Effects of Different Variable on Stock Prices of Chemical Sector

Tauqir Ahmed Sohaib Rasool Hassam Azhar Usman Wayne

12/12/2011

LETTER OF ACKNOWLEDGMENT

We would like to thank Ms. Shazia Farooq course instructor Portfolio Management, for providing us with this opportunity of practically performing what we are studying. We are deeply indebted to the Almighty God for bestowing the numerous blessings on us. Sincerely,

Contents
Abstract: .......................................................................................................................................... 5 Introduction:.................................................................................................................................... 6 ICI: ................................................................................................................................................ 6 Engro Chemicals: ......................................................................................................................... 6 Sitara Chemicals: ......................................................................................................................... 6 Lotte Pak: ..................................................................................................................................... 7 Literature review: ............................................................................................................................ 8 Stock price dynamics & firm size: an empirical investigation: .................................................... 8 The Effect of Stock Market Fluctuations on Corporate Cash Flows: ........................................... 8 Are Cash Flows Relevant for Stock Pricing: ................................................................................. 9 Determinants of Share Prices in India: ........................................................................................ 9 Stock returns and volatility a firm-level analysis ....................................................................... 10 Methodology: ................................................................................................................................ 11 Source of Data: .............................................................................................................................. 11 Sample Size: ................................................................................................................................... 11 DEPENDENT AND INDEPENDENT VARIABLES DESCRIPTION ......................................................... 12 Dependent variable: .................................................................................................................. 12 Independent variables:.............................................................................................................. 12 Book Value (BV): .................................................................................................................... 12 Net Income (NI): .................................................................................................................... 12 Net Sales (NS): ....................................................................................................................... 12 Cash Flow (CF): ...................................................................................................................... 13 Hypothesis: .................................................................................................................................... 14 STATISTICAL TOOLS ....................................................................................................................... 15 EMPIRCAL RESULTS AND ANALYSIS OF THE FINDINGS ................................................................. 15 Sitara chemical .......................................................................................................................... 15 Descriptive Statistics.............................................................................................................. 15 ANOVAb.................................................................................................................................. 16 Coefficientsa........................................................................................................................... 17 3

Lotte ppta .................................................................................................................................. 19 Descriptive Statistics.............................................................................................................. 19 ANOVAb.................................................................................................................................. 20 Coefficientsa........................................................................................................................... 21 Engro.......................................................................................................................................... 23 Descriptive Statistics.............................................................................................................. 23 ANOVAb.................................................................................................................................. 24 Coefficientsa........................................................................................................................... 24 ICI ............................................................................................................................................... 27 Descriptive Statistics.............................................................................................................. 27 ANOVAb.................................................................................................................................. 28 Coefficientsa........................................................................................................................... 29 Conclusion: .................................................................................................................................... 31 BIBLIOGRAPHY ............................................................................................................................... 32

Abstract:
The research on whether information on cash flow, book value, net income and net sales have any significant impact on stock prices of chemical listed firms in Pakistan. The changes in variables are annualized to check the annualized affect on stock prices. For the above purpose we have run regression analysis on the data to check the significance of the entire hypothesis. The results show that all the independent variables (cash flow, book value, net income and net sales) have significant impact on stock prices of companies in the chemical sector.

Introduction:
ICI:
ICI were formally acquired by AkzoNobel on January 2, 2008, and since then they have functioned as an independent business unit within AkzoNobel and as a part of its specialty chemicals portfolio, known as Chemicals Pakistan. They are one of the largest quoted companies on the Karachi, Lahore and Islamabad Stock Exchanges. They have a paid up share capital of Rs 1.39 billion and turnover in 2010 was Rs 39.53 billion and profit before tax was Rs 3.73 billion. They currently have over 1300 employees. There major five businesses, Polyester, Soda Ash, Paints, Chemicals and Life Sciences, manufacture and sell a wide range of industrial and consumer products. The current market price of the share is Rs. 124.02.

Engro Chemicals:
Engro Polymer & Chemicals Limited (EPCL) is a subsidiary of Engro Chemicals Pakistan Limited. The company is the leading PVC manufacturer in Pakistan. Companys plant is located at Port Qasim. There current share price in the market is Rs 7.54. They are expecting to expand and bring in a $200 million worth of investments into Pakistan.

