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Volume IV Issue - I December 2013


Dr. Bindiya Kunal Soni & : A Study on Leverage Analysis and Pro tability
Dr. Jigna Trivedi for Selected Paint Companies in India

Culture and Performance :

Monarch A. Joshi :
A Study in Small Scale Family Firms of Chhattisgarh

Anitha Thomas & OCTAPACE the work values and Psychological Contract :
Prof. Avijan Dutta An Investigation in a Hotel Business

Do Weaker Companies List in The Favourable Market Condition ?

Prof. Souvik Banerjee :
An Empirical Study From The Indian Equity Market
1. A Study on Leverage Analysis and Profitability 3
for Selected Paint Companies in India
- Dr. Bindiya Kunal Soni & Dr. Jigna Trivedi

2. Culture and Performance : 14

A Study in Small Scale Family Firms of Chhattisgarh - Monarch A. Joshi

3. OCTAPACE the work values and Psychological Contract : 24

An Investigation in a Hotel Business
- Anitha Thomas & Prof. Avijan Dutta

4. Do Weaker Companies List in The Favourable Market Condition ? 37

An Empirical Study From The Indian Equity Market
- Prof. Souvik Banerjee

5. Guidelines for authors 46

6. Subscription Form 47

Vol. IV, Issue I, DECEMBER, 2013 1

A Study on Leverage Analysis and Profitability
for Selected Paint Companies in India


ne of the ways to increase value or impact of
Dr. Bindiya Kunal Soni resource is to use leverage. Traditionally,
leverage was viewed from the perspective
Assistant Professor
of financial leverage which arises from financing
Anand Institute of Management activities. However, operating leverage arising from
Anand the operating activities of business is also used
E-mail : drbindiyasoni@gmail.com extensively these days. Alongwith the trends of
financial leverage, operating leverage, combined
& leverage, debt-equity ratio and EPS of the paint
companies over a period of ten years (2003-2012),
Dr. Jigna Trivedi the present study makes an attempt to analyse the
impact financial leverage and combined leverage on
Assistant Professor
the profitability (measured through Earning Per
Shri Jairambhai Patel Institute of Share “EPS”) of the selected paint companies of
Business Management and Computer India. The findings suggest that financial leverage
Applications had no significant relationship on profitability and
Gandhinagar the returns were observed to be more volatile in case
E-mail : jigna2804@gmail.com of Shalimar and AkzoNobel paints as compared to
other paint companies in the sample.

Key Words : Operating Leverage, Financial

Leverage, Profitability, Debt-Equity Ratio

Vol. IV, Issue I, DECEMBER, 2013 3

Leverage arises from the existence of fixed costs. Operating leverage arises from the
firm's fixed operating costs while the financial leverage arises from the fixed financing
costs (Chandra, 2008). Leverage analysis is used to quantify the risk return relationship
among alternative capital structure. Risk attached to a firm can be classified as business
risk and financial risk. Operating leverage is a measure of business risk and shows the
impact of changes in sales on operating income. While financial leverage is a measure of
financial risk and shows the impact of changes in operating income on Earnings Per Share
(EPS) (Tulsian, 2009). The present study analyses the trend of financial, operating and
combined leverage and its impact on profitability for the selected five paint companies in
India for a period of ten years (2003-2012). The following section describes information
related to paint industry in India, research objectives, methodology, analysis and findings.
Indian Paint Industry
There are two segments of paint industry i.e. decorative and industrial paints. Decorative
paints segment includes interior and exterior wall finishes, enamels, wood finishes and
ancillary products. Decorative segment accounts for nearly 70% of the industry sales,
while the industrial paint segment, which comprises automotive and industrial,
protective, powder, coil and marine coatings accounts for the remaining 30% of the
industry sales. The size of the Indian paint industry is estimated at roughly Rs. 24,000
crores. India's per capita consumption of paints per annum is at 0.5 kg which is the lowest
in the world as compared to the global average of 10-13 kgs (TATA Securities Equity
Research Report, 2012). This gives plenty of room for the paints industry to expand in
future. Over the years, the Indian paint industry has witnessed a gradual shift towards the
organized players who command nearly 65 % of the market share. Berger paints, Asian
paints, Kansai Nerolac, AkzoNobel paints and Shalimar paints are the major players in the
organized segment. The remaining share is held by the unorganized sector which
comprises of around 2000 small scale paint units (Paint Industry Report, SPA Securitas
Ltd., 2011).
Literature Review
A conceptual understanding of financial leverage is expressed as the ratio of debt to equity.
It refers to the magnitude that a business is financed by debt versus equity. The more the
debt the greater will be the financial leverage (Schmedt, n.d.). Burney et al. (2007)
contemplated that it is a herculean task for finance faculty to convince students on the
crude concept of financial leverage, as the concept advocates that raising debt in certain
circumstances is a good alternative. Aydemir et al. (2007) tried to quantify the effect of
financial leverage on stock return volatility in a dynamic general equilibrium economy
with debt and equity claims. The study explored that, in an economy that generates time-
variation in interest rates and the price of risk, there is significant variation in stock return
volatility at the market and firm level. In such an economy, financial leverage has little
effect on the dynamics of stock return volatility at the market level. Financial leverage
contributes more to the dynamics of stock volatility for small firm exposed to both
idiosyncratic risk and market risk.

Kumar's (2007) exhaustive conceptual work highlighted the absence of common
consensus on universal factors responsible for determining financial leverage. He
theoretically concluded that leverage irrelevance, static trade off, pecking order,
asymmetric information signaling framework were treated as important underpinnings
which determined firm's financial leverage. An empirical paper based on secondary data
analysis was contributed by Negi et al. (2012). The paper examined the effect of financial
leverage on the shareholder's return and market value of 50 Indian companies listed on
NSE and BSE across different sectors, to traditionally examine the effect on earnings per
share, dividend pay-out ratio and price-earnings ratio. Pachori and Totala (2012) found
no significant influence of financial leverage on shareholders return and market
capitalization for Automotive Cluster Companies of Pithampur (M.P.), India.
Operating leverage refers to the firm's fixed production costs and the concept is in the
nascent stage. Irrespective of firm's borrowing, the operating risk still persists in the firm.
If the proportion of fixed cost is greater, then the operating leverage is higher. Operating
leverage increase risk because it makes return less predictable, over time (Schmedt, n.d.).
Khal et al. (2012) studied that high fixed cost firms have lower leverage ratios but also
much larger cash holdings than low fixed cost firms. It was also noticed that the market
values, marginal cash holdings of high fixed cost firms more than those of low fixed cost
firms. Houmes et al. (2012) expressed the importance of division of operating costs in
fixed and variable components. Researchers concluded that cost structure for operating
characteristics of many industries (in which firms were exogenously or technologically
constrained) require that firms make substantial investments in long-lived assets and
leaves managers with no discretionary power. Guthrie (2011) critically pointed out that
the relationship between operating leverage and the expected return is actually non-
monotonic when allowance is made for the option to abandon an unprofitable project: the
expected return is an increasing function of operating leverage when the latter is low, but a
decreasing function when it is high.
Need for the Research
Many papers were available in the area of financial leverage, but the research work in the
area of operational leverage was too scanty especially from Indian perspective. A study by
Chandrakumarmangalam and Govindasamy (2010) analysed the impact of leverage on
profitability of cement companies in India. However, there are no such studies found in the
area of paint industries. Researchers have made an attempt to address this lacuna in the
present paper. A rational investor would always prefer to analyse the financial position of
the company and make investments in a scientific way so as to avoid the risk of not getting
the expected return. This study would help such investors to evaluate the past performance
of the company over a period of ten years (2003-2010) till date if they prefer investing in
the paint industry in India.
Research Objectives
The basic objective of undertaking this study was to assess the impact of leverage on
profitability of selected companies in the sample. However, the specific objectives are
mentioned as under.

Vol. IV, Issue I, DECEMBER, 2013 5

1. To understand the meaning and importance of leverage from the perspective of
corporate and investors.
2. To analyze the trend of Degree of Financial Leverage (DFL), Degree of Operating
Leverage (DOL) and Degree of Combined Leverage (DCL) position of selected
companies over a period of time (2003-2012) and examine statistically whether the
DFL, DOL and DCL position of the selected companies differ significantly or not.
3. To study the impact of DFL and DCL on the profitability as measured through the EPS
of the selected companies.
4. To analyze the correlation between debt-equity ratio and the EPS of these companies.
Research Methodology
The research aiming at describing the impact of leverage on profitability is based on
descriptive research design. The secondary data for the study is collected from the annual
reports (Profit & Loss account and Balance Sheet) of these companies. For this study, top
five listed paint companies (by total assets) on moneycontrol.com have been selected. The
sample comprises of Asian paints, Berger paints, Nerolac, Shalimar paints and
AkzoNobel paints (Delux). The reason for selecting these public listed companies is easy
availability of data. The Judgmental sampling technique has been used for this study.
Variables such as Contribution, Earnings Before Interest and Tax (EBIT), Earnings
Before Tax (EBT), EPS, DFL, DOL, DCL and Debt-Equity Ratio have been analysed for
the study. The basic financial inputs have been taken from the licensed capitaline
software. For data analysis, descriptive statistics such as mean, standard deviation,
skewness, kurtosis were used. Inferential statistics like ANOVA and Pearson Correlation
were used for more meaningful analysis. The study is conducted during January, 2013 to
March, 2013.
Data Analysis and Interpretation
The leverage position, EPS and Debt-Equity position of the selected companies for a
period of 2003-2012 (ten years) have been analysed in this section.
Financial Leverage
Table 1 Financial Leverage of Selected Paint Companies
Asian Berger Nerolac Shalimar AkzoNobel
paints paints paints paints
Mean 1.028 1.083 1.008 1.730 1.026
Standard Deviation 0.011 0.034 0.008 0.379 0.021
Skewness 1.595 0.027 1.667 1.816 0.7 74
Kurtosis 3.258 -1.042 3.287 2.265 -0.071

