ACC It offers short-term investment opportunities, generally up

ACC Limited

Listing Details

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Sector

Construction Materials  

Industry

Cement & Construction Materials  

Sub-Industry

 

House

ACC  

BSE Code

500410  

NSE Symbol

ACC  

ISIN NO

INE012A01025  

Face Value

10  

Listing

BSE,NSE  

Market Capitalization

? 32448.70 Crore

Indices

BSE100, BSE200, BSE500, SHA50, CARBONEX, BASMTR, S&P LARGEMIDCAP, LRGCAP, ALLCAP, SNXT50, ESG100, S&PDIVSTABLE, LMI250 , NIFTYJR, NIFTY500, NIFTY100, NIFTY200, NIFTYCDTY, NIFTYLOWVOL, NIFTY100WEIGHT, NIFTY100 LOW VOL 30, NIFTYLGEMID250 

 

Beta of the Stock (Regression Beta)

Beta is a numeric value that measures the fluctuations of a stock to changes in the overall stock market. It measures the responsiveness of a stock’s price to changes in the overall stock market. It helps the investor to decide whether he wants to go for the riskier stock that is highly correlated with the market (beta above 1), or with a less volatile one (beta below 1).

To calculate beta of the ACC Ltd. we have taken information from aceanalyser.com to showcase the closing price on a weekly basis of share prices starting from 07.01.2012 to 01.01.2018. As this period falls under two different government regimes, so the calculated value would reflect more accurate figure of risk volatility.

 

n

353

n*(? XY)

45.05212469

?X * ?Y)

0.538727957

n*(?X^2)

43.88895232

(?X)^2

0.721758233

BETA(ß)

1.0312

 

Inference:

As the stock’s beta value is 1.0312, it means, theoretically this stock is 3.12% more volatile than the market. The stock is marginally riskier, the stock is expected to rise by 3.12% as well as fall by 3.12%.

 

Risk-Free Rate

We have considered 364 days treasury bill as Risk-Free rate. It offers short-term investment opportunities, generally up to 1 year. As the treasury bill issued by the Government of India, so the credibility of the instrument is much higher than other financial instruments available in the Indian market.

Govt. of India issue 3 types of treasury bills through auctions, namely 91-day, 182-day, 364 days. We considered 364-day treasury bill to calculate the cost of capital. As cost of capital refers to opportunity cost of making a specific investment, we assumed that the company is considering to raise short term funds through market. So, we have taken into account short term risk free instrument issued by Government of India, i.e. 364-days treasury bill.

Risk Free Rate

364-day Treasury Bill Yield

6.53%

 

 

Return of the Market

The Sensex and Nifty are both indicators of market movement. If these two indices go up, it means that most of the stock in India went up during the given period.

Sensex is composed of 30 of the largest and most actively-traded stocks on the Bombay Stock Exchange(BSE), providing an accurate gauge of India’s Economy. It is the oldest stock exchange in India. It also known as the S BSE Sensex index. BSE SENSEX stood at 36,046.10 as on 30.01.2018.

The NIFTY 50 is the flagship index on the National Stock Exchange of India Ltd. It represents the weighted average of 50 Indian company stocks in 12 sectors. NIFTY 50 stood at 11,039.15 as on 30.01.2018.

We considered Nifty 50 to calculate Return of the market. With the resources available at www.aceanalyser.com we analyse the closing price of Nifty 50 from 07.01.2012 to 01.01.2018. After NDA government came to power, the stock market moved up rapidly, owing to the pro-business policies of the government. So, it would not be rational if we considered the data after NDA government came into existence. So, we are considering the market data of two different government regimes, i.e. NDA & UPA.

After analysis the data, we have derived 11.62% as the market rate of return for the past 6 years.

 

 

 

 

 

 

Cost of Equity

The cost of equity is the return of a company requires to decide if an investment meets capital return requirements. It represents the compensation the market demands in exchange for owning the asset and bearing the risk of ownership.

There are two methods to calculate Cost of Equity, i.e.

a.       CAPM Model i.e. SML is a Graphical Representation of CAPM formula

b.      DDM Model

 

CAPM Model: The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of risky securities, generating expected returns for assets given the risk of those assets and calculating costs of capital. To calculate Cost of Equity with the help of CAPM model, we need to consider Risk Free Rate, Beta and Return on Market. The calculated figure stood at 11.74%.

 

Ri

Risk Free Rate + ßi(Return On Market – Risk Free Rate)

 
 
 
 
 
 
11.74

 

 

 

 

 

 

Risk Free Rate

364-day Treasury Bill Yield

6.53

Return on Market

 

 

 

11.58

Beta

 

 

 

1.0312

Return on Market-Risk Free Rate

 

 

 

5.05

 

 

 

DDM Model: According to Gordon’s Dividend Discount Model, the cost of equity is a function of current market price and the future expected dividends of the company.