Sitara Chemicals:
SCIL was incorporated in 1981 and began producing caustic soda in 1985, initially at a rate of 30 metric tones Caustic a day. The plants capacity was gradually increased over years to current level of 545 metric tones a day. In addition, various by-product facilities have been added and expanded from time to time to cope with growing demand. Company entered into Textile Spinning Business in 1995. Its specialty chemicals and export division was established in 2001 and agricultural chemicals division in 2003. There current market price is 72.40.
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Lotte Pak:
Lotte Pakistan PTA Ltd is a world-class supplier of purified terephthalic acid, an essential raw material used in the polyester industry. Lotte Pakistan PTA Ltd is the single largest foreign direct investment to date (US$ 490 million) in Pakistans petrochemical industry. The plant at Port Qasim, Karachi was built using ICIs state-of-the-art technology when it was commissioned in 1998. It produces Purified Terephthalic Acid (PTA), an essential raw material for Pakistans textile and PET packaging industries and forms the backbone of the polyester chain, including Polyester Staple Fibre, Filament Yarn and PET (bottle grade) resin. The current market price of its share is Rs. 9.18.

Literature review:
Stock price dynamics & firm size: an empirical investigation:
By Yin & Lillian Abstract We show that after controlling for the effects of bid-ask spreads and trading volume the conditional future volatility of equity returns is negatively related to the level of stock price. This "leverage effect" is stronger for small, as compared to large, firms. We also document that while the essential characteristics of the relations between stock price dynamics and firm size are stable, the strengths of the relationships appear to change over time.

The Effect of Stock Market Fluctuations on Corporate Cash Flows:

By Frederick, Murray, Rient .

Abstract Fluctuations in stock prices affect corporate cash flows. When a firms own stock price drops significantly, the firms customers are less likely to delay payment on invoices. In effect, customers are providing insurance to the firm. This insurance effect does not exist for private firms. However, overall customers delay payment on invoices from publicly traded firms more than twice as often as they delay payment on invoices from private firms. As far as we can tell this is not driven by a difference in the average quality of the customers. Thus in terms of corporate cash flows there are both costs and benefits to being publicly traded.

Are Cash Flows Relevant for Stock Pricing:

By Chang & Shamsher Abstract The research on whether information on cash flows have any impact beyond earnings disclosures has inconclusive results. Changes in cash flows are found to have significant impact beyond that of earnings only if share price changes are measured over a short window of about 3 days and not over a long window of say annual or 51 days windows. The results show that cash flow changes measured over one-year intervals did not affect share prices. This is also reconfirmed using the portfolio approach. To recapitulate, though cash flows appear to have no information content on share prices in the annual and medium windows tests, it does have information content in the short window tests with incremental information content beyond earnings, implying it has relevant value information though investors are more comfortable with earnings announcements for share price valuation. This finding reported from an emerging economy is consistent with evidence from developed markets.

Determinants of Share Prices in India:

By: Nirmala, Sanjay, Ramachandaran. Abstract The focus of this study is to identify the determinants of share prices in the Indian market. The study uses panel data pertaining to three sectors viz., auto, healthcare and public sector undertakings over the period 2000-2009 and employs the fully modified ordinary least squares method. The results indicate that the variables dividend, priceearnings ratio and leverage are significant determinants of share prices for all the sectors under consideration. Further, profitability is found to influence share prices only in the case of auto sector.

Stock returns and volatility a firm-level analysis

By: Gregory

Abstract It has been previously documented that individual firms' stock return volatility rises after stock prices fall. This paper finds that this statistical relation is largely due to a positive contemporaneous relation between firm stock returns and firm stock return volatility. This positive relation is strongest for both small firms and firms with little financial leverage. At the aggregate level, the sign of this contemporaneous relation is reversed. The reasons for the difference between the aggregate- and firm-level relations are explored.