From table 1, it may be observed that mean DFL values of all sample paint companies

were around 1 suggesting that there exists financial leverage for all these companies. The
standard deviation values, between 0 to 1, indicate that DFL values did not deviate much
from the mean. Further, the skewness was positive for all the companies. Except the
Berger paints and AkzoNobel paints, the DFL values for the remaining companies were
highly skewed and kurtosis were leptokurtic i.e. more peaked than the normal curve. For
substantial analysis, one way ANOVA test was performed with the following hypothesis.
Ho1: There is no significant difference between the DFL positions of the paint companies.
Ha1: The DFL position of the paint companies differs significantly.
As per the ANOVA test results, DFL position of paint companies differed significantly
across the selected companies, F (4,45)=33.272, p=.000. Tukey HSD post-hoc
comparisons of the five companies indicated that the Shalimar paints (M = 1.73, SD=0.38,
p=.000) had higher mean DFL values than the other companies.
According to the literature, DFL influences EPS of the companies in a significant way. In
order to find the correlation between DFL and EPS, Pearson Product Moment Correlation
test was performed with the following hypothesis.
Ho2: There is no significant relationship between DFL and EPS of the paint companies.
Ha2: DFL and EPS of the paint companies are related.
Table 2: Pearson Correlation between DFL and EPS
Company ‘r’ value Correlation Significance Hypothesis
results value result
Asian paints -0.583 Negative 0.077 Not Rejected
Berger paints -0.032 Negative 0.930 Not Rejected
Nerolac -0.572 Negative 0.084 Not Rejected
Shalimar paints -0.435 Negative 0.209 Not Rejected
AkzoNobel paints -0.769 Negative 0.009 Rejected

As per table 2, there was a negative correlation between the said variables and the same
was statistically significant for all the companies (p>0.05) except AkzoNobel paints.
Operating Leverage
Table 3 : Operating Leverage of Selected Paint Companies

Particular Asian Berger Nerolac Shalimar AkzoNobel

paints paints paints paints
Mean 1.346 1.523 1.521 2.479 4.442
Standard Deviation 0.175 0.178 0.379 1.291 2.572
Skewness 0.126 0.927 0.687 2.012 0.472
Kurtosis -1.354 1.857 1.330 4.835 -0.737

As per table 3, mean DOL values for the companies suggest that except Shalimar paints

Vol. IV, Issue I, DECEMBER, 2013 7

and AkzoNobel paints, for the rest of the companies, these values were between 1 to 2.
AkzoNobel paints with mean DOL of 4.442, would be most sensitive to changes in sales
as compared to other firms. AkzoNobel paints with the highest standard deviation (2.572)
among the other companies had high variation in fixed cost expenditure over a period of
ten years (2003-2012). Besides, the DOL values for all the companies were skewed
positively and kurtosis of Shalimar was more peaked (leptokurtic) except the remaining
companies. In order to find whether there was a significant difference among the DOL
values of the selected companies, One way ANOVA test was performed with the
following hypothesis.
Ho3: There is no significant difference between the DOL positions of the paint companies.
Ha3: The DOL position of the paint companies differs significantly.
As per ANOVA test results, DOL position of paint companies differed significantly across
the selected companies, F (4,45)=9.916, p=.000. Tukey HSD post-hoc comparisons of the
five companies indicated that the AkzoNobel paints (M = 4.44, SD=2.57, p=.000) had
higher mean DOL values than the other companies.

Combined Leverage
Table 4 Combined Leverage of Selected Paint Companies
Asian Berger Nerolac Shalimar AkzoNobel
Particular paints paints paints paints
Mean 1.385 1.651 1.536 4.661 4.598
Standard Deviation 0.192 0.218 0.398 3.844 2.742
Skewness 0.126 1.356 0.790 2.470 0.562
Kurtosis -1.321 2.950 1.479 6.499 -0.524

As per table 4, DCL (a product of DFL and DOL) reflected that except for Shalimar and
AkzoNobel paints, the mean DCL values did not deviate much for the remaining ones.
DCL was positively skewed and was maximum in case of Shalimar paints. Again the
kurtosis value of Shalimar paints was greater than 3 suggesting more peaked than normal
curve (leptokurtic). Here also, One Way ANOVA test was performed to check whether
there was a significant difference in the DCL values among the selected companies.
Ho4: There is no significant difference between the DCL positions of the paint companies.
Ha4: The DCL position of the paint companies differs significantly.
As per ANOVA test results, DCL position of paint companies differed significantly across
the selected companies, F(4,45)=6.438, p=.000. Tukey HSD post-hoc comparisons of the
five companies indicated that the Shalimar paints (M = 4.66, SD=3.84), p<0.05) and
AkzoNobel paints (M = 4.60, SD=2.74, p<0.05) had higher mean DCL values than the

other companies. Further, the correlation between DCL and the EPS was examined with
the following hypothesis.
Ho5: There is no significant difference between DCL and EPS of the paint companies.
Ha5: DCL and EPS of the paint companies are related.
Table 5: Pearson Correlation between DCL and EPS
Company ‘r’ value Correlation Significance Hypothesis
results value result
Asian paints -0.753 Negative 0.012 Rejected
Berger paints 0.516 Positive 0.127 Not Rejected
Nerolac -0.669 Negative 0. 034 Rejected
Shalimar paints -0.570 Negative 0.085 Not Rejected
Akzo N obel paints -0.766 Negative 0.010 Rejected

As per table 5, the correlation between DCL and EPS was observed to be strong and
negative for all the companies with the exception of Berger paints. Except in the case of,
Berger and Shalimar paints, DCL and EPS were found to be statistically related for all
other companies (p<0.05).

Debt-Equity Ratio
Table 6 Debt-Equity Ratio of Selected Paint Companies
Particular Asian Berger Nerolac Shalimar AkzoNobel
paints paints paints paints
Mean 0.122 0.242 0.206 1.448 0.009
Standard Deviation 0.063 0.096 0.083 0.305 0.012
Skewness 0.324 -0.216 -0.173 0.200 1.009
Kurtosis -0.435 -0.727 -1.512 -1.203 -0.812

As per table 6, debt-equity ratio of selected companies suggest that the proportion of debt
was quite less as compared to equity in all the companies except for the Shalimar paints.
Still the Debt-Equity ratio of 1.448 for Shalimar paints was found to be within an
acceptable range. Here Asian paints, AkzoNobel paints and Shalimar paints were
positively skewed. Kurtosis value of all the companies were observed to be flatter than
normal value (platykurtic). The following hypothesis was set to check whether this ratio
differed among the selected companies.
Ho6: There is no significant difference between the Debt-Equity ratio of the paint
Ha6: The Debt-Equity ratio of the paint companies differs significantly.

Vol. IV, Issue I, DECEMBER, 2013 9

As per ANOVA test results, debt-equity ratio of paint companies differed significantly
across the selected companies, F (4,45)=7.026, p=.000. Tukey HSD post-hoc
comparisons of the five companies indicated that mean debt-equity ratio of Shalimar
paints (M =1.45, SD=0.31, p<0.05) and AkzoNobel paints (M=0.01, SD=0.012, p<0.05)
differed significantly from the other companies with the exception that the mean debt-
equity ratio value of AkzoNobel paints did not differ significantly from Asian paints.
Further, Pearson Correlation test was also performed to check whether there was any
relation between debt-equity ratio and EPS of the selected companies. The hypothesis and
the result of the test are stated as below.
Ho7: There is no significant difference between the Debt-Equity ratio and EPS of the paint
Ha7: The Debt-Equity ratio and EPS of the paint companies are related.
Table 7: Pearson Correlation between Debt-Equity ratio and EPS
Company ‘r’ value Correlation Significance Hypothesis
results value result
Asian paints -0.815 Negative 0.004 Rejected
Berger paints 0.094 Positive 0.795 Not Rejected
lNerolac -0.292 Negative 0.413 Not Rejected
Shalimar paints -0.550 Negative 0.099 Not Rejected
Akzo N obel paints -0.548 Negative 0.101 Not Rejected

As per table 7, the correlation between debt-equity ratio and the EPS was negative for all
the companies except Berger paints. The relationship was not statistically significant for
all the companies (p>0.05) except Asian paints.
Table 8 EPS of Selected Paint Companies
Asian Berger Nerolac Shalimar AkzoNobel
Paints paints paints paints
Mean 41.312 5.023 39.833 15.776 40.266
Standard Deviation 29.206 4.684 9.512 11.913 30.464
Skewness 0.922 1.863 0.780 0.639 1.181
Kurtosis -0.844 2.306 1.081 -1.208 1.011

As per table 8, mean EPS of Asian paints was observed to be maximum while the
minimum was in case of Berger paints. The higher standard deviation values suggest that
the EPS values deviated much from the mean values over a period of ten years. The EPS
values were positively skewed while the kurtosis value of Asian paints and Shalimar

paints were platykurtic. The result of One Way ANOVA test alongwith the hypothesis is
stated as below.
Ho8: There is no significant difference between the EPS of the paint companies.
Ha8: The EPS of the paint companies differs significantly.
As per ANOVA test results, EPS of paint companies differed significantly across the
selected companies, F (4,45)=7.026, p=.000. Tukey HSD post-hoc comparisons of the
five companies indicated that the Berger paints (M = 5.023, SD=4.68, p<0.05) and
Shalimar paints (M = 4.66, SD=3.84, p<0.05) had lower mean EPS than the other

