2.

Topic Identification

The Share prices and profits generated by companies are two of the most important parameters
for companies to assess their health and stability. It would be worthwhile to ascertain if there is a
relationship between the two. The mathematical technique of regression analysis is a good tool to
perform the above-mentioned analysis.

The firm chosen for the same is ITC limited as this company has been operating for a long time
and so has stable operations. Also, its stock has been traded on the stock market for more than 20
years so sufficient data is also available.

The data includes the profit for the financial years (taken as X variable) starting from the year
ended 31st March 2004 till the financial year 2022. Corresponding share prices of ITC limited
have been taken. The closing share price on 31st March of the respective years has been taken.
This results in a total of 19 data points.

The collected data is presented in the table 1 below.

Profit for the year (Cr Rs) Closing share price (Rs) - 31st March 20xx
Year
X Y
2003-04 1,592.85 23.40
2004-05 2,191.40 29.67
2005-06 2,235.35 65.22
2006-07 2,699.97 50.40
2007-08 3,120.10 69.33
2008-09 3,267.56 61.70
2009-10 4,061.60 88.00
2010-11 4,987.61 121.37
2011-12 6,162.37 151.60
2012-13 7,418.39 206.00
2013-14 8,785.21 235.67
2014-15 9,607.73 217.23
2015-16 9,844.71 217.40
2016-17 10,200.90 282.80
2017-18 11,223.25 257.00
2018-19 12,464.32 297.00
2019-20 15,136.05 171.70
 2020-21 13,031.68 220.00
2021-22 15057.83 250.00
Table 1: Data for ITC Ltd

3. Procedure Analysis

The procedure analysis constitutes the calculation of estimators for the Y intercept and slope of
the regression line. The method being used herein is the method of least squares. For finding the
sum of squares and cross-products the values of X2, Y2 and XY are calculated in Table 2 given
below.

Year X Y X2 Y2 XY
2003-04 1,592.85 23.40 2537171.12 547.46 37269.15
2004-05 2,191.40 29.67 4802233.96 880.11 65011.53
2005-06 2,235.35 65.22 4996789.62 4253.21 145782.08
2006-07 2,699.97 50.40 7289838.00 2540.16 136078.49
2007-08 3,120.10 69.33 9735024.01 4807.11 216326.94
2008-09 3,267.56 61.70 10676948.35 3806.89 201608.46
2009-10 4,061.60 88.00 16496594.56 7744.00 357420.80
2010-11 4,987.61 121.37 24876253.51 14729.87 605329.61
2011-12 6,162.37 151.60 37974804.02 22982.56 934215.33
2012-13 7,418.39 206.00 55032510.19 42436.00 1528188.34
2013-14 8,785.21 235.67 77179914.74 55538.78 2070381.20
2014-15 9,607.73 217.23 92308475.75 47190.32 2087119.25
2015-16 9,844.71 217.40 96918314.98 47262.76 2140239.89
2016-17 10,200.90 282.80 104058360.81 79975.83 2884814.40
2017-18 11,223.25 257.00 125961340.56 66049.00 2884375.25
2018-19 12,464.32 297.00 155359273.06 88209.00 3701903.04
2019-20 15,136.05 171.70 229100009.60 29480.89 2598859.74
2020-21 13,031.68 220.00 169824683.62 48400.00 2866969.60
2021-22 15057.83 250.00 226738244.31 62500.00 3764457.50
Sum 1,43,088.88 3015.48 1451866784.80 629333.96 29226350.60
 Table 2

Now,

SSx = ∑x2 – (∑x)2/n = 1451866784.80 – (143088.88)2/19 = 374265333.2

SSy = ∑y2 – (∑y)2/n = 629333.96 – (3015.48)2/19 = 150748.3583

SSxy = ∑xy – (∑y∑x)/n = 29226350.60– (143088.88*3015.48)/19 = 6516781.388

Now,

b1 = SSxy/ SSx = 6516781.388/374265333.2 = 0.017412196

b0 = y – b1x = (3015.48/19) – 0.017412196(143088.88/19) = 27.57839316

So, the equation becomes,

y = 27.57839316 + 0.017412196x

Further, we can find the error variance and standard error of the regression estimators we have
found above. The first step is finding the Mean square error (MSE), S2 of the regression. MSE
equals the Sum of squares for error (SSE) divided by the degrees of freedom of the error.

Here,

df(error) = n-2 = 19-2 = 17

SSE = SSy – b1 SSxy = 150748.3583 - 0.017412196 * 6516781.388 = 37276.8826

MSE = SSE/(n-2) = 37276.8826/17 = 2192.7578

The standard error of estimate is equal to the squared root of MSE.

s = root of MSE = root of 2192.7578 = 193.0722212

Now, we can compute the standard error of b1 and b0,

s(b0) = = 87.24018471

s(b1) = = 0.009979987

Also, the confidence interval of b1 comes to (-0.0032364, 0.038061)

And the confidence interval of b0 comes to (-152.921549, 208.0783)

Finally, we can apply the hypothesis test about the regression relationship to check whether there
is a statistically significant linear relationship between X and Y or not. We are employing the
two-tailed t-test for the same.

The following are the null and alternate hypothesis,

H0: beta1 = 0

H1: beta1 != 0

The test statistic value is the following,

t(n-2) = b1/s(b1) = 1.745

Using the t-tables, the value for t0.05 at df =17 comes to 2.11. Since, 1.745<2.11, we cannot reject
the null hypothesis.
4. Result Description

The regression linear equation come to

y = 27.57839316 + 0.017412196x + e;

where y is the Year ending share Price

x is the Net profit for the financial year; and

e is the error term

The Hypothesis test resulted in the null hypothesis not being rejected. So, we cannot confirm the
linearity between the profit for the financial year and the year ending share price for ITC Ltd.

This could either mean that there is no relationship between the profits generated and the share
prices or that the relationship is of a higher order.

5. Recommendation

The results of the above analysis show that there is not enough evidence pointing towards a
linear relationship between the profits of the financial year and the share prices at the year end
for ITC Ltd over the past 19 years.

Further analysis is needed to fully ascertain the type of relationship that exists, if it does at all. A
similar simple regression analysis for further firms should be conducted to understand if there is
evidence of any linear relationship between the two variables or not. Post that, a higher order
linear regression analysis should be conducted for ITC Ltd. and other firms as well to see if a
higher order regression equation results in better fitting and a statistically significant result.

For now, we can be statistically confident that the profits of ITC do not linearly impact its stock
prices, and hence the simple regression equation cannot be used to predict the stock prices for
this firm.
6. Conclusion

Simple regression is a useful technique and can quickly fit a relationship between two variables
along a line and helps ascertain the corresponding error and forecasts for the dependent variable.
In this case, the simple regression technique showed that the relationship between the variables
was not a linear one as the hypothesis test could not reject the null hypothesis. Further analysis of
the higher order is needed to ascertain if there is any relationship between the two variables or
not. A similar analysis of other firms would also be useful metric for comparison.