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Methodology:
To analyze the relationship between our dependent and independent variables, first we would develop our hypothesis, and then we will use the data of four companies in chemical sector. We would get the data from various sources, related articles and financial websites. We would find the change in book value over the years which are the first independent variable. Then for the second independent variable that is changing in net income. For the third independent variable we would find percentage change in net sales, and finally our last independent variable change in cash flow. We would use all these independent variables plus the dependent variable that is change in price for that year using the formula (P1-P0)/P0 and find their relationship. To find that relationship we would feed our changes in dependent and independent variables into SPSS and get the results. Then we would analyze those results and prove or reject our hypothesis and thus getting to a conclusion.

Source of Data:
The data is to be collected from various sources including company websites, financial websites, and financial articles and from Karachi Stock Exchange website.

Sample Size:
Sample size initially was the data of four companies with five years of financial reports. Then due to inability of SPSS to run less than seven years of data, we have decided to use financial reports of four companies with seven years of data.

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DEPENDENT AND INDEPENDENT VARIABLES DESCRIPTION

Dependent variable:
The dependent variable in this model is Change in Stock price which is change between prices on January 01 and December 31st in a particular year.

Independent variables:
Book Value (BV): The value at which an asset is carried on a balance sheet. To

calculate, take the cost of an asset minus the accumulated depreciation. We have take the growth in book value for seven years and will find out that the significance of it in determining Stock Price.

Net Income (NI): A company's total earnings (or profit). Net income is calculated by

taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share. Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. Net Income is profit after deducted interest and taxes. We have taken the growth of Net Income of the past 7 years by taking percentage change from a previous in a particular year and will find out the role of Net Income in determining Stock Price.

Net Sales (NS): Deductions from the gross sales are represented in the net sales figure.

Therefore, net sales give a more accurate picture of the actual sales generated by the company, or the money that it expects to receive. A company will book its revenue once the good or service is delivered or performed for the customer. However, in the case of returns, even after a good has been sold it can often be returned under a company's return policy. If the good is returned by the customer, it is not considered a sale, as the customer will receive a credit or money back, so it needs to be deducted from the gross sales. The
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allowances for damaged or missing goods reflect the situations in which the goods are damaged in transit or are not what the customer expected. We have taken the percentage change in Net sales of last 7 years and will find out its impact on stock price.

Cash Flow (CF): An accounting statement called the "statement of cash flows", which

shows the amount of cash generated and used by a company in a given period. It is calculated by adding noncash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company's financial strength. We have taken the data of past 7 years of cash flows and took out the growth in it and will find out the significance of Cash flow in determining Stock Price by empirical testing.

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Hypothesis:

H0: Book value is a significant factor in determining stock price. H1: Book value is not a significant factor in determining stock price.

H0: Net Income is a significant factor in determining stock price. H1: Net Income is not a significant factor in determining stock price.

H0: Sales is a significant factor in determining stock price. H1: Sales value is not a significant factor in determining stock price.

H0: Cash Flow is significant factor in determining stock price. H1: Cash Flow is not a significant factor in determining stock price.

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STATISTICAL TOOLS
After taking all the growth and change in the variables for 7 years. We will use SPSS to runs some empirical tests on the data. The test we will run is Regression mainly and we will also use some other tools like Scatter plot and Descriptive. The regression will give us a model and will also give us the t-statistic of each variable. We will also run Anova test on the data. We will also find out the R2.

EMPIRCAL RESULTS AND ANALYSIS OF THE FINDINGS

Sitara chemical

Descriptive Statistics

Std. Mean Stock Price Growth Value Growth Income Growth in Net Sales .0902 Growth Flow The average growth in stock price of Sitara chemicals was 2.27% with a standard deviation of 0.3437. in Cash -.0507 .11083 .22262 7 7 in Net .1257 .32631 7 in .0227 Book .2140 Deviation .34370 .16170 N 7 7

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Model Summaryb Adjusted Model R 1 .988a R Square Square .976 .927 R Std. Error of Durbinthe Estimate .09267 Watson 1.401

a. Predictors: (Constant), Growth in Cash Flow, Growth in Net Income, Groth in Book Value, Growth in Net Sales b. Dependent Variable: Stock Price The number of explained variation in this model is 97.6% and only 2.4% variations are unexplained so it is a very well explained model.

