CF Project on Crompton

Greaves
Section - A

By
Table of Contents:

Sno Topic Page Number

1 Introduction 1
2 Beta Calculation 2
3 Cost of Capital 5
CROMPTON GREAVES

The company’s past 99 weeks data was gathered to calculate the Beta of the stock through Regression using MS
Excel.

The return of each week for Crompton Greaves is plotted in the Y Axis and the return of each week for BSE Sensex
is plotted in the X Axis. Then we use the regression in the MS Excel and find the Beta of the stock.

The Beta for CG comes out to be 0.98. This means company’s Market price variability responds very well to market
movement. CG responds to market fluctuation 98% of the time.

Other Competitors Havell India and HBL power have their beta more as compared to CG whereas ABB has lesser
beta. This shows that market fear or investor’s confidence affects Havells and HBL more than market itself whereas
for ABB and CG it is fluctuation is less than market. This can be good as well as bad. In case of panic in market CG
and ABB will suffers less and Havells and HBL suffer more. But since all the competitors are more or less having
same beta therefore Crompton Greaves performance is at par with sectoral average.

Now we calculate Cost of Capital, for which we will have to calculate Cost of debt, cost of equity and cost of
preference shares.

Cost of Equity

It can be calculated by the formula:

Ke = {(Dividend to be paid this year)/(Current Share Price) + (Growth Rate)}

Growth Rate g = {(EPS now)/ (EPS a year back) – 1}

Other ways of calculating cost of equity Ks is

Ks = Rf + {b*(Km - Rf)}
Define each var

  Rf Km b b*(Km-Rf) Ks
0.978981
CG 0.0729 0.2005 4 0.12491802 0.197818021
0.922951
ABB 0.0729 0.2005 4 0.1177686 0.190668605
1.118531
Havells 0.0729 0.2005 7 0.14272465 0.215624649
1.021890
HBL 0.0729 0.2005 8 0.13039326 0.203293262

As per this table Cost of Equity of Crompton Greaves is 19.7% while for competitors it is 19%, 21% and 20.3%.
This shows that cost of equity of Crompton greaves is at par with industry standards of ~20%. This shows that all
the companies in the sector more or less face same amount of cost of equity. Moreover since Company will be
needing high growth at this moment as the cost of capital is too much if we will compare with risk free rate of
return. Company will not face much difficulty as it’s growth requirement is similar to market growth rate