will regain confidence in the sector and start investing

Picking up of Sectoral Index vs. NIFTY

Thank You