ANOVAb

Sum Model 1 Squares Regression .692 Residual Total .017 .709

of df 4 2 6 Mean Square F .173 .009 20.132 Sig. .048a

a. Predictors: (Constant), Growth in Cash Flow, Growth in Net Income, Groth in Book Value, Growth in Net Sales b. Dependent Variable: Stock Price

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Coefficientsa

Unstandardized Coefficients Model 1 (Constant) Growth Value Growth Income Growth in Net Sales -1.261 Growth Flow Dependent Variable: Stock Price in Cash -.581 1.569 .339 in Net 1.312 .493 in B -.166 Book .506 Std. Error .177 .414

Standardized Coefficients Beta t -.937 .238 1.223 Sig. .448 .346

1.246

2.660

.117

-.407 -.376

-.803 -1.713

.506 .229

SP = -0.166 + 0.506BV + 1,312NI - 1,261NS - 0.581CF

As per our results growth in all the four independent variables are a significant factor in determining the stock price of Sitara chemicals because they have a p-value greater than 0.05. So we can say dont reject H0. If sales increases by one unit the stock price would decrease by -1.261 and if cash flows increases the stock price of Sitara

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chemical would decrease by -0.581. Growth in book value and growth in Net income has a positive relationship with stock price.

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Lotte ppta
This table shows the mean of all the variables and there standard deviations. Where only growth in net sales has a positive mean, the rest of them are negative.
Descriptive Statistics

Std. Mean Stock Price Growth Value Growth Income Growth in Net Sales .150260 Growth in Cash flow -.808670 .1056960 4.9812569 7 7 in Net -1.639354 5.1963588 7 in -.003192 Book -.080828 Deviation .0139732 .0336008 N 7 7

Model Summaryb Adjusted Model R 1 .646a R Square Square .417 -.748 R Std. Error of the Estimate .0184724

a. Predictors: (Constant), Growth in Cash flow, Growth in Net Income, Groth in Book Value, Growth in Net Sales

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Model Summaryb Adjusted Model R 1 .646a R Square Square .417 -.748 R Std. Error of the Estimate .0184724

a. Predictors: (Constant), Growth in Cash flow, Growth in Net Income, Groth in Book Value, Growth in Net Sales b. Dependent Variable: Stock Price The number of explained variation in this model is 41.7% and 48.3% of variations are unexplained so a huge part of variations are unexplained. A high R 2 means a well explained model. This model is not well explained we should introduce new variable ors should increase the sample size in order to get better results.

ANOVAb

Sum Model 1 Squares Regression .000 Residual Total .001 .001

of df 4 2 6 Mean Square F .000 .000 .358 Sig. .826a

a. Predictors: (Constant), Growth in Cash flow, Growth in Net Income, Groth in Book Value, Growth in Net Sales

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ANOVAb

Sum Model 1 Squares Regression .000 Residual Total .001 .001

of df 4 2 6 Mean Square F .000 .000 .358 Sig. .826a

a. Predictors: (Constant), Growth in Cash flow, Growth in Net Income, Groth in Book Value, Growth in Net Sales b. Dependent Variable: Stock Price

Coefficientsa

Unstandardized Coefficients Model 1 (Constant) Growth Value Growth Income Growth in Net Sales -.032 .080 in Net .000 .001 in B .015 Book .165 Std. Error .023 .231

Standardized Coefficients Beta t .632 .397 .714 Sig. .592 .549

-.247

-.445

.700

-.242

-.402

.727

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Growth in Cash flow .001 a. Dependent Variable: Stock Price

.002

.352

.558

.633

SP = 0.015 + 0.165BV + 0.000NI - 0.032NS + 0,001CF

Only Nest sales growth has a negative relation with stock price which means increase in it will have a negative impact on stock price of Lotte-ppta. The other variables have a positive relationship and would increase stock price if they grow by some percentage.All the variables with t-test have a higher p-value than 0.05 so they are playing a significant role in determining the stock price of Lotte Pakistan.

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Engro
Only stock price on average has a negative growth. Book value, NI, NS and Cash Flows all have a positive mean.
Descriptive Statistics

Std. Mean Stock Price Growth Value Growth Income Growth in Net Sales .2159 CF .6263 .17174 3.41762 7 7 in Net .3495 1.35035 7 in -.0923 Book .3625 Deviation .18289 .50377 N 7 7

The number of explained variation in this model as shown in the table below are 92.2% and only 7.8% of the variations are unexplained so it is a will be considered as a well explained model.