Findings and Conclusion

The paper analyses various leverages and its impact on the profitability of the companies.
Mean DFL for the period of ten years was highest in Shalimar paints and it differed
significantly from the other sample companies in the paint industry as per ANOVA results.
It means that the EPS of Shalimar paints is quite unpredictable and more volatile as
compared to other companies assuming that the other factors would remain constant. This
volatility makes the shares of Shalimar paints high risk-high return profile. An investor
buying shares of Shalimar paints in expanding economy would benefit more as compared
to other investors. Mean DOL values were observed to be maximum in case of AkzoNobel
paints and the same differed significantly from the rest of the companies as proved by
ANOVA results. Thus, AkzoNobel paints has an opportunity to make more money from
the incremental revenues than the other companies. But at the same time, it is more
vulnerable to economic swings that may cause decline in sales; as compared to the rest of
Mean DCL values observed the impact of both the leverages i.e. DFL and DOL. the mean
DCL values of Shalimar paints and Akzo Nobel differed significantly from the other
companies in the sample. Thus, it may be inferred that these two companies are perceived
to be riskier as compared to other paint companies in the sample with higher fixed
financial and operating cost. Mean EPS values were observed to be minimum for Berger
paints followed by Shalimar paints and the difference were statically significant as per
ANOVA test results. The mean debt-equity ratio was maximum in case of Shalimar and
minimum in case of AkzoNobel paints. The said values differed significantly from the
debt-equity ratio of the remaining companies.
The correlation analysis of financial leverage and EPS revealed that both these variables
were inversely related with each other and the same was statistically significant for all the
companies except the AkzoNobel paints. From this result, it may be inferred that there is a
negative impact of financial leverage on the EPS of the paint companies. A favorable
financial leverage occurs when the firm earns more on the assets purchased with the funds,
than the fixed cost of their use. In a way, use of fixed cost source of funds should generate
increased returns for the equity shareholders without an additional requirement of finance
from them. Unfavorable leverage occurs in the reverse scenario. Hence, in case of these
Vol. IV, Issue I, DECEMBER, 2013 11
paint companies, the after tax cost of debt may be more than the return to the equity
shareholders. The probable reasoning for this situation could be that these companies in
the sample would not have found cheaper debt capital as compared to equity capital over
the period of ten years (2003-2012). The lenders would have been charging high risk
premium to the paint companies as the nature of the business depends upon the growth of
the economy and constant changing preferences of retail and industrial consumers.
The correlation between DCL and EPS of the paint companies revealed that except Berger
paints, the results were negative for all other companies. Hence, it may be said that the
higher fixed operating cost and financial cost led to lower profitability for the companies
with exception of Berger paints. The same correlation results stand for debt-equity ratio
and EPS of the companies.
Thus, overall it may be concluded that there existed both financial as well as operating
leverage for all the selected paint companies in the study. The same was inversely related
with the profitability of these companies with the exceptions of few. The study would help
the investors to judge the business (operating) risk and financial risk involved in these
companies and take an informed decision while investing in the shares of paint
companies. Investors may expect risky returns in case of Shalimar and AkzoNobel paints
as compared to other paint companies as analysed here.
Acknowledgement :
The authors would like to acknowledge the sincere efforts of Ms. Ruchi Shah and Ms.
Kinjal Patel (Students of fourth semester M.B.A., Anand Institute of Management) for
collecting the secondary data for the study.
1. Aydemir, A., Gallmeyer, M., and Hollifield, B. 2007. “Financial leverage and the
leverage effect- A market and firm analysis”. Tepper School of Business. Pp.142.
Retrieved April,20,2013 from
2. Burney, R.B., Marcis, J.G., and Boyles, G.V., 2007. “The Pedagogy of Financial
Leverage: Using a “Hook” to Improve Learning”. Journal of Economics and
Finance Education, 6 (1), summer, 57-69. Retrieved April 19, 2013 from
3. Chandra, P.,2011. “Financial Management: Theory and Practice”, New Delhi: Tata
McGraw Hill Education Private Limited.
4. Chandra,P.,2007. “Financial Management: Theory and Practice”, New Delhi: Tata
McGraw Hill Education Private Limited.

5. Chandrakumarmangalam,S. and Govindasamy,P. 2010. Leverage – “An Analysis
and its Impact on Profitability with Reference to Selected Cement Companies in
India”. European Journal of Economics, Finance and Administrative Sciences, 7.
Pp. 53-66.
6. Guthrie, G. 2011. “A Note on Operating Leverage and Expected Rates of Return”.
Finance Research Letters, 8(2), Pp. 88-100. June, Retrieved on April 10, 2013,
from http://ideas.repec.org/a/eee/finlet/v8y2011i2p88-100.html.
7. Houmes, R., MacArthur, J. B., and Stranahan, H.A. 2012. “The Operating Leverage
Impact on Systematic Risk Within A Context of Choice”, An Analysis of the US
Trucking Industry Managerial Finance, 28(12), Pp.1184-1202. Retrieved on April
12, 2013, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2159959.
8. Kahi, M., Lunn, J., and Nilsson, M. 2012. “Operating Leverage and Corporate
Financial Policies”. Retrieved on April 15, 2013, from
9. Kumar, R., 2007. “Determinants of Firm's Financial Leverage”, A Critical Review.
Retrieved April, 17, 2013, from http://papers.ssrn.com/sol3/papers.
10. Negi, P., Sankpal, S., Mathur, G., and Vaswani, N., 2012. “Impact of Financial
Leverage on Payoffs to Stockholders and Market Value.”, The IUP Journal of
Accounting Research and Audit Practices, 11(1), January, 35-46. Retrieved on
A p r i l 1 8 , 2 0 1 3 , f r o m
11. Pachori,S. and Totala, N., 2012. “Influence of Financial Leverage on Shareholders
Return and Market Capitalisation”. A Study of Automotive Companies of
Pithampur (M.P.), India. Paper Presented at 2nd International Conferenceon
Humanities, Geography and Economics (ICHGE`2012)Singapore April 28-29,
2012. 23-26. Retrieved April 30, 2013 from
12. Schmedt, F. (n.d.)., “The concept of operating leverage”, Retrieved on April 20,
2013, from http://www.noble.org/ag/economics/operatingleverage/.
13. Tulsian, P.C., 2009. “Financial Management. New Delhi”, Chand, S. and Company

Vol. IV, Issue I, DECEMBER, 2013 13

Profitability Ratio Analysis of selected
Indian Organized Retailing Companies:
An Empirical Study


rganized Retail, one of India's upcoming
sectors, has presently emerged as the most
dynamic and fast paced industries of recent
times with several players entering the market. There
are many parties interested in an entities business as

Monarch A. Joshi well as profitability, which we state them in general as

Assistant Professor, stakeholders to firm. All of them have their views in
Center for Marketing Excellence, assessing, analyzing and interpreting financial
Gujarat Technological University,
statement of a firm. This paper focuses on, estimating
Email : monarch_joshi@rediffmail.com profitability over a timeframe of five financial years
with respect to different available tools for stakeholders
for ten listed companies selected from National as well
as Bombay stock exchange.

Keywords: Organized Retail Profitability, Indian

Organized Retailing, Profitability Analysis of Retail
Sector, Retail Finance

Vol. IV, Issue I, DECEMBER, 2013 15

The Indian retail market, which is the fifth largest retail destination globally, has been ranked the
second most attractive emerging market for investment after Vietnam in the retail sector.1 Moreover
gross retail sale for 2018 is projected at US $ 1.3 Trillion. The Indian organized retail sector accounts
for only 5% in the country.2 It is expected to contribute 15.5 per cent by 2016.3
More than fifty million people in India depend for their livelihood on retail trade. Indian retail sector
viz. organized as well as unorganized is second largest with respect to employment after agriculture.
Moreover retail trade contributes around 10-11% of India's GDP.4
According to Booz & Co. (I) Pvt. Ltd. and RAI February study – “ The overall retail sector will grow
9% in 2012-16, with organized retail growing at 24% or three times the pace of traditional retail, which
is expected to expand at 8%.”5
According to February report of RAI & TCS – “Retailers are not shying away from closing stores that
are unviable, or undertaking resizing exercises to make them operating profit positive as soon as
Profit is the yardstick for judging economic and managerial efficiency of organization. As per Lord
Keynes - 'Profit is the engine that drives the business enterprise'. To measure performance and
operating efficiency of a company profitability analysis is carried out.7
Many a times the terms 'Profit' and 'Profitability' are used interchangeably, but in real sense; there is a
difference between the two. Profit means the total income earned by the enterprise during the specified
period of time, while profitability means the operating efficiency of the enterprise. As per W. M. Harper
profitability indicates the most profitable alternative. Hence profit is an absolute term while
profitability is a relative concept.
As per Weston and Brigham “to the financial management profit is the test of efficiency and a measure
of control, to the owners a measure of the worth of their investment, to the creditors the margin of
safety, to the government a measure of taxable capacity and a basis of legislative action and to the
country profit is an index of economic progress, national income generated and the rise in the standard
of living”, while profitability is an outcome of profit.
According to Harward & Upton, “profitability is the ability of a given investment to earn a return from
its use”. Profitability analysis focuses on profit ability and shareholders wealth maximization of a firm
over a period of time. For most of the measurement it is calculated in ratios showing percentage.
Measuring performance in ratio form helps results comparable across firms of specific industry or
group of industries over a period of time as well as of different size i.e. market capitalization / net

Decadal review of literature is discussed as follows for the above said study:
Harcourt (1965) stated that the accountant's rate of return is 'extremely misleading'.
Solomon and Laya (1967) provided numerical examples to illustrate the disparity of accounting and
economic profitability.
Ijiri (1979, 1980) observed that under certain conditions the recovery rate converges to the “discounted