Period

Equity Dividend Paid

Growth %

Dec 2007

535.62

Dec 2008

435.14

-0.187595684

Dec 2009

435.93

0.001815508

Dec 2010

500.23

0.147500746

Dec 2011

585.05

0.169562001

Dec 2012

522.88

-0.106264422

Dec 2013

560.2

0.071373929

Dec 2014

644.51

0.150499821

Dec 2015

561.67

-0.128531753

Dec 2016

320.32

-0.429700714

 

Total Growth = -3.46%

Expected Dividend = 309.239/-

Current Market Price = 1733.80/-

Cost of Equity = 14.38%

 

Cost of Debt Capital (Post Tax)

Cost of Debt refers to cost associated with the Long-Term borrowings. As the company did not raise any funds through long term borrowings, so we considered that ACC’s cost of debt capital is NIL.

Cost of Irredeemable Debentures: 

Where, Kd = Cost of Debt after tax

            I = Annual Interest Payment

            NP = Net proceeds of debentures

            T = Tax rate

 

 

Cost of redeemable Debentures:

Where: Kd = Cost of Debt after tax

            I = Annual Interest Payment

            NP = Net proceeds of debentures

            RV= Redemption value of debentures

            T = Tax rate

            N= Life of debentures

 

Cost of Preference Share Capital (Post Tax)

Cost of Preference share refers to the cost involved in payment of fixed preference dividend in accordance with the preference share capital. As the company did not raise any funds through preference share, therefore the cost of preference share capital is NIL.

Cost of Irredeemable Preference shares:

Where, PD = Annual Preference Dividend

            PO = Net proceeds in issue of preference shares

            Dt = Tax on preference dividend

Cost of Redeemable Preference shares:

Where, PD = Annual Preference Dividend

            RV = Redemption value of preference shares

            NP = Net proceeds on issues of preference shares

            N = Life of preference shares

 

 

 

 

 

Cost of Term Loan (Post Tax)

In the year 2016, the amount in Unsecured loan stood at 131.68 crores. As there is no precise information regarding the interest amount in the www.aceanalyser.com or in the company’s website, we have taken interest amount of State Bank of India to determine the cost of term loan.

Cost of Term Loan = Interest (1-Tax rate)

So, the amount derived 7.84%.

 

Weighted Average Cost of Capital

It is the average rate of return a company expects to compensate all its different investors. The weights are fraction of each financing sources in the company target capital structure.

Type

Cost

Market Value(Cr.)

Weights

Equity Share Capital

14.38

187.79

58.78173

Retained Earnings

Preference Share Capital

Debenture

Term Loans

7.84

131.68

41.21827

 

 

 

319.47

 

Rwacc

 

11.68432529

 

 

This means for every ? 100 ACC ltd. raises from investors, it must pay its investors almost ?11.68 in return. If ACC ltd. wants to reduce their overall cost of capital they need to increase the proportion of term loans rather equity. As cost of equity is almost double than the cost of term loans.

 

 

 

 

 

 

 

 

 

Analysis of Industry Beta

Beta of Competitor Company

Company Name

Beta

UltraTech Cement

1.04

Shree Cement

0.9

Ambuja Cement

0.91

Dalmia Bharat

1.12

Binani Industries Ltd.

1.74

ACC Ltd.

1.031185781

Industry Average Beta

1.123530963

Cost of Equity Capital

Risk Free Rate + ßi (Return on Market – Risk Free Rate)

12.2487726

Risk Free Rate

364-day Treasury Bill Yield

6.53

Return on Market

 

11.62

Beta

 

1.123530963

Return on Market-Risk Free Rate

 

5.09

 

As we can see in this case, the average beta of the cement industry is 1.1235, which is way higher than that of ACC Limited., which is 1.0312. This means that the volatility of the industry is much higher than that of ACC Limited. This denotes the following conclusions:

·         Cement industry is relatively less stable than ACC Limited in terms of market returns.

·         Overall investment in the stocks of the cement industry is riskier than investing in the stocks of ACC Limited only.

·         However, the percentage of returns on the industry stock will be higher than the percentage of returns on the stock of ACC Limited, as the former carries higher risk premium, owing to its higher beta value.

·         Investors, who can take risks, will prefer maintaining their portfolio as per the cement industry, rather than focusing on ACC Limited only, and vice- versa.

 

x

Hi!
I'm Johnny!

Would you like to get a custom essay? How about receiving a customized one?

Check it out