Model Summaryb Adjusted Model R R Square Square R Std. Error of the Estimate

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.960a

.922

.765

.08872

a. Predictors: (Constant), CF, Groth in Book Value, Growth in Net Sales, Growth in Net Income b. Dependent Variable: Stock Price

ANOVAb

Sum Model 1 Squares Regression .185 Residual Total .016 .201

of df 4 2 6 Mean Square F .046 .008 5.873 Sig. .151a

a. Predictors: (Constant), CF, Groth in Book Value, Growth in Net Sales, Growth in Net Income b. Dependent Variable: Stock Price

Coefficientsa

Unstandardized Model Coefficients

Standardized Coefficients t Sig.

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B 1 (Constant) Growth Value Growth Income Growth in Net Sales -.664 CF .002 in Net .087 in .003 Book .046

Std. Error .065 .077

Beta .044 .127 .596 .969 .611

.031

.643

2.805

.107

.218 .012

-.623 .030

-3.045 .131

.093 .908

Dependent Variable: Stock Price

SP = 0.003 + 0.046 BV + 0.087NI - 0.664 NS + 0.002CF

Engro also like Lotte-ppta has only Growth in Nest Sales has a negative relationship with stock price and all the remaining 3 variables (BV, NI and CF) have a positive relationship with the stock price. As p-values associated with the t-test are greater than 0.05 so we dont reject H0. It means that all the four variables play a significant role in determining stock price of Engro polymer.

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ICI
The table below shows Means of the variable and their respective standard deviations. Only Cash flow has a negative mean. The other variables have a positive mean, it means all other variables have a positive growth on average.

Descriptive Statistics

Std. Mean Stock Price Growth Value Growth Income Growth in Net Sales .0914 CF -1.3080 .11523 2.23071 7 7 in Net .3972 1.05443 7 in .3027 Book .0674 Deviation .72566 .06888 N 7 7

Model Summaryb

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Adjusted Model R 1 .922a R Square Square .850 .551

R Std. Error of the Estimate .48644

a. Predictors: (Constant), CF, Growth in Net Income, Growth in Net Sales, Groth in Book Value b. Dependent Variable: Stock Price The number of explained variation in the table above are 85% and 15%

variations are unexplained so it still is quite explained model because the R 2 is quite high and most of the variations are explained.

ANOVAb

Sum Model 1 Squares Regression 2.686 Residual Total .473 3.160

of df 4 2 6 Mean Square F .672 .237 2.838 Sig. .277a

a. Predictors: (Constant), CF, Growth in Net Income, Growth in Net Sales, Groth in Book Value Dependent Variable: Stock Price

SP = -0.918 + 13.477BV + 0.459NI + 0.809NS - 0.043CF

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The table below shows all the betas and t-statistics of the independent variables and the intercept. ICI also like Engro is showing a negative relationship between Cash Flows and stock price of ICI and all the other variable show a positive relationship with the stock price. Since p-values associated with t-test of all the variables are greater than 0.05 so we dont reject H0. So Book value, Net Income, Net Sales and Cash flows are significant factors in determining the stock price of ICI Pakistan.

Coefficientsa

Unstandardized Coefficients Model 1 (Constant) Growth Value in B -.918 Book 13.477 Std. Error .636 4.843

Standardized Coefficients Beta t -1.444 1.279 2.782 Sig. .286 .109

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Growth Income

in

Net .459

.312

.667

1.472

.279

Growth in Net Sales .809 CF -.043

2.630 .133

.128 -.133

.308 -.323

.787 .777

a. Dependent Variable: Stock Price

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Conclusion:
We can conclude are study by saying that we cannot reject hypotheses and all the independent variables(net income, cash flows, net sales and book value) taken into account are showing significance with dependent variable (stock price). This also shows that the important financial data have an annualized impact in determining the stock prices of the firms taken as sample from chemical sector.

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BIBLIOGRAPHY
http://www.akzonobel.com/pk/ http://www.kse.com.pk http://www.sitara.com.pk/scil/index.php http://www.lotte-ppta.com/ http://www.zhvsec.com/ http://www.engropolymer.com/ http://pkfinance.info/ www.investopedia.com www.jstor.com

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