1. AT Kearney's 7th annual GRDI, in 2008. 2. FICCI Earnest & Young 3. Investment Commission of India 4. AT Kearney's
7th annual GRDI, in 2008. 5. bBooz & Co. (I) Pvt. Ltd. and Retail Association of India 6. Retail Association of India& Tata
Consultancy Services 7. http://www.maynardkeynes.org/maynard-keynes-economics.html, accessed on 10 / 07 /2013

cash flow rate” which is similar to economist's measure of the firm's profitability. The economist's
valuation is based on the future cash flows while in the profitability estimation only the historical data
are used.
Horrigan (1983) states that - “financial ratio research should be more interested in the role of the
financial ratios themselves than in the nature of the ratio components or to the ratios incidental role as
data size deflators”.
Bhaya (1990) studied the time series data from 1981-82to 1985-86 using three indicators (viz. money,
workforce & material) of efficiency published annually for the public and private sector by the survey
of industries and concluded that efficiency in public sector is at par with that of private sector.
Brief and Lawson (1991a, 1991b) derive a simplified error term for the IRR estimation. They cast
doubt especially on the accuracy of IRR estimation for a small number of observations using
Jha (1992) studied Annual Survey of Industries data for the years 1960-61 to 1982-83 for cement,
cotton textiles, electricity, and iron & steel. All selected companies were found to be as efficient as
Joshi and Little (1994) have attempted to estimate the rates of return to investment in the public and
private sectors.
Sharma (1995) have used Cobb- Douglas production function to study productive, which combines
both technical and allocate efficiencies for the cement industry in India.
Majumdar (1995) evaluated relative performance difference between the public sector, joint sector and
private sectors of Indian industry.
Shine and Soemen (1998) studied large sample of listed US companies for the year 1975 – 1994 found
that there is an inverse relation between the cash conversion cycle and corporate profitability.
Kaur (1998) compared TFPI of 15 public as well as 15 private sector firms from different sectors
(aluminum, steel, fertilizers, engineering, drugs and chemicals and consumer durables).
Saravanan (2001) made a study on working capital management in ten selected non-banking financial
companies by different statistical tools on different ratio to examine the effective management of
working capital.
Mansur Mulla (2002) used Z score model with five weighted financial ratios to study for the financial
health of textile mill.
Vijayakumar and Venkatachalan (2003) in their study stated that keeping more current assets and
variations in size of working capital cause a reduction in profitability.
Naib (2003) compared financial efficiency of 26 enterprises (13 public sector and 13 private sector) for
a 12 year period from 1988-89 to 1999- 2000. All selected firms returned modest positive average
annual growth rate during the selected period.
Selvam, M.V. (2004) had analyzed Indian Cement industry's financial health using Z scores.
K (2004) stated that accounting ratios are still dominant factors for analyzing associated credit risk of
Eljelly (2004) stated that efficient liquidity management involves planning and controlling of current
assets and current liabilities, hence to eliminate the risk of inability to meet short-term obligations as
well as avoids excessive investment in assets. Moreover it was stated that cash conversion cycle was of
more importance as a measure of liquidity than the current ratio that affects profitability.

Vol. IV, Issue I, DECEMBER, 2013 17

V and K.C. (2005) used Z model to measure the financial distress of IDBI and concluded that IDBI is
likely to become insolvent in the years to come.
Dr. S.K.Varghese, (2011) found that the profitability more or less depends upon the better utilization of
resources and to manpower. Hence profitability can be increased by cost cutting and using modern
technology to increase production.
Asha Sharma and R.B. Sharma (2011) identified and studied the movement of key financial parameters
and their relationship with profitability of textile industry.
In depth study of literature review indicates that no industry specific (Indian organized retailing) study
has been conducted to examine the profitability analysis. Moreover it is observed that IRR (internal
rate of return), ARR (average rate of return) and CRR (Cash Recovery Rate) approaches to study
profitability of companies have certain inherent limitations. Hence net worth ratio, return on capital
employed, earning per share and market to book value ratio as profitability ratios has been selected to
study Indian retailing companies profitability.

To analyze the profitability ratios of the Indian organized retailing companies.
Sources of Data
Study is based on secondary data. To analyze the trend and growth of value addition in terms of EVA in
selected retailing organizations required financial data were collected from respective companies
website, annual reports, audited balance sheet, profit & loss account, research and analysis conducted
by various sites active in equity trading viz. moneycontrol.com, icicidirect.com, indiainfoline.com,
karvy.com and motilaloswal.com.
Sample Design
The sample size of present study is top 10 organized retailing companies of India with respect to market
capitalization. These companies were selected as sample companies by considering the availability of
financial data for computing EVA, components of EVA (NOPAT, WACC), for the study period from
2007-2008 to 2011-2012. The sampled companies for the study are as under:
Sr. Market Capitalization
Company Name (Rs . Cr.)*
1 Trent 3,3339.77
2 Shoppers Stop 3,051.06
3 Future Retail 2,803.31
4 Kewal Kiran 985.94
5 Prozone Capital 366.25
6 Provogue 97.20
7 Cantabil 27.76
8 Rei Six Ten 22.95
9 Kootons 14.33
10 Brandhouse Retails 11.58

* As on 15 June 2013

Tools selected for measuring profitability

Below mention tools will be used to calculate selected company's profitability individually and will be
compared with other companies.

a. Return on Net worth (%) :

It is also known as return on equity (ROE) and reflects profit generated by shareholders investment
over a period of time. It is calculated as:

 Net Worth Ratio = (Net Profit / Net Worth) * 100

b. Return on Capital Employed (%) :

Return on capital employed is also known as Return on investment. It is ratio of the average amount of
capital employed and an average of accounting earnings from the different portfolios. Generally, it is
known about the rate of return on investment. It can be calculated from below mentioned formula.

 Return on Capital Employed = (EBIT / Capital Employed) * 100

c. Earnings per Share (Rupees) :

Earnings per share are widely used method of measuring profitability of the common shareholders'
investment. It measures the profit available to the equity shareholders on per share basis. The trend
analysis of EPS shows whether or not the firms earning power on per share basis has changed over that
period.EPS does not reflect the amount paid as dividend and amount retained in business. It can be
calculated from below mentioned formula.

 Earnings per Share = (Net profit after tax − Preference dividend) / No. of equity shares

d. Market to Book Value (%):

It is also known as price to book (P/B) ratio.Book value is calculated from the firm's historical cost or
accounting value while market value / market price is determined in the stock market (phenomenon of
demand and supply) through its market capitalization. A lower P/B ratio could mean that the stock is
undervalued or something is fundamentally wrong with the company. It can be calculated as:

 Market to Book Value Ratio = (Market Value/Book Value) * 100


From the five years available balance sheets and profit & loss account following ratios viz. net worth
ratio, return of capital employed, EPS and market to book value ratio, were computed and average
returns over five years were compared.

Vol. IV, Issue I, DECEMBER, 2013 19

(a) Return on Net Worth :
Table 1.1 Net Worth of Indian Organized Retailing Companies
(2007-08 - to 2011 – 12) (Ratio in Percentage)
Company 2007-08 2008-09 2009-10 2010-11 2011-12 Average
Trent 5.37 4.15 6.34 4.03 3.51 4.68
Shoppers Stop 2.34 -27.33 18.05 12.56 9.75 3.07
Future Retail 10.99 7.06 6.24 6.99 2.90 6.83
Kewal Kiran 15.02 9.42 18.56 23.37 23.11 17.89
Prozone - - - - -0.50 -0.5
Provogue 8.21 4.37 4.03 4.55 4.53 5.13
Cantabil 32.68 41.95 48.96 9.02 -22.79 21.96
Rei Six Ten 28.37 39.28 32.78 23.93 0.21 24.91
Kootons 21.12 20.01 18.86 16.29 -166.90 -18.12
Brandhouse 23.14 11.94 12.98 14.03 5.61 13.54

From table 1.1 it can be observed that average net worth ratio is highest of Rei Six Ten (24.91%)
followed by Cantabil (21.96%) and Kewal Kiran (17.89%). Hence it indicates that Rei Six Ten has
highest profitability with respect to net worth ratio among the selected organized retail companies.
Further due to increase in price of raw material and other variable overheads external borrowings
increased by which operating profit nosedived and loss were incurred as per profit and loss account of
company hence return on net worth nosedived from 16.29 % to -166.90 %.

(b) Return on Capital Employed :

Table 1.2 Return on Capital Employed of Indian Organized Retailing Companies

(2007 -08 - to 2011 – 12) (Ratio in Percentage)
Company 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 Average
Trent 4.92 3.30 5.23 4.65 3.85 4.39
Shoppers Stop 27.18 28.23 45.86 37.57 13.99 30.56
Future Retail 7.75 10.17 10.62 11.12 6.21 9.17
Kewal Kiran 20.45 14.81 26.36 34.94 32.65 25.84
Prozone - - - - 0.72 0.72
Provogue 10.42 5.86 6.35 7.48 7.60 7.54
Cantabil 2.29 3.39 6.32 13.16 -12.75 2.48
Rei Six Ten 43.10 63.37 38.89 31.05 0.88 35.45
Kootons 17.93 18.86 20.20 18.69 -32.53 8.63
Brandhouse 15.59 15.59 16.05 15.50 17 15.94

From table 1.2 it can be observed that average return on capital employed ratio is highest of Rei Six Ten
(35.45%) followed by Shoppers Stop (30.56%) and Kewal Kiran (25.84%). Hence it indicates that Rei
Six Ten has highest profitability with respect to return on capital employed among the selected
organized retail companies.

(c) Earnings per share (Rupees) :

Table 1.3 Earnings per share of Indian Organized Retailing Companies
(2007 -08 - to 2011 – 12) (R upees)
Company 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 Average
Trent 16.68 12.90 20.07 21.45 17.34 17.68
Shoppers Stop 2 -18.28 14.39 9.15 7.78 3.00
Future Retail 8.18 7.91 7.39 8.71 3.63 7.16
Kewal Kiran 17.23 11.57 26.38 37.51 42.30 26.99
Prozone - - - - -0.13 -0.13
Provogue 12.99 2.53 2.48 2.92 2.19 4.62
Cantabil 5.62 12.20 17.17 7.58 -15.60 5.39
Rei Six Ten 5.28 7.87 1.84 1.99 0.02 3.4 0
Kootons 22.74 26.04 26 .77 -102.76 -43.83 -14.20
Brandhouse 20.82 2.50 3.02 3.75 1.59 6.33

From table 1.3 it can be observed that average EPS is highest of Kewal Kiran (Rs. 26.99) followed by
Trent (Rs. 17.68) and Future Retail (Rs. 7.16). Hence it indicates that Kewal Kiranhas highest
profitability with respect to EPS among the selected organized retail companies.

(d) Market to Book Value:

Table 1.4 Markets to Book Value Ratio of Indian Organized Retailing Companies
(2007 -08 - to 2011 – 12) (Ratio in Percentage )
Company 2007 -08 2008 -09 2009 -10 2010 -11 2011 -12 Average
Trent 1.68 0.94 2.63 1.75 1.88 1.78
Shoppers Stop 2.42 0.76 2.41 4.68 4.88 3.03
Future Retail 5.45 1.38 3.43 2.15 1.16 2.71
Kewal Kiran 2.72 0.81 1.72 3.13 3.51 2.38
Capital 0.00 0.00 0.00 0.00 0.92 0.18
Provogue 1.27 0.57 0.78 0.67 0.25 0.71
Cantabil 0.00 3.44 1.10 0.20 0.26 1.00
Rei Six Ten 11.25 3.98 7.83 1.44 0.25 4.95
Kootons 3.93 2.48 0.21 0.21 0.33 1.43
Retails 0.18 1.58 1.03 0.45 0.14 0.68

Vol. IV, Issue I, DECEMBER, 2013 21

From table 1.4 it can be observed that average market to book value ratio is highest of Rei Six Ten
(4.95), followed by Shoppers Stop (3.03) and Future Retail (2.71). Hence it indicates that Rei Six Ten
has highest profitability with respect to market to book value ratio among the selected organized retail


Following conclusions are made from the above analysis of data:

Rei Six Ten has highest profitability with respect to net worth ratio, return on capital employed.
 Kewal Kiran has highest profitability with respect to earnings per share, while it stood third best
profitable company in terms of net worth ratio and return on capital employed.
 Cantabil is second highest profitable company with respect to net worth ratio.
 Shoppers Stop is second highest profitable company with respect to return on capital employed.
 Trent is second highest profitable company with respect to earning per share.
Future retail is third highest profitable company with respect to earning per share.
 Rei Six Ten is highest profitable company with respect to market to book value ratio.
 Shoppers stop is second highest profitable company with respect to market to book value ratio.
From the above it can be concluded that investors can invest in Rei Six Ten, Kewal Kiran, Shoppers
Stop, and Trent respectively, depending on the parameters of profitability analysis they consider.


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estimate economic returns”, Journal of Business Finance and Accounting 18 (1).Pp. 13-20.

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estimate economic returns: A correction”, Journal of Business Finance and Accounting
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Unpublished Doctoral Dissertation, University of Delhi.

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XXX 7(8). Pp.25-32.

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Textile Mills-A Case Study”, Abhigyan, Vol.Xix, No.4, Pp37-41.

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21. Sharma, R.C. and N. Sinha, 1995. “Frontier System and Estimation of Productive Efficiency
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OCTAPACE the work values and Psychological Contract :
An Investigation in a Hotel Business


ork values and beliefs systems are
playing an increasingly influential role in
shaping the attitudes and behaviour of
individuals and organizations towards the
employment relationship. This paper explores the
impact organizational work values (Openness,
Autonomy, does on psychological contract with their
Anitha Thomas employees. Numerous studies exist indicating that
the psychological contract is an important antecedent
Assistant Professor,
of work-related attitudes and behaviours. When
Faculty- School of Business and Law organization work setting is examined, it is important
Navrachana University to understand how psychological contract gets
Vadodara affected because of organizational work values
E-mail : anitha_tom@rediffmail.com which in return define the attitudes and behaviour.
This study attempts to extent the psychological
contract research field by focusing on two
antecedents (work values and contract) for which the
& study propose a relationship exists with the content of
each employees' psychological contract relating to
work values. Defining the psychological contract as
Prof. Avijan Dutta
subjective, promise-based beliefs about employer
Assistant Professor, and employee obligations, we argue that individual
HOD- Department of Management Studies dispositions namely their age, year of experience etc,
National Institute of Technology ( NIT) influence these beliefs. All 70 employees employed
West Bengal - India in a renowned hotel was studied using 40 item
E-mail : avijan.dutta@dms.nitdgp.ac.in OCTAPACE inventory for Organizational work
values developed by Udai Pareek and 23 PCI items
developed by Donald Cable. While investigating
individual work values it were found openness,
confrontation, collaboration and trust showing high
significance with Psychological contract and least
with Authenticity and Autonomy.

Keywords : Psychological Contract, Organization

Work Values, Organization Culture, Employment

Vol. IV, Issue I, DECEMBER, 2013 25

Today's business organizations live in an age of paradoxes fraught with uncertainties, complexities
and chaos due to which survival has become very difficult .This has prompted them to adopt new HRD
strategies for both managerial and non-managerial staff to combat with an ever increasing
competitiveness and also maintaining a high level of efficiency and productivity in their work force.
The scarcity of people with energy, enthusiasm and potential of knowledge, skills, attitude, aptitude,
experience, motivation, physical and intellectual and capability for growth has led to the problem to re-
investigate the organization culture. Incompetency in managing manpower makes them less
productive to counterproductive asset, by instigating others and creating an environment of frustration.
The basic premise of the culture concept, that psychological processes or attributes are shared by
members of a group, is also apparent in the definitions advanced by other writers: "the underlying
values, beliefs, and principles that serve as a foundation for an organization's management system as
well as the set of management practices and behaviors that both exemplify and reinforce those basic
principles" (Denison, 1990). "The synergistic set of shared ideas and beliefs that is associated with a
way of life in an organization” (Cleland, 1994). “Shared explicit and implicit agreements among
organizational members as to what is important in behavior, as well as attitudes expressed in values,
beliefs, standards, and social and management practices" (Cleland, 1994). "A pattern of shared beliefs
and values that give the members of an institution meaning and provide them with rules for behavior in
their organization" (Baron and Walters, 1994).
It can be seen, therefore, that although there are widely-differing definitions of the term, culture is
commonly seen to have some essential characteristics. These include shared values, attitudes and
beliefs within the group [in this context the term group does not imply any limits on the number of
people having membership of the group]; distinctive customs and practices; shared assumptions;
mutually understood and accepted norms; and certain mutual expectations. These may be implicit
rather than explicit, and may operate below the level of conscious awareness of the members of the
group. "The strength of a culture depends on three things; first, the pervasiveness of the norms and
behaviors in the explicit culture, and the pervasiveness of the values and beliefs in the implicit culture -
ie the proportion of the members of the social group that firmly hold to the norms and beliefs. Secondly,
cultural strength depends on the pervasiveness of the beliefs and behaviours themselves - ie the range of
behaviours and the range of beliefs and values which the culture sets out to control. The third feature of
a strong culture [is] consonance between the explicit and the implicit culture" (Payne, 1991). It`s here
where Psychological Contract makes a difference. The formation of the contract depend largely the
value organization practices.
Organizational culture will have the answer for the multidimensional relationships between employee
and employer. Each time this employment relation is working, it's working due to the framework it has
set around. The framework in question is built of organizational culture and the values it practices.
Eight work values may be examined to develop the profile of an organizational culture that is called
OCTAPACE designed by Udai Pareek is Openness, Confrontation, Trust, Authenticity, Proactive,
Autonomy, Collaboration and Experimenting. Organizational Culture is the expression of the
organization itself. It can be defined as cumulative, crystallized and quasistable shared life shared style
of people as reflected in the presence of some states of life over others, in the response predispositions
towards several significant issues and phenomena (attitudes), in the organized ways of filling time in
relation to certain affairs (rituals), and in the ways of promoting desired and preventing undesirable
behavior (sanctions).
An expected natural outcome was the emergence of OCTAPACE culture defines new terms and
persuades/ convinces employees to accept them; it is unrealistic for it to expect employee involvement

and commitment. It needs to be understood that employees and organizations have reciprocal
obligations and mutual commitments, both stated and implied that define their relationships. The
commitment may be in formal, psychological or social terms. The employees wish to know what they
are supposed to do for the organization and the support they will get in performing their jobs. Their
performance appraisal and reward systems need to be linked to the new initiative. They should derive
personal satisfaction and social recognition from the new initiative. Most of all, they should believe
that the top management sincere and practices what it preaches. The features that shape these contracts
include voluntary choice, belief in mutual agreement, multiple contract makers, managing losses when
contracts fail, and the contract as a model of the employment relationship (Rousseau, 2004).
More importantly, the fulfillment and breach of the contract has been linked to meaningful
organizational outcomes (Bocchino, Hartman & Foley, 2003; Johnson & O-Leary-Kelly, 2003;
Kickul, Lester, & Belgio, 2004; Robinson, 1996; Turnley, Boling, & Bloodgood, 2004). Empirical
findings (Johnson & O-Leary-Kelly, 2003; Robinson, 1996) have indicated that a psychological
contract fulfillment is related to higher levels of key work-related attitudes (e.g., organizational
commitment, job satisfaction, trust, loyalty) and objective measures (e.g., job performance) and the
breach has been found to have a relationship with lowered organizational citizenship behavior (Hui,
Lee, & Rousseau, 2004; Robinson, Kraatz, & Rousseau, 1994; Robinson & Morrison, 1995; Robinson
& Rousseau, 1994). Its efficiency and effectiveness in an organization has been acknowledged by past
research (Podsakoff, MacKenzie, Moorman, & Fetter, 1990; VanDyne, Graham, & Dienesch.
An emerging stream of research suggests that organizational culture has a greater impact on the
relationship between psychological contracts and organizational outcomes such as organizational
citizenship behavior and organizational effectiveness. Organizational culture has been identified as an
important variable that influences such relationships. As De Witte and Van Muijen (1999) found,
“organizational culture is incorporated in people's psychological contracts… people are attracted to a
certain type of organizational culture because it provides them with guidance and security” (p.585). In
other words, certain types of organizational culture influence the type of psychological contract an
employee forms with their employer. For example, if an organizational culture provides an employee
with guidance and security this influences the psychological nature that the employee will form with
their employer. Hence, when an employee is provided with guidance and security they will make
assessments about what the organization's commitments and obligations are to them. These
assessments provide the foundations for creating psychological contracts. Therefore, the question of
whether organizational culture influences psychological contract is of interest because it may moderate
this relationship.

OCTAPACE the work values and Psychological Contract: The Link

Organizational culture is critically important to relationships management practices because it
significantly influences the attitude and commitment of all members towards relationship
management. In essence, the psychological contract constitutes an unwritten agreement between the
organization and employees based on mutually accepted promises and obligations among the
organization and the employees. From the recruitment stage of an employee's work to retirement or
resignation, it can have a profound effect on the attitudes and well-being of an individual. Although it is
an unwritten contract it has a central role in work behavior by better specifying the dynamics of the
employment relationship. It is clearly an important ingredient in the business relationship between
employers and employees and can be a powerful determinant of workplace behavior and attitudes.
Thus the main parameters of this relationship as: -

Vol. IV, Issue I, DECEMBER, 2013 27

 What the organization provides: Includes everything the organization is perceived to bring
in the agreement, from financial rewards and fairness to the fulfillment of all its obligations –
 What the organization expects from employees: Everything the organization believes its
employees will add in the total value especially intangible elements such as work, honesty,
loyalty, flexibility etc.
 What employees bring to the organization : Everything that employees are perceived to
bring to the agreement such as effort, skills, commitment and of course, the fulfillment of
 What employees expect from the organization: What employees expect the organization to
provide including pay, job security, good working environment etc.
These parameters of the psychological contract are fulfilled when the work values are as per the
expectation of the employees: Openness, Confrontation, Trust, Authenticity, Proactive, Autonomy,
Collaboration and Experimenting, which are embodied in the following eight points:
1) Organization openness and integrity in the stated focus are necessary for successful relationships
in the organization (Mohr, Fisher 1996, and Hunt 1994).
2) Confrontation organization culture group together the following elements: oppositional
orientation, power, competition and perfectionism ( Xenikou et all: 1996)
3) Trust is an essential aspect of healthy human relationships (Handy 1999). Employees perceived
trust within the organization formulate sense of community ( Mishra 1996).
4) Authenticity is the congruence between what one feels, says and does. Sachein 1993 claims that
this integration leads to reduced distortion in communication.
5) Organization success is largely dependent on being proactive. Employees are more receptive to
changes when told exactly what is going on in their working environment (Hiltrop,1995; Guest &
Conway, 2002;)
6) Autonomy is a very important element in creating a workplace conducive to innovation and
flexibility, leading to the higher commitment with the organization. ( Levine and Pittinsky 1997)
7) No organization can be effective unless its members are motivated to work together, making
collaboration an essence. ( Cross 2006)
8) A culture which minimizes the fear of making mistake and exercise praises and reward succeeds in
achieving desired result. Thus experimenting and learning becomes key to organization success. (
Ali, Pascoe 2002)
Any organization with firmly established organizational culture would teach the values, belief and
expected behavior of that organization. Just as society moulds human behavior, similarly an
organization also moulds the work behavior of the employee in tune to its set of norms. According to
Baron (1994) “Value-driven organizations manage by developing a set of values which they expect
everyone involved with the organization to subscribe to”. In the process a psychological contract is
getting built in. Though highly subjective in nature, the adoption process largely depends on the
learning of the individual and motivation of the employee to remain in the said employment relation.
Employee/employer relations and changing conditions of employment give rise to issues not
addressed in conventional transaction-oriented models. The development, maintenance, and violation

of psychological and implied contracts are described along with their organizational implications.
Subjectivity is inherent in all contracts. Rousseau (1995) in her study stated that there would be
different contract at different organization setting and culture. Thus the underline aspect is
psychological contract type is highly dependent on organization culture elements.
Characteristics of Different Contracts
Transactional Relational
Little organizational loyal High organizational loyalty
Employees develop marketable skills Employees develop company-specific-skills
Unstable employment Stable employment
Flexibility/easy exit Willing to commit to one company
Less willing to take additional responsibilities High intent to stay with organization
Reward system focuses on short term Members highly socialized
Source: Rousseau, 1995.
Area of Study: Hotel
Hotel Industry in India has witnessed tremendous boom in recent years. Contribution of hotel industry
to GDP is 18.5 percentages. Average growth of 8.5% over the next 10 years in this sector is indicated.

Problem Statement
Accordingly, this study explores the relationship between types of OCTAPACE (eight values of
organization culture) and psychological contract. It also addresses the influence of perceptions of these
eight values of organizational culture on this relationship. To address the problem this study looks at
the psychological contracts, perceptions of organizational culture, and inclination to create
effectiveness among employees in a Hotel.

Research Objective
The objective as noted, the specific factors to be evaluated include (a) perceptions of organizational
culture and its eight values in a hotel and b) types of psychological contract prevailing in the joint due to
these values. The following research questions are posed:
1. Which work value is most effective among employees?
2. Does the work value and psychological contract differ among age, experience and marital status in
3. How do work values relate to an employee's propensity to perform in the organization?
In order to evaluate the research hypotheses, a survey was used to measure (a) psychological contracts,
(b) organizational culture work values among the employees of a Hotel business. The demographics of
the respondents reviewed in order to identify response trends were based on (a) age (b) experience and
(c) year of experience in current employment.

Vol. IV, Issue I, DECEMBER, 2013 29

Sample and Procedures
Full-time employee working for the hotel were the respondent. The participants were selected from all
the areas of the hotel. Participants were invited to participate through a questionnaire. The study's
purpose of testing the relationship between the link, fit, and influence of organizational culture with
psychological contracts, and information informing them that the study was seeking to identify the
strongest indicator(s) of which work value has a greater influence. In addition, the employees
contacted were advised that their responses and participation are confidential, that their participation is
Since the age experience and year of experience in the current employment is regarded as a strong
influencing elements in perception, it was found that average age of the participants were 25, years of
experience on average in the industry been 3 to 4 year and in the current employment not more than 2
year, which itself indicates that employees join young, leave organization fast and this makes an
interesting study to understand what is their attitude and behavior towards their organization and the
industry in whole.

To investigate the OCTAPACE profile and Psychological contract in a Hotel, the instrument designed
by Prof. Udai Pareek on OCTAPACE containing 40 and 23 item from Donald Cable ( Appendix 1) was
administered. On the basis of purospsive sampling total 70 sample data was collected and questioners
were analyzed using SPSS software

The study presents the analysis of the research study conducted to investigate the relationship between
the link, fit, and influence of organizational culture on psychological contracts, seeking to identify the
strongest indicator(s) of which work value plays a greater role in the Hotel. This provides the results for
the three research questions posed. To begin, descriptive statistics for the variables in the study are
presented. Following thereafter, the research questions are investigated using a t-test, ANOVAs,
correlations, and regression analysis. The Statistical Package for Social Sciences (SPSS) version 13.0
was used in this study. The following sections present the findings accordingly

Research Findings
Table 1 :
N Minimum Maximum Mean Std. Dev
Openness 70 1.2 3.8 2.81 0.55
Confrontation 70 1.6 3.8 2.79 0.40
Trust 70 1.8 3.8 2.71 0.51
authenticity 70 1.6 3.4 2.38 0.50
proaction 70 1.6 3.6 2.84 0.59
Autonomy 70 1.8 3.6 2.86 0.47
Collaboration 70 1.8 3.4 2.66 0.45
Experimenting 70 1.6 3.2 2.59 0.44
Psychological Contract 70 2.5 4.8 3.19 0.45

The reliability conducted Corbach Alpha method revealed .716 which is the generally accepted
standard (Nunnally & Bernstein, 1994). The mean scores of psychological contracts (M = 3.19, SD =
.45) been the higher in all depicts that the sample had a significant opinion that work values has a link
with Psychological contract and authenticity mean (M = 2.38, SD = .50) been the lowest indicate that
authenticity being the value underlying trust is in question. And further study revealed that among new
entrants authenticity and trust value is very low. It was felt that trust among employees is not extended
to delegating work and responsibility among them.
Research Question 1: Which work value is most effective among employees?
Table 2 : Correlation Significance between OCTAPACE and Psychological Contract

Sum of Mean
Squares df Square F Sig.

Openness Between Groups 13.366 13 1.028 7.435 .000

Within Groups 7.744 56 .138
Total 21.111 69
Confrontation Between Groups 5.471 13 .421 4.059 .000
Within Groups 5.807 56 .104
Total 11.278 69
Trust Between Groups 6.039 13 .465 2.124 .027
Within Groups 12.247 56 .219
Total 18.286 69
Authenticity Between Groups 3.402 13 .262 1.051 .419
Within Groups 13.938 56 .249
Total 17.339 69
Proaction Between Groups 7.121 13 .548 1.856 .056
Within Groups 16.527 56 .295
Total 23.648 69
Autonomy Between Groups 3.374 13 .260 1.253 .269
Within Groups 11.598 56 .207
Total 14.971 69
Collaboration Between Groups 5.291 13 .407 2.714 .005
Within Groups 8.400 56 .150
Total 13.691 69
Experimenting Between Groups 4.806 13 .370 2.401 .012
Within Groups 8.624 56 .154
Total 13.431 69

Vol. IV, Issue I, DECEMBER, 2013 31

The study indicates Openness, Confrontation, Collaboration, and Trust having good norms of the value
in the Hotel. With Openness they are free to communicate within the organization. It is also observed
that when Employees face the problems: Confrontation especially customer complaint they work
jointly with others concerned to find its solution. They face the issues squarely without hiding them or
avoiding them for fear of hurting each other. Collaboration indicates working together and using one
another's strength for a common cause. Individuals, instead of solving their problems by themselves,
share their concerns with one another and prepare strategies, work out plans of action, and implement
them together. And study also indicate employees department and groups trust each other and relied
upon to 'do' whatever they say they will do. Inspite of strong work values, study also marks poor work
values prevailing in the organization. The areas are Authenticity, Autonomy Proaction and
Q-2) Does organizational culture (work values) moderate psychological contract?
Table 3 : Regression TEST

Sum of Mean
Squares Square F Sig.
1 Regression 11.072 8 .179 0.43 .003
Residual 2.919 62 .417
Total 13.991 70

This table summarizes the results of an analysis of variance. The sum of squares, degrees of freedom,
and mean square are displayed for two sources of variation, regression and residual. The significance
value of F is .003 it means the independent variables OCTAPACE do explain the variation in the
dependent variable and it signifies that Work values do moderate Psychological Contract. While
investigating individual work values Table no. 4 also suggest that openness, confrontation,
collaboration and trust showing high significance with Psychological contract and least with
Authenticity and Autonomy.
Table 4 : ANOVA TEST

Unstandardized Standardized
Coefficients Coefficients t Sig.

B Std. Error Beta

1 Openness 4.834 .754 6.408 .000
Confrontation -.251 .149 -.226 -1.688 .096
Trust -.218 .152 -.250 -1.439 .055
Authenticity -.065 .129 -.073 -.504 .616
Proaction .108 .107 .140 1.010 .316
Autonomy .082 .144 .085 .573 .568
Collaboration -.423 .134 -.419 -3.150 .003
Experimenting .150 .164 .147 .915 .364

Q-3) Does the work value and psychological contract differ among age, experience and marital
status in organization?
Table 5 : Co- relational studies between Psychological Contract and Employee Profile

Elements Correlation of Work values , PC with Age, Experience PC

and Current employment experience
Age Openness - .592
Openness – Autonomy - -.407
Confrontation .592
Collaboration: Experimenting:
.529 .592 .556 -.536
Experience Openness - Openness – Authenticity – Autonomy - Proactive - -.375
Confrontation: Collaboration: Trust: .615 Experimenting: Trust:
.521 .497 -.639 .586
Year of Openness – Openness – Authenticity – Autonomy - .600
experience Collaboration: Collaboration: Trust: Experimenting:
at current .543 .512 .586 -.557

Significant findings both positive and negative were observed across age, experience and year of
experience at current employment with regards to the work values and psychological Contract. Table 5
indicates positive significance very much vital at Openness with Confrontation; Openness with
Collaboration and Authenticity and trust, wherein negative significance in Autonomy and
Conclusion :
The study overall indicating that perceived organizational support and psychological contract
fulfillment are important factors that shape the quality of work values. The significance value of F 0.43
is .003 it means the independent variables OCTAPACE do explain the variation in the dependent
variable and it signifies that Work values do moderate Psychological Contract. The study indicates
strong individual work value: Openness, Confrontation, Collaboration, and Trust having good norms
of the value in the Hotel, and Inspite of strong work values, study also marks poor work values
prevailing in the organization. The areas are Authenticity, Autonomy Proaction and Experimenting.
The observations were in line to the findings they employees are not given enough freedom to work,
things are more tailor made. That's the reason scope for experimenting new and breaking the traditional
format is somewhat difficult in any hotel setting. Even the moderating variables of age, experience and
year of experience indicating positive significance at Openness with Confrontation; Openness with
Collaboration and Authenticity and trust, wherein negative significance in Autonomy and
It facilitates the creation of 'workable arrangements' of mutual benefit to the employee involved. It
leads to a trust which has been established through the psychological contract, and this makes both
parties to exhibit openness and honesty.

Vol. IV, Issue I, DECEMBER, 2013 33

Implication and Future areas of the study
Organizational or corporate culture is viewed by many writers as analogous to individual
personality. In its observable manifestations it represents distinctive patterns of behaviour - often
expressed as “the way we do things here” These behavioral characteristics are shaped and determined
by underlying values, beliefs and attitudes which are shared among members of the organization.
These in turn rest upon sets of assumptions. Members of the organization may be unaware of the
specific constituents of this complex system of assumptions, values, beliefs individuals bring
with them to the organizational setting the values and assumptions of other cultural systems to
which they belong, such as ethnic, linguistic, class or professional contexts, and these
contribute to the development of the organizational culture. The interaction between the individual
and his or her organization is governed by a set of mutual expectations, commonly called the
psychological contract. This “contract” is unwritten and often defined only by learning
mechanisms, and is therefore subject to different interpretations by the parties involved. The
psychological contract is both a product of the prevailing culture, as influenced by individual
contributing factors, and a determinant of it.
The future areas of the work could be: understanding in detail of each organization work values of this
organization, can have comparative study between two hotels and industry mapping relating to
organization work values and psychological contract.

Bibliography and Reference :

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Vol. IV, Issue I, DECEMBER, 2013 35

Do Weaker Companies List in
The Favourable Market Condition?
An Empirical Study From The Indian Equity Market


I t is of intense interest, to know, whether

companies with different fundamental qualities,
access the primary market through IPO in similar
market condition or not. As the literature shows, that
the number of companies raising money through
Initial Public Offer(IPO) and quantity of money
raised, both increases, when the market condition is
perceived to be good. In our analysis, we analyzed
167 companies from the Indian capital market,
between 2007 and 2013, to understand whether, there
is any difference in market conditions as far as timing
in accessing primary market, among various
companies of different quality is concerned. In 2007
Prof. Souvik Banerjee Indian capital market regulator SEBI(Securities
Assistant Professor, Exchange Board Of India), introduced IPO Grading
Sri Sri Institute of Management Studies, as a pioneering concept. The mandatory assignment
Goa, India. of grade is based on the fundamental strength of a
e-mail : souvik.2005@gmail.com company; for our analysis we have taken this as a
proxy for the strength of a company, and three
month's average return and average PE(Price to
Earnings ratio)of benchmark 30 share BSE (Bombay
Stock Exchange) sensex(sensitive index) is taken as a
proxy for market condition. Using non-parametric
statistical analysis, it is concluded that, there is no
significant difference in market condition among
different time frame, when companies of different
quality accessed the market for capital.
Key Words: Market Condition, Fundamental
Strength, Average Return, Average PE
JEL Classification:G0,G14,G24

Vol. IV, Issue I, DECEMBER, 2013 37

Introduction :
Capital market (both debt and equity)is an important channel, through which savings can be moved to
productive sectors of an economy. Stock markets play a major role in the development of national
economies (Bohnstedt, 2000). Developed Equity Market is one of the pillars on which success of a
market oriented economy depends.
There is always a perception amongst the analysts and researchers that weak companies want to bask in
the glory, when going is strong in the equity market. There is a good amount of literature, already
existing in this regard. For example, Initial Public Offerings (IPO), come in clusters, to give the
impression, that they are taking advantage of a windows of opportunity (Ibbotson and Jaffe (1975)).
Investors may also forego their own information and instead use information disseminated from other
sources, for example Scharfstein and Stein (1990), Bikchandani, Hirshleifer, and Welch (1992), and
Welch (1992) show that investors may rationally ignore their own information and follow the decisions
of other investors. This fuels irrationality in the market, as evidenced from the cyclic boom and bust.
A good example of this phenomenon is the vanishing companies of 1990s. As India opened up in 1991,
a new bull market started in India, based on the assumption that Indian economy will grow faster,
leaving behind the history of 'Hindu rate of growth'(Professor Rajkrishna, an Indian economist, coined
the term 'Hindu rate of growth' in 1978 to characterize the slow growth of the country's economy).As
equity market return zoomed , host of companies of all shades, accessed the primary market to tap high
investor appetite for IPOs. However what followed from mid 1990s onwards is a black spot till date, in
the history of equity market in India. Taking the advantage of regulatory lacuna, hundreds of
companies simply vanished. Indian authorities simply lacked the regulatory and information
mechanism to trace these companies. At last count as on 2009, Department of Company Affairs(DCA)
identified 121 such companies(Source: Financial Times, London, Dated July 14,2009), who duped
investors, thousand of crores (1crore = 10 million) of Indian rupees. According to some observers in
such instances, there is still some regulatory lacunae exists. For example liability of merchant bankers,
auditors etc. is still not clear. So entities, which are supposed to do, due diligence professionally, there
is no mechanism to hold them accountable.

Information Asymmetry in the IPO market:

The primary reason for this is information asymmetry in the market. Investors, specially retail
investors, lack the knowledge and analytical tools to decipher relevant information. In this context it is
relevant to discuss 'Market for “Lemons” theory': This theory propagated by noted economist George
Akerlof in his seminal paper "The Market for Lemons: Quality Uncertainty and the Market
Mechanism" (The Quarterly Journal of Economics, Aug., 1970). Using the example of Lemons(slang
of used cars) in the US market, he showed that trust is important for a functioning market, where seller
knows more than the buyer, the resulting information asymmetry causes problem for the
consumer.IPO grading is important in this context.
To bridge the information asymmetry in the developed western markets, some informal certification
acts as the signal, these includes and not limited to venture capital, lead manager and underwriter
affiliation. But these informal certifications does not work in the Indian market (Khurshed, Paleari,
Pande & Vismara,2011).
To overcome these difficulties and disseminate knowledge in a transparent way, Securities Exchange
Board of India(SEBI), the capital market regulator of India, introduced IPO grading on voluntary basis
in April,2006. It was optional till 30th.April,2007.However, the experiment was not successful as
borne out by the relevant data; although around 40 companies tapped the primary market in that time

frame, only 4 companies approached Credit Rating Agencies(CRAs) for grading. These 4 companies
also did not accept the grade assigned to them. This situation aroused because there were no incentive
for companies to opt for rating/grading. On the one hand a fundamentally good company had an
apprehension, that if they do not get a good rating, their plan to raise money may jeopardize on the other
hand fundamentally not so good companies had fear that, their careful cover ups may get

Post Mandatory IPO Grading Period:

SEBI has made Initial Public Offer Grading mandatory with effect from May 1, 2007.Explaining the
rationale behind making the IPO grading mandatory, the then SEBI chairman M. Damodaran
explained, “ When the market started going up suddenly a lot of people(companies) started coming to
the market. It is not that only the best and the brightest continue to come to the market, there are a lot of
other people(companies) who started entering the market. One of our concerns is whether we are going
to have another round of 'vanishing companies' which will raise money and never spend it for the
intended purpose. I firmly believe that (IPO) grading , if made mandatory, will prevent vanishing
companies in future.”
Credit rating agencies like CRISIL, CARE, ICRA, India Rating(earlier Fitch India) and Brickwork
Rating are entrusted with the job of IPO grading, and they are registered with SEBI for this purpose.
The rating scale used is 1 to 5, with 1 being the worst, and 5 being the best. Securities Exchange Board
of India (SEBI) has made IPO grading mandatory primarily to safeguard the interest of retail investors.
Investment in IPOs depend primarily on three factors namely, i)Fundamental analysis of the company,
ii) Pricing of the issue, and iii) Investor preference. IPO grading addresses the issue of fundamental
analysis of the company.

IPO Grading Framework :

Grade / Scale Grading Definition

5/5 Strong Fundamentals

4/5 Above Average Fundamentals
3/5 Average Fundamentals

2/5 Below Average Fundamentals

1/5 Poor Fundamentals

Table No.1: IPO Grading Framework

According to SEBI guidelines, Credit Rating Agencies (CRAs)are supposed to analyse companies, for
the purpose of grading on the following parameters:
a. Business Prospects and Competitive Position
i. Industry Prospects
ii. Company Prospects
b. Financial Position
c. Management Quality

Vol. IV, Issue I, DECEMBER, 2013 39

d. Corporate Governance Practices
e. Compliance and Litigation History
f. New Projects—Risks and Prospects
On the basis of this, we can assume, that any company graded 4 or 5 are above average in fundamentals;
Companies with grade 3 are average in fundamental and companies having grade assigned 1 or 2 are
below average in fundamental.
In this paper we tested, whether three broad categories of companies i.e. fundamentals with I above
average, ii) average and iii) below average, show any distinction, in terms of IPO timing, with respect
to market sentiment.
We have considered all the companies, that got listed in the Indian equity market, after IPO Grading
was made mandatory. Only companies which got listed in SME(Small and Medium Enterprise)
platform of BSE(Bombay Stock Exchange) and NSE(National Stock Exchange), the leading two
exchanges of India are exempted.

The distribution of 167 companies, that offered IPO between 2007 and 2013 are as follows:

Figure1: Break up of companies in different categories

Literature Review:
There is significant amount of literature available in this domain. Prior research shows that there is no
statistically significant differences between firms who go public during a recession and those who wait
for markets to improve(Blum,2011).

The Initial Public Offering(IPO) is considered to be one of the most significant events in the life cycle
of a company (Celikyurt, Selvilir, and Shivdasani, 2010; Latham and Braun, 2010). An IPO is the first
sale of stock by a private company to the public and the consequential listing on a stock exchange.
Going public allows firms to raise and access funds necessary to accelerate growth in order to achieve
market leadership (Ernst and Young, 2010).

The IPO market serves as an economic indicator in both practice and academia due to its proven pro-
cyclical nature (Lowry, 2003). During an economic expansion, IPOs experience a ―boom market;
characterized by an increased number of firms tapping primary market to raise resources , while ―bear
marketsǁ, occurring during a recession, exhibit low levels of IPO activity(Blum,2011). Lowry (2003)
and He (2007) recognize that variation in IPO volume cannot fully be explained by financing
requirements and identify the economically significant factors contributing to aggregate IPO
fluctuations. Bugstallen (2008) suggest that firms issue equity following period of high stock market
valuations to benefit from the accompanying low cost of equity, at that phase.

Brau and Fawcett (2004) in a survey of 336 CFOs(Chief Financial Officer's) found that, while
considering IPO, timing of the issue is in top of their mind. Rosen, Smart and Zutter (2005) found that
firm quality does not differ significantly among firms, that access primary market at the boom or bust
time. The current study studies Indian equity market in this context, over the period of 2007 to 2013.

Hypothesis of the Research:

Null Hypothesis : H0-There is no difference in market condition across IPOs of different
Alternative Hypothesis: H1-There is difference in market condition across IPOs of different

Research Methodology :
In this paper it is explored whether market condition in terms of prior 3 months return(compounded
annual growth rate or CAGR) and average Price to Earning(PE) ratio of Bombay Stock Exchange's
(BSE) top 30 share “sensitive index” or sensex differ significantly for IPOs of different fundamentals,
namely above average, average and below average.
Secondary data from Capital Market database is being used, the software package being used is SPSS
To remove the outliers, any value outside 3-standard deviation from the mean, for both 3 months
CAGR and 3 months average PE is removed. This way 2 values for 3 months average return and 1 value
for 3 months average PE is removed.
The data is tested for normal distribution, and found that data are not normally distributed. So non-
parametric statistics is used for analysis.

Empirical Results and Analysis :

In this section the results from the SPSS software are put.

Casewise Diagnostics a
Case Three_Months_Avg_
Number Std. Residual Return Predicted Value Residual

126 -4.767 -12.9141 .789967 -1.3704059E1

156 3.960 12.3092 .923982 1.1385265E1

a. Dependent Variable: Three_Months_Avg_Return

Casewise Diagnostics a

Number Std. Residual Three_Months_Avg_PE Predicted Value Residual

16 -3.793 12.6333 20.782716 8.1493824E0

a. Dependent Variable: Three_Months_Avg_PE

Vol. IV, Issue I, DECEMBER, 2013 41



Kruskal-Wallis Test
mental N Mean Rank
Avg_3_Months_Return_of_ 1 71 70.08
Sensex 2 60 61.17
Total 131
Avg_3_Months_PE_of_ 1 71 65.75
Sensex 2 60 66.30
Total 131

Test Statistics a,b

Avg_3_Months_ Avg_3_Months_
Return_of_Sensex PE_of_Sensex

Chi - Square 1.796 .007

df 1 1
Asymp. Sig. .180 .934

a. Kruskal Wallis Test b. Grouping Variable : Fundamental

Kruskal-Wallis Test Ranks

mental N Mean Rank

Avg_3_Months_Return_of_ 1 71 82.80
Sensex 2 60 72.62
3 33 99.80
Total 164

Avg_3_Months_PE_of_Sensex 1 71 81.30
2 60 82.12
3 33 85.79
Total 164

Test Statistics a,b

Avg_3_Months_ Avg_3_Months_
Return_of_Sensex PE_of_Sensex

Chi - Square 6.984 .208

df 2 2
Asymp. Sig. .030 .901
a. Kruskal Wallis Test b. Grouping Variable : Fundamental

Vol. IV, Issue I, DECEMBER, 2013 43

The p-value as depicted by Asymp. Sig. is .03 for prior 3 months average return of sensex and .901 for
prior 3 months average PE multiple of sensex. So in terms of market return, with 97% confidence, it can
be said that, market condition differs significantly in terms of timing, with respect to companies with
different fundamental quality accessing the market for capital.

However, with a p value of 0.901( which is significantly higher than 0.05), the same cannot be said
about prior 3 months average PE value of sensex. As a result Null Hypothesis is accepted.

Conclusion :

In this study we found no significant difference in market condition based on two parameters, e.g.
Average PE(of 3 months) and Average Return(average of 3 months), for the time frame when
companies with different fundamental quality get listed. We analyzed 167 companies, which are
graded by different credit rating agencies, over a 6 year(2007-2013) time period.

Limitations of the study and future research areas :

One of the limitations of the study is, we analyzed data only for 6 years period. We also considered only
two parameters as a proxy for market condition, other factors like broad money supply(M3), Gross
Domestic Product (GDP) growth rate etc. also can be considered for analysis in some future studies.

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Vol. IV, Issue I, DECEMBER, 2013